In re Allianz Global Inv'rs U.S. LLC Alpha Series Litig.
| Decision Date | 30 September 2021 |
| Docket Number | 20 Civ. 7952 (KPF),20 Civ. 7606 (KPF),20 Civ. 7154 (KPF),20 Civ. 9587 (KPF),20 Civ. 5817 (KPF),20 Civ. 7842 (KPF),20 Civ. 9479 (KPF),20 Civ. 10028 (KPF),20 Civ. 5615 (KPF),20 Civ. 8642 (KPF),20 Civ. 9478 (KPF),20 Civ. 7061 (KPF) |
| Parties | In re ALLIANZ GLOBAL INVESTORS U.S. LLC ALPHA SERIES LITIGATION |
| Court | U.S. District Court — Southern District of New York |
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 (“AllianzGI”) arising out of the collapse of a series of Structured Alpha Funds (the “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. 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 (“ERISA”), and at common law for breach of contract, breach of fiduciary duty, and negligence. One Plaintiff also asserts claims for fraud and misrepresentation. Now before the Court is Defendant's omnibus motion to dismiss in part Plaintiffs' complaints in the first twelve of these related cases (collectively, the “Related Cases”). For the reasons that follow, Defendant's motion is granted in part and denied in part.
BACKGROUND[1]
The Related Cases encompass twelve actions, each with a unique complaint containing extensive factual allegations. Defendant moves to dismiss only certain of Plaintiffs' claims in each complaint. As such, the Court relays in this Opinion only those facts relevant to resolving the instant motions to dismiss.[2]
Plaintiffs are institutional investors with millions, if not billions, of dollars of investments under management. (See, e.g., BCBS ¶¶ 16, 17; CMERS ¶¶ 3, 21).[3] Most Plaintiffs are fiduciaries that owe duties to the individuals or entities whose assets they have been entrusted to invest. (See, e.g., BCBS ¶ 16; TMRT/BLYR SAC ¶¶ 8, 10). Some Plaintiffs utilize the services of independent investment advisors. (See, e.g., ATRS ¶ 17; CLPF ¶ 20). Eight of the twelve Related Cases - the BCBS, CLPF, CPPT, CTWW, FFLD/NEHC, IBEW, TMRT/BLYR, and UFCW actions - involve Plaintiffs that are subject to ERISA. (See Giuffra Decl., App. B (summary of Plaintiffs' investments)).[4] Across the Throughout this Opinion, the Court refers to Defendant's omnibus memorandum in support of its motion to dismiss as “Def. Br.” (Dkt. #83); to Plaintiffs' joint memorandum in opposition to the omnibus motion to dismiss as “Pl. Opp.” (Dkt. #97); to Defendant's reply brief in further support of its omnibus motion to dismiss as “Def. Reply” (Dkt. #104). Defendant's brief in support of its supplemental motion to dismiss Lehigh's fraud claims is referred to as “Def. Supp. Br.” (Lehigh, Dkt. #57); Lehigh's opposition is referred to as “Lehigh Opp.” (Lehigh, Dkt. #69); and Defendant's reply is referred to as “Def. Supp. Reply” (Lehigh, Dkt. #75).
For the convenience of the reader, the Court adopts the abbreviations that Defendant uses to refer to Plaintiffs in its omnibus memorandum of law in support of its motion to dismiss. (See Def. Br. ix-xii).
Related Cases, Plaintiffs invested in more than a dozen of Defendant's Structured Alpha Funds. (Id.). Defendant is a Delaware limited liability company and registered investment advisor under the Investment Advisers Act of 1940, with its principal office in New York, New York. (See, e.g., ATRS ¶ 20; BCBS ¶ 17). Defendant is the investment manager for the Funds. (See, e.g., ATRS ¶ 20; CMERS ¶ 22). ATRS, the first of Plaintiffs to invest in the Funds, did so in April 2009 (Giuffra Decl., Ex. 39), and the last investment made by any of the Plaintiffs occurred in November 2019 (see Lehigh FAC ¶ 45).
Broadly speaking, Plaintiffs allege that Defendant marketed the Funds as relatively safe investments, pitching a multi-pronged investment strategy designed to both provide “broad market exposure” and achieve “targeted positive return potential, ” while still maintaining “structural risk protections” to safeguard against losses in the event of a market crash. (BCBS ¶ 20). The key to the Funds' investment strategy was the implementation of “alpha” and “beta” components. (See, e.g., FFLD/NEHC SAC ¶ 17; MTA FAC ¶ 46). The “beta” component consisted of investments “that [sought] to deliver a return equivalent to” a specified “benchmark” index (PPM 1), essentially aiming to replicate the return of a selected market index or other passive investment strategy (Lehigh FAC ¶ 62). Depending on the Fund, the beta component could be comprised of investments that tracked different market indices. (ATRS ¶ 53). The “alpha” component, by contrast, sought to generate returns above the benchmark index, “using the underlying investments of the [b]eta [c]omponent as collateral” (PPM 1-2) in order to execute an options-based strategy (TMRT/BLYR SAC ¶¶ 36-37; PPM 1-2).[6] Plaintiffs allege that Defendant marketed the alpha component as a strategy for trading options aimed at delivering a “steady, resilient return stream with a fundamental emphasis on risk management.” (Lehigh FAC ¶ 65). Defendant purportedly marketed the alpha component as “non-directional, ” insofar as it “[wa]s not predicated on correctly taking a view on the direction of equities, interest rates or any other fundamental factor.” (BCBS ¶ 22; UFCW ¶ 30). In other words, the alpha component was pitched to Plaintiffs as a way of achieving relatively safe, risk-managed returns that were uncorrelated with market performance. (See, e.g., ATRS ¶ 4; IBEW FAC ¶¶ 4- 5). As such, Defendant told Plaintiffs that Defendant would “never make a forecast on the direction of equities or volatility.” (BCBS ¶ 22; CMERS ¶ 7; see also CLPF ¶ 5; CTWW ¶ 5). The risk protections Defendant purportedly utilized “combine[d] both long- and short-volatility positions at all times, ” meaning that the Funds simultaneously held positions betting for (long-volatility) and against (short-volatility) market vicissitudes. (BCBS ¶ 23; see also Giuffra Decl., Ex. 5 (“Lehigh Pitchbook”) at 12). Defendant's risk management strategy aimed to “capitalize on the return-generating features of selling options (short volatility), ” while “simultaneously benefit[ing] from the risk-control attributes associated with buying options (long volatility)[.]” (BCBS ¶ 23).
Defendant told Plaintiffs that three types of trades were the “building blocks” of Defendant's investment strategy for the Funds: (i) range-bound spreads, (ii) directional spreads, and (iii) hedging positions. (See, e.g., BCBS ¶ 24; CMERS ¶¶ 64-68). The range-bound spreads were “short volatility positions, ” “designed to collect option premium[s] and to generate excess returns in normal market conditions.” (Lehigh FAC ¶ 81). The strategy underpinning the range-bound spreads was to “sell options [with] the greatest probability of expiring worthless” (Lehigh Pitchbook 12-13), meaning that these positions “would make money if the underlying asset stayed in a particular range” of volatility - the so-called “profit zone” - “but would lose money if the price of the underlying asset landed outside” the profit zone. (Lehigh FAC ¶ 81; see also PPM 1, 25; Lehigh Pitchbook 12). Directional spreads, which were advertised as “combination long-short volatility positions, ” consisted of “option positions that benefit[ed] from a large index move to the upside and/or downside” (Lehigh Pitchbook 12-13; see also BCBS ¶ 26). Directional spreads were “intended to be a diversifier that provided returns when the market behaved unusually” (CMERS ¶ 65; see also BCBS ¶ 26).
In deploying the range-bound and directional spreads, Defendant was “effectively selling expensive insurance to other investors seeking to protect themselves from large market swings.” (ATRS ¶ 10; see also CMERS ¶ 64). In essence, the Funds' options-based strategy sought to generate above-market returns by collecting premiums from options sales, which premiums could be passed along as profit to Plaintiffs if the market did not move in such a way as to trigger the exercise of the options. (See TMRT/BLYR SAC ¶¶ 41-42; CMERS ¶ 79; PPM 1). Defendant informed Plaintiffs of the substantial risks implicated by this strategy. (See, e.g., PPM 25-26; Lehigh Pitchbook 36). In recognition of these risks, Defendant employed the third component of the investment strategy, the hedges, as “long-volatility positions” that were “designed to protect the portfolio in the event of a market crash.” (UFCW ¶ 36; see also CPPT FAC ¶ 63). In conjunction with writing options and collecting premiums, hedges involved options that Defendant purchased itself to mitigate the risk that market volatility would trigger the options it wrote as part of the range-bound and directional spreads. (See TMRT/BLYR SAC ¶¶ 50-51, 53-54). Defendant told Plaintiffs that as part of its hedging strategy, it would purchase put options “out of the money at various levels to the downside, and always in a greater quantity than the amount of puts sold for the range-bound positions, ” in order to protect against the exposure to market volatility. (BCBS ¶ 28; see also CLPF ¶ 8; Lehigh Pitchbook 14). Defendant purportedly emphasized to Plaintiffs that the “long puts are in place at all times, ” and were utilized “exclusively for risk-management purposes.” (BCBS ¶ 28; see also CPPT FAC ¶ 109).[7] These hedges were supposed to prevent against the risk of an ...
To continue reading
Request your trial