Allianz Global Investors U.S. LLC agreed to plead guilty to securities fraud and to pay more than US$6 billion to settle allegations that a trio of former fund managers hid the risk of a complex trading strategy that was exposed when the pandemic hit.

Allianz will pay more than US$1 billion to settle the allegations from the U.S. Securities and Exchange Commission (SEC) and more than US$5 billion in restitution to the investors that sustained heavy losses when the strategy imploded, the regulator said.

“After the Covid-19 market crash of March 2020 exposed the fraudulent scheme, the strategy lost billions of dollars as a result of AGI US and the portfolio managers’ misconduct,” the SEC said in a release.

The SEC’s complaint, which was filed in a federal district court in Manhattan, alleged that the strategy’s lead portfolio manager, Gregoire Tournant, “orchestrated the multi-year scheme to mislead investors” who invested approximately $11 billion into the strategy, known as Structured Alpha.

Alongside Tournant, the regulator also charged co-lead portfolio manager Trevor Taylor and portfolio manager Stephen Bond-Nelson with manipulating disclosure to investors to conceal the strategy’s true risk and the funds’ actual performance.

For instance, the SEC alleged that in a risk report to investors, which should have shown losses under a market crash scenario of 42.15%, the report dropped a digit and reported the potential loss at 4.15%.

The three portfolio managers and the firm were also charged in a parallel criminal proceeding by the U.S. attorney’s office for the Southern District of New York.

“From at least January 2016 through March 2020, the defendants lied about nearly every aspect of a highly complex investment strategy they marketed to institutional investors, including pension funds managing the retirement savings of everyday Americans,” said Gurbir Grewal, director of the SEC’s division of enforcement, in a release.

“While they were able to solicit over US$11 billion in investments by the end of 2019 and earn over US$550 million in fees as a result of their lies, they lost over US$5 billion in investor funds when the market volatility of March 2020 exposed the true risk of their products,” Grewal said.

In settling the case, Allianz Global admitted that its conduct violated federal securities laws and it agreed to a cease-and-desist order, a censure, a US$675 million penalty, US$315.2 million in disgorgement, and US$34 million in prejudgment interest, with the disgorgement and prejudgment interest deemed satisfied by amounts it paid to the U.S. Department of Justice (DoJ) as part of an integrated, global resolution.

In its settlement with the DoJ, the firm agreed to plead guilty to one count of criminal securities fraud.

As a consequence of the guilty plea, the firm is disqualified from providing advisory services to U.S. registered investment funds for 10 years and will exit that business. The SEC said that it will allow a “brief transition period” to avoid disruptions to the funds that it does currently serve.

To that end, Allianz Global announced a deal with Voya Financial that would see the firm transfer its U.S. investment teams and assets to Voya Investment Management in exchange for up to a 24% equity stake in Voya IM.

“Definitive documentation is anticipated to be finalized in the coming weeks, and completion of the transaction is subject to customary closing conditions,” it said.

The firm said the settlements fully resolve the U.S. authorities’ investigations, which found that the “criminal misconduct regarding the Structured Alpha funds was limited to a handful of individuals” in the firm’s structured products group.

In addition to the SEC sanctions, the firm is also compensating harmed investors with the approximately US$5 billion. The firm has already provisioned for those payments.

The SEC’s complaint seeks permanent injunctions, disgorgement plus interest, and penalties against Tournant, Taylor and Bond-Nelson. It also seeks an officer and director ban against Tournant.

The regulator said that Taylor and Bond-Nelson have agreed to partial judgments against them, consenting to “injunctive relief with monetary relief to be determined by the court in the future.”