The last time we checked in on the remarkable story of Allianz’ imploded hedge funds in mid-February, we learned that the insurance giant would take a €3.7 billion charge against the event which was That’s because the hedge funds offered by the AGI unit were created to like the one that took place in 2020… and which at the end of March 2020 after massive losses, with Allianz forced to wind down the rest.

Fast forward to today when we learn that the Allianz unit behind the hedge fund collapse has agreed to plead guilty to fraud in the implosion of its “hedge” funds (they didn’t hedge anything) that lost $7 billion; with Allianz also agreeing to be banned from providing financial advice for 10 years, while former Allianz employees are banned from the industry and the DOJ has filed criminal charges.

As part of the agreement by Allianz Global Investors US – the New York investment “adviser” owned by Allianz SE – GregTournant, the former chief investment officer and co-lead portfolio manager of the Structured Alpha Funds, was taken into custody Tuesday and charged separately for his role in the alleged scheme to defraud investors, Manhattan U.S. Attorney Damian Williams said in a statement.

The agreement, under which AGI will also plead guilty to a single count of securities fraud, calls for the firm to forfeit $463 million and pay $3.2 billion in restitution to victims of the fraud as well as a $2.3 billion penalty. It will get a credit for $1.9 billion that has already been paid to victims. In addition, AGI will pay a civil penalty under an anticipated settlement with the U.S. Securities and Exchange Commission.

Tournant, the former CIO and co-lead portfolio manager of the Structured Alpha Funds, and others overstated the level of independent oversight that AGI was providing, misrepresented hedging and other risk mitigation strategies and altered documents to hide the riskiness of the funds, according to prosecutors.

“As a result of this scheme to defraud, investors’ funds were exposed to higher risk than promised, and investors were deprived of information about the true risks to which their investments were exposed,” according to the Tournant’s indictment.

As we reported previously Allianz had set aside billions to resolve the lawsuits and government probes tied to the funds. The charges are a “fair estimate” of the exposure, the company said earlier this month. All charges announced Tuesday are covered by the provisions, an Allianz spokesman said.

According to Bloomberg, AGI is due to make the forfeiture payment on Wednesday and will make the restitution payments within a week into an escrow account that will be distributed to victims.

WOW. This is quite the case announced by the SEC. THIS is what enforcement should look like. Allianz is fined, banned from providing financial advice for 10 years, individuals are banned from the industry and the DOJ has filed criminal charges. https://t.co/e9gKeGerWS

— Dave Lauer (@dlauer) May 17, 2022

“No one at AGI US or Allianz was verifying that Tournant and his colleagues were actually adhering to the investment strategies promised to investors,” according to Tournant’s indictment. “For example, no risk or compliance personnel at AGI US verified, attempted to verify, or were responsible for verifying that Tournant and his colleagues were purchasing hedging positions within the range that was represented to investors, or adhering to other agreed upon risk mitigation strategies, including those specifically promised to the funds’ largest investor.”

Tournant misled investors that Allianz was “one of the largest and most conservative insurance companies in the world” and was monitoring every position that he took as a “master cop,” according to the court filing. None of that actually happened, and the moments markets tumbled, the hedge fund blew up.

Here’s the funny part: as we noted in February, the Structured Alpha hedge funds were designed to provide protection against a market crash yet blew up during the tumultuous early days of the pandemic when markets crashed. They were not anything! Following a controversial options strategy, the Florida-based funds lost between 49% and 97% of their value during the first quarter of 2020. Investors said they lost billions of dollars. Allianz liquidated two of the vehicles in March 2020 and has been unwinding the others.

There’s a reason for that – starting in late 2015, the “hedge funds” became just “funds” as that’s when Tournant grew frustrated with the cost of hedging, which was eating into returns, and the fund “abandoned the promised hedging strategy and instead began to purchase cheaper hedges that were further out of the money, and therefore less protective in the event of a market crash,” according to the indictment. That change was not disclosed to investors, prosecutors allege.

If fake hedging isn’t enough, the indictment also claims that the defendants reduced losses under a market crash scenario in one risk report sent to investors from negative 42.1505489755747% to negative 4.1505489755747% — by simply dropping the single digit 2!

It gets worse: prosecutors also said that Tournant then tried to obstruct a government probe.

“In or about the summer of 2020, after the onset of the pandemic and in order to avoid detection of the fraudulent scheme, Gregoire Tournant, the defendant, obstructed an investigation by the U.S. Securities and Exchange Commission (the ‘SEC’) into the circumstances that led to the losses in March 2020. Among other things, Tournant repeatedly directed Stephen Bond-Nelson, a portfolio manager for the funds, to lie to the SEC” and spoke to him at a vacant construction site, like a bunch of mafia gangsters.

Bottom line: it appears that with Archegos three weeks ago, and now this, regulators are finally starting to crack down on white collar crime. Of course, since everyone on Wall Street is guilty of something (look no further than the king of the vampire squid Lloyd Blankfein who was bounced to avoid hard time as part of the bank’s criminal relations with Malaysia’s 1MDB), it remains to be seen just how high up the corner suite this latest crackdown goes.

The entire SEC complaint tied to Allianz Structured Alpha options strategy is worth readinghttps://t.co/D6vzNS59QQ “After Bond-Nelson’s testimony before the SEC, Taylor had a conversation with Tournant at a vacant construction site” pic.twitter.com/rRVOl1tuXM

— Gunjan Banerji (@GunjanJS) May 17, 2022