According to a plea agreement reached with federal prosecutors in New York, Allianz Global Investors U.S. pleaded guilty to one count of securities fraud and admitted that it lacked internal controls and oversight for a series of private-investment funds and made false and misleading statements to investors.
Investors lost billions of dollars on the funds, including pension funds that managed the retirement plans of Arkansas teachers and New York City subway workers.
Three former Allianz Global Investors employees were also charged in the scheme. Two people have pleaded guilty.
Gregoire Tournant, the head of the investment group responsible for the funds' massive losses, was charged with securities fraud and investment-adviser fraud. According to a person familiar with the situation, Mr. Tournant surrendered to authorities in Denver on Tuesday morning.
Trevor Taylor, Mr. Tournant's co-lead portfolio manager of the funds, and Stephen Bond-Nelson, a third money manager in the group, agreed to plead guilty to conspiracy to commit securities fraud, as well as securities fraud and investment-adviser fraud. Mr. Bond-Nelson also agreed to enter a guilty plea to obstructing justice.
The Securities and Exchange Commission also filed a civil securities fraud lawsuit against the three men.
In a statement, Allianz cited Justice Department findings that the criminal misconduct was limited to a small number of employees who have since left the company. It stated that the Justice Department's investigation found no evidence of wrongdoing in other parts of Allianz.
Mr. Bond-lawyer Nelson's declined to comment. Mr. Taylor's lawyer and Mr. Tournant's spokeswoman did not immediately respond to requests for comment.
The case centered on Allianz Global Investors' Structured Alpha funds, which bet heavily on stock options, effectively selling insurance to other investors hedging against a potential market selloff. During the market's calm period, the strategy had been profitable, and Allianz executives had assured investors that they had hedged their own trades in the event that the markets became volatile.
"When there is a catastrophic event, we might have to pay—very much like an insurance company," Mr. Tournant said in a marketing video released in May 2016. "You could call the positions we buy to protect ourselves from those catastrophic shocks reinsurance."
Mr. Tournant's Structured Alpha funds will have managed more than $11 billion in assets by 2020.
The strategy was put to the test in March, when the coronavirus swept through the world, causing a market panic about the pandemic's impact on the economy. Stocks plummeted, credit markets froze, and volatility reached a new high.
Managers at Allianz scrambled to restructure their trades as options contracts swung dramatically. They were struggling to keep up as the stock market plummeted at an unanticipated rate.
According to the government, the Structured Alpha funds lost more than $7 billion in March 2020. Allianz informed investors on March 25, that year, that two of its funds would be liquidated.
Within months, fund investors began suing Allianz, and the SEC launched an investigation into the losses.
According to court documents, the scheme ran from at least 2014 to March 2020. Prosecutors claimed that Mr. Tournant and his team misled investors about the risks the funds were taking and how they generated their returns. Prosecutors claimed that the Structured Alpha managers also misrepresented the hedging strategies they used to protect the funds' assets.
Mr. Tournant was also accused of attempting to obstruct the SEC's investigation into the losses by instructing Mr. Bond-Nelson to lie to the regulator.