After more than a day of grilling by U.S. Securities and Exchange Commission officials in May last year, Stephen Bond-Nelson went to the bathroom and cut his testimony short.

The fund manager had just been presented with changes he had made to key investor documents that were intended to create a series of funds that he helped manage. Allianzleading European insurer and one of the leading global asset managers, appear less risky than they were.

This week, authorities announced that Bond-Nelson and his former colleague Trevor Taylor had pleaded guilty to fraud in a $6 billion settlement Allianz had agreed with US authorities over an uncovered scandal. during the pandemic-related market crisis of early 2020 – leaving investors with billions of dollars in losses.

The U.S. arm of Allianz Global Investors and its fund managers “significantly misled investors about the significant downside risks” of so-called Structured Alpha funds as early as January 2016, according to the SEC.

Grégoire Tournant, the former lead manager of the funds that raised $11 billion at their peak and were marketed as capable of withstanding a stock market crash, has been charged but has yet to submit a plea. He swore to defend himself in court.

With its US investment unit pleading guilty to fraud and banned from providing certain local services for a decade, the Munich-based insurer has been rocked by the episode of Allianz Global Investors, an asset management firm that n only provided 2% of the € of the group. 149 billion in revenue last year.

For Wall Street prosecutors who have vowed to crack down on white-collar crime, it’s also provided a major scalp for businesses.

The seriousness of the case makes it “easily understandable why the US government has pursued such an aggressive and punitive outcome,” said Jacob Frenkel, partner at law firm Dickinson Wright.

As Allianz tries to put the damaging episode behind it, SEC and Justice Department legal documents show an opportunity to spot the behavior was missed five years ago and highlight the influence that the incentive structures have had on the trio that manages the funds.

Following Bond-Nelson’s testimony, after which he and Taylor began cooperating with authorities, Allianz launched its own intensive investigation that required nearly 17,000 hours of attorney and expert time “going through every e- mail and communication”. , according to people familiar with the matter.

While Tournant reportedly portrayed Allianz – which also owns bond giant Pimco – in conversation as a “master cop”, telling an investor in 2014 that he had “behind me one of the most important insurance companies and most conservative in the world monitoring every position which I assume,” the DoJ investigation highlighted “significant gaps and weaknesses” in fund controls.

A 2017 internal audit by Allianz’s U.S. investment unit of the Structured Products Group, which managed the funds, found inaccuracies in the documents presented to investors.

“While this audit identified red flags that, if pursued, could have led to the identification of at least some aspects of the fraudulent scheme, no meaningful follow-up was performed,” said the DoJ. In fact, it was conducted by specialists from the structured products group itself, “whose compensation was directly linked to the quarterly performance of the funds”, according to the fillings.

The incentive structures, which included performance fees and led to more than $110 million in bonuses being awarded to the three men between 2016 and 2020, were highlighted by regulators.

In an email, Tournant told colleagues that a recalculation he had requested from fellow accountants, based on underestimated targets, was “[w]orth about 900K to our Comp pool,” according to the SEC.

“It’s hard to believe that such a [bonuses] did not trigger some kind of audit by Allianz on how the team generated such returns,” said Jérôme Legras, head of research at investment firm Axiom. “It seems like some leaders still believe that money grows on trees.”

Tournant turned himself in to authorities in Denver, Colorado, earlier this week. His attorneys said the investors’ losses in 2020 were “not the result of any crime”.

An attorney representing Bond-Nelson declined to comment, and an attorney for Taylor did not respond to a request for comment.

Although the funds were invested in stocks, debt and derivatives, regulators pointed to the sometimes crude attempts to misrepresent the funds.

In the result of a funds stress test, Tournant removed one number, according to the SEC, so that projected losses of -42.1505489755747% were turned into -4.1505489755747%.

Authorities said fund managers “smoothed” performance data to reduce the magnitude of gains and losses and changed documents detailing the funds’ hedging strategies so that the options they had purchased appear “more close to silver”, or worth more in a market. slow-down.

The hedges available to the funds were not enough to prevent them from stranding in the sharp market sell-off in March 2020, when governments around the world shut down their economies to stem the spread of the coronavirus.

Allianz, whose promised $5 billion compensation to investors led to a significant reduction in the fine, said this week’s settlements had “fully” resolved the episode. The investment unit is implementing additional controls over what is communicated to investors, as part of an ongoing governance overhaul, according to a person familiar with the matter.

The Allianz settlement comes as authorities pledged to take a tougher approach to corporate malfeasance than during Donald Trump’s presidency, which critics have deemed too lax.

This has included increased scrutiny of companies breaching deferred prosecution agreements – where companies can postpone criminal prosecution in exchange for remedies and penalties – and requiring cooperating companies to identify more people involved in misconduct if they are to benefit from relief. the clemency.

At a press conference on Tuesday, Damian Williams, a U.S. attorney for the Southern District of New York, hailed the settlement as “one of the most significant corporate lawsuits in history.”