Alliance Global Investors, Three Portfolio Managers Charged with Fraud
Offering fraud cases are frequently the largest group of actions filed during any period by the Commission. Many of the cases have common elements: A scheme centered on some catchy product tied to crypto or some other trendy asset group; and promises of outsized profits and assurances against loss. All to frequently it is the Main Street investors who are convinced to put their life savings, 401-K funds or similar money into the offering and who in the end suffer the huge losses.
Mr. & Mrs. Mainstreet are not the only investors that fall prey to the hucksters that peddle high risk and often worthless securities in offering fraud actions. The point is will illustrated by the cases filed Tuesday by the Commission and the Department of Justice against Allianz Global Investors and three former senior portfolio managers. There a complex product was used in conjunction with a series of misrepresentations to dupe some of the largest pension funds into purchasing shares in what turned out to be an offering fraud.
SEC v. Tournant, Civil Action No. 1:22-cv-04016 (S.D.N.Y. Filed May 17, 2022) names as defendants three Alliance senior portfolio managers who used AGI US’s Structured Alpha funds to defraud many of the largest pension funds through the use of a complex investment scheme. Named as defendants are: Gregoire P. Tournant, Chief Investment Officer of the U.S Structured Products Group for AGI US and lead portfolio manager for the Structured Alpha funds; Trevor L. Taylor, Managing Director at AGI US and Co-lead Portfolio Manager of the Structured Alpha funds; and Stephen G. Bond-Nelson, Managing Director at AGI US and Portfolio Manager for the Structured Alpha funds.
At the center of the cases is Allianz Global Investors U.S. LLC and Structured Alpha funds. The former is a registered investment adviser. The latter is a group of 17 pooled investment vehicles.
Structured Alpha offered investors a complex options trading strategy designed to generate profits by using a portfolio of debt or equity securities as collateral to purchase and sell options. Investors could get exposure to a variety of debt or equity securities tied to a complex options trading strategy that was designed to add profits with hedges to protect against loss.
The debt or equity component was designed to be the beta component; the options trading strategy the alpha component. Investors could choose among various combinations of alpha and beta targets. For example, one fund provided exposure to 90-day T Bills; it had an alpha target of 10% per year; another fund offered exposure to the S&P 500 Index with an alpha target of 5% per year.
The option trading strategy had three components: Range-bound and directional spreads, each designed to generate profit by collecting premiums from selling put and call options that expired out of the money; and hedges, designed to protect against short-term market crashes.
Over a period of about four years, beginning in early 2016, AGI US and Defendants marketed Structured Alpha funds to 114 institutional investors. About $11 billion was raised.
Over time Defendants sought to and did manipulate key financial metrics and reports in an effort to conceal the scope of the financial risk and eventually the actual risk. Mr. Tournant, for example, materially misrepresented to investors the levels at which hedge positions were put into place. He also caused the portfolio management team not to implement a risk manage program agreed to with the largest investor. In addition, Mr. Tournant manipulated certain reports provided to AGI US and the largest investor, regarding the risk mitigation program.
The funds performed reasonably well until the COVID pandemic took hold in March 2020 and the market drop. At that point Defendants sought to conceal the impact from the SEC. For example, initially Defendant Bond-Nelson provided false testimony during the investigation at the urging of Mr. Tournant. Later Defendant Bond-Nelson recanted the false testimony and cooperated with the staff investigation as did Defendant Taylor. Ultimately, the fund collapsed causing millions in losses.
The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). See also In the Matter of Global Investors U.S. LLC, Adm. Proc. File No. 3-20855 (May 17, 2022)(Proceeding against the fund based on above; resolved with a cease-and-desist order based on Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4) and a censure; the firm will pay disgorgement of $315.2 million plus prejudgment interest of $34 million, deemed satisfied by the forfeiture and restitution order entered in the parallel criminal case; in addition a penalty of $675 million that will be paid by putting $131 million into a fair fund; see also U.S v. Allianz Global Investors U.S. LLC (S.D.N.Y.) in which the firm pleaded guilty); In the Matter of Stephen G. Bond-Nelson, Adm. Proc. File No. 3-20854 (March 17, 2022 (based on guilty plea in parallel criminal case; Respondent is barred from the securities business and participating in any penny stock offering); In the Matter of Trevor Taylor, Adm. Proc. File No. 3-20853 (May 17 2022)(same as immediately above).