NEW YORK – A federal judge has ruled that a German financial services company will face claims from investors that it wrongly administered hedge funds which took billions of dollars in losses, at the start of the COVID-19 pandemic in 2020.
U.S. District Court for the Southern District of New York Judge Katherine Polk Failla ruled Sept. 30 that investors would be given the opportunity to show negligence on the part of Allianz Global Investors U.S. LLC, in the management of its Structured Alpha hedge funds.
“Plaintiffs, large institutional investors, have brought more than a dozen related actions, including two putative class actions, against defendant Allianz Global Investors U.S. LLC, arising out of the collapse of a series of Structured Alpha Funds in which plaintiffs had invested. The funds lost much of their value, and in some instances collapsed completely, in February and March of 2020 during the market turmoil caused by the COVID-19 pandemic,” Failla said.
“Plaintiffs allege that defendant’s mismanagement and self-dealing caused the Funds’ precipitous collapse in value, and they assert claims under the Employee Retirement Income Security Act of 1974, and at common law for breach of contract, breach of fiduciary duty, and negligence. One plaintiff also asserts claims for fraud and misrepresentation.”
Court filings detail that the Structured Alpha Global Equity 500 fund lost 75 percent of its value, trailing its benchmark by almost 60 percent. Two other hedge funds which at one time had amassed $2.3 billion in wealth were liquidated, sealing losses to investors.
Both the U.S. Department of Justice and the U.S. Securities and Exchange Commission are actively investigating the collapse of the Allianz funds.
One of the plaintiffs in 12 separate lawsuits against Allianz, two of which are class actions, is Bethlehem-based Lehigh University, located in Lehigh County.
Lehigh University claims that between 2013 and 2019, it had invested $67 million with Allianz, a value totaling five percent of its total $1.4 billion endowment. The university sought what it called “a modest incremental return”, through the fund’s advertised strategy to minimize potential risk and losses.
But in the first quarter of 2020, Lehigh alleged Allianz had wiped out $62 million of its $67 million investment, through a combination of “misrepresentation and negligence.”
Failla’s ruling retained a number of claims against Allianz, over the company’s attempt to dismiss them. In one instance, the company asserted that Lehigh’s allegations were mere “holder” claims in violation of New York law.
“Here, Lehigh does not plead speculative lost profits, but pleads out-of-pocket losses by alleging that it would have redeemed its entire investment upon learning the truth about defendant’s new investment and risk management practices,” Failla said.
“At the very least, Lehigh’s damages are capable of being calculated and proven, as its investment will have a certain, verifiable value as of the date where discovery establishes that defendant’s misrepresentations or fraud began (assuming discovery reveals such misconduct at all). Thus, because Lehigh alleges specific, verifiable out-of-pocket losses associated with defendant’s purported fraud and misrepresentation, dismissal for violation of New York’s out-of-pocket rule is inappropriate.”
Failla further found that Allianz’s argument that the collapse of the funds was due to the unprecedented effect of COVID-19 on the stock market, was not germane to the case.
“Defendant’s argument that the funds’ collapse was caused by the unanticipated effects of COVID-19 and that “market events overwhelmed the strategy”, is largely irrelevant to the issue of fraudulent intent, and is thus not more compelling than Lehigh’s claim that defendants implemented a clandestine reversal of its investment strategy,” Failla said.
“Defendant’s failure to predict the COVID-19 pandemic is unrelated to Lehigh’s actual allegations, which are that defendant improperly concealed a change in investment strategy that left the funds severely exposed to an increase in volatility – an allegation that is sustained regardless of any tail risk.”
U.S. District Court for the Southern District of New York case 1:20-cv-07061
From the Pennsylvania Record: Reach Courts Reporter Nicholas Malfitano at nick.malfitano@therecordinc.com