The Allianz subsidiary pleads guilty to a $ 7 billion investment implosion.

German insurance company Allianz will pay over $ 6 billion for the implosion of a group of hedge funds that two years ago blocked public pensions, religious organizations, foundations and other investors with heavy losses.

An American subsidiary of the insurer, Allianz Global Investors US, pleaded guilty Tuesday to stock fraud for not stopping the scheme, which came to light after funds plummeted at the start of the pandemic, losing more than $ 7 billions before their closure, according to federal prosecutors’ court records.

The fraud involved three former portfolio managers, including the funds’ former chief investment officer, who duped investors for at least four years by hiding their risk, prosecutors said. Gregoire Tournant, the former chief investment officer, tried to cover up the plan and mislead investigators in the spring of 2020, prosecutors said.

Mr. Tournant was charged with fraud and obstruction of justice in an unsealed indictment Tuesday. The other portfolio managers, Stephen Bond-Nelson and Trevor Taylor, pleaded guilty in March and are collaborating with the government, prosecutors said.

Damian Williams, United States Attorney for New York’s Southern Borough in Manhattan, She said the three men provided investors with false documents that “hid the fact that they were secretly exposing investors to substantial risk.”

Those investors included a number of retirement funds: the Teamster Members Retirement Plan, the New England Health Care Employees Pension Fund, the Arkansas Teacher Retirement System, the Milwaukee City Employees’ Retirement System, and Blue’s National Employee Benefits Committee. Cross Blue Shield. Under its plea deal, Allianz said it would pay more than $ 5 billion in restitution to investors and more than $ 1 billion to the government, federal officials said.

But the consequences of the case go beyond the investors concerned. As a result of his guilty plea, Allianz said he would no longer be authorized to advise on certain types of funds in the United States. The company said Tuesday that it has reached a preliminary agreement to transfer management of approximately $ 120 billion of assets to a new partner, Voya Financial. Allianz said a deal will be finalized in the coming weeks.

Allianz, which is the parent company of giant mutual fund bond firm PIMCO, said it does not expect any disruption to its other US operations. Allianz said so should get a waiver by the Securities and Exchange Commission which would ensure that the guilty plea will not affect the operation of either PIMCO or Allianz’s insurance business in the United States.

“We accept our corporate responsibility for the isolated but serious wrongdoing of these three former employees,” Allianz said in a statement. The company said it supported the investigators’ efforts and tried to reach “fair deals” with customers who had been lied to.

An attorney from Allianz’s investment subsidiary filed a guilty plea on her behalf on Tuesday afternoon. A factual statement included in the plea documents claimed that it had “made false and misleading statements to current and potential investors who have substantially underestimated the risks taken by the funds.”

The Department of Justice and the SEC began examining the company’s structured Alpha funds after suffering heavy losses at the start of the Covid-19 pandemic, when stock prices plummeted as freezes caused widespread economic upheaval. Authorities said the seeds of that destruction were planted years earlier by fund managers, who fabricated risk reports, altered performance data and manipulated spreadsheets to lie about their investment strategy.

Prosecutors have presented a series of attempts to mislead investors. In one case, authorities said, portfolio managers reported a daily loss of 9.3%, halving the actual decline. In another, the portfolio manager told investors that a potential market crash would result in losses of 4.15 percent, a figure achieved by lowering the actual estimate by one figure by 42.15 percent.

Investigators said the managers began misleading investors as early as 2016, helping the company generate $ 400 million in net profits from managing the funds, as well as massive bonuses for themselves.

“The conduct of the defendants in this case was brazen,” said Gurbir S. Grewal, director of the police division of the SEC.

Even so, authorities said, the investment firm’s oversight was too weak to grasp the problem before it was too late: the firm’s controls were full of loopholes that made them inadequate to oversee the managers’ trade.

After the funds fell apart, investigators said, the coverage began.

Mr. Grewal said that when Mr. Bond-Nelson was confronted by SEC staff members for a false statement he had made, he took a bathroom break and never came back. And Mr. Taylor met with Mr. Tournant at an empty construction site to discuss how to answer investigators’ questions, authorities said.

Mr. Tournant, 55, voluntarily surrendered to Denver authorities Tuesday morning to face charges including title fraud, conspiracy, and obstruction of justice. In a statement, Tournant’s attorneys Daniel Alonso and Seth Levine called the case an “unfair and reckless attempt by the government to criminalize the impact of Covid’s unprecedented March 2020 market dislocation.”

Attorneys claimed that Mr. Tournant was on medical leave at the time and had suffered losses due to the “substantial investment” he had made in the fund.

“Although the losses are deplorable, they are not the result of any crime,” the lawyers said.

In addition to his criminal case, Mr. Tournant faces civil charges from the SEC, which has already agreed on settlements with Mr. Bond-Nelson and Mr. Taylor.

“Victims of this misconduct include teachers, clergy, bus drivers and engineers, whose pensions are invested in institutional funds to support their retirement,” SEC President Gary Gensler said. “This case shows once again that even the most sophisticated institutional investors, such as pension funds, can become victims of wrongdoing.”