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May 26, 2022
By Stewart Bishop | Law360 (May 25, 2022) -- Following the bombshell guilty plea last week by Allianz Global Investors U.S. and more than $6 billion in financial penalties, the beleaguered asset manager on Tuesday was hit with a proposed securities class action in California federal court claiming it defrauded retail investors.
It appears to be the first class action to be filed after AGI, a unit of Germany's Allianz SE, last week pled guilty to securities fraud and settled with the U.S. Securities and Exchange Commission in connection with a group of multibillion-dollar investment funds called "Structured Alpha," which tanked amid market volatility during the COVID-19 pandemic.
Lead portfolio manager Gregoire Tournant, co-lead portfolio manager Trevor Taylor and portfolio manager Stephen Bond-Nelson were also criminally charged. Taylor and Bond-Nelson have pled guilty and are cooperating with the government, while Tournant is pressing ahead to trial.
The instant proposed class action, brought by Silver Golub & Teitell LLP and Selendy Gay Elsberg PLLC, excludes the trio as defendants, and instead names AGI, its mutual fund Virtus Strategy Trust — formerly known as Allianz Funds Multi-Strategy Trust — and the trustees of that investment vehicle.
While the criminal actions focus on AGI's structured products group's mismanagement of the series of "Structured Alpha" private investment funds, the proposed class action says that group also served as investment manager for five mutual funds with $2 billion in assets that were marketed to the retail investing public and were also fraudulently mismanaged.
"[AGI] committed securities fraud from 2015 through 2020 through a scheme to defraud prospective and current mutual fund investors by making false and misleading statements that substantially understated the risks being taken by the mutual funds," the law firms said in a statement Wednesday.
Just like the private investment funds, the mutual funds were touted as delivering consistent returns while protecting against abrupt, severe market events, according to the class action complaint.
Retail investors suffered devastating losses, the complaint says, due to failures by AGI in its risk management and internal controls, which enabled deviation from the mutual funds' stated investment strategy to go undetected for nearly five years.
Four of the five mutual funds were owned by the trustees through the AGI trust and were ultimately liquidated in late 2020 due to AGI's conduct, according to the suit.
Each fund had an alpha and a beta component. The beta was invested in an equity or fixed income index, such as the S&P 500, while the fund's alpha section purportedly operated on a complex options trading strategy, using "long, out of the money" put options to hedge against short-term market crashes.
The proposed class action says, however, that the funds overstated and misrepresented their hedging and risk mitigation strategies, and instead focused on an investment strategy that prioritized returns over risk management in a way that was inconsistent with AGI's promises to investors.
As the pandemic hit in March 2020, the mutual funds suffered "disastrous losses," yet AGI and its staff tried to conceal their mismanagement, the complaint says, by falsely denying any wrongdoing until the criminal actions and the parallel SEC case and settlement were announced May 17.
Representatives for Allianz did not immediately respond Wednesday to a request for comment.
Gurbir Grewal, director of the SEC's Enforcement Division, at the time called the commission's nearly $1 billion settlement with AGI, which does not include the criminal sanctions, "one of the largest penalties in an SEC fraud case since the days of Enron and WorldCom."
Grewal said the asset manager would soon wind down its U.S. operations. AGI and Voya Financial Inc. on May 17 said they have reached a deal to transfer certain AGI investment teams and assets comprising most of its U.S. business to Voya, a New York-based investment and insurance company. AGI's structured products group was previously dissolved.
Roughly three weeks before the criminal charges and the SEC settlement were announced, AGI and institutional investors which lost nearly $1 billion during the coronavirus-induced market crash in 2020, reached settlements resolving claims that AGI abandoned its risk controls for the fund purportedly designed to weather extreme market volatility.
The asset manager has also been hit by several other suits over its pandemic-related losses.
The proposed class is represented by David Golub, Steven Bloch and Ian Sloss of Silver Golub & Teitell LLP and Jordan Goldstein, Mitchell Nobel and Samuel Kwak of Selendy Gay Elsberg PLLC.
Counsel information for the defendants was not immediately available Wednesday.
The case is Cole v. Allianz Global Investors U.S. LLC et al., case number 3:22-cv-00747, in the U.S. District Court for the Southern District of California.
--Additional reporting by Lauren Berg. Editing by Orlando Lorenzo.