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Law360 (September 16, 2020, 10:53 PM EDT ) A Blue Cross Blue Shield employee benefits committee sued Allianz in New York federal court Wednesday, claiming the investment firm falsely touted a low-risk strategy when in reality it made bad bets that were a "ticking time bomb" and cost investors $2 billion during coronavirus-related market volatility.
The committee accuses Allianz Global Investors US LLC and its fiduciary investment adviser, Aon Investments USA Inc., of violating the Employee Retirement Income Security Act by falsely assuring the committee repeatedly that Allianz had "structural risk protections" in place — called its Structural Alpha strategy — to minimize the losses of the benefit committee's portfolio.
Allianz promised that hedges would be in place "at all times" to limit any risks associated with options trading and eliminate the risk of a margin call, according to the suit. But when the stock market plunged in February and March as the novel coronavirus spread around the world, Allianz abandoned its strategy, the suit claims.
The committee says Allianz made one bad bet after another, lying about which hedges it purchased to protect the investments and then making bad bets against market volatility. Once the market dropped in the spring, the suit claims, Allianz made another bad bet and sold hedges that could have protected the benefits committee's investments from further losses, based on the inaccurate assumption that the market would quickly recover.
"Allianz had constructed the portfolio not to pursue 'risk-managed returns' as it had promised but instead to earn marginal returns selling insurance against market volatility while maintaining no meaningful protection against the downside associated with the large tail risk of a market collapse — a strategy that has been aptly described as picking up pennies in front of a steamroller," the complaint says.
The series of investment decisions exposed the employee retirement funds to "catastrophic losses" and a margin call, which Allianz had promised investors would never happen, the suit claims. BCBS funds dropped from $2.9 billion in January to facing a margin call six weeks later, forcing the funds to liquidate their investments, the suit says.
"As a result of Allianz's breaches, a substantial portion of plan assets meant to provide retirement security to thousands of employees and their beneficiaries was wiped out," the suit says.
The committee also accuses Aon of breaching its fiduciary duty as its adviser by failing to monitor risks associated with Allianz's strategy. The suit says Aon should have known that Allianz had strayed from its hedging strategy and warned the committee, but instead Aon repeatedly encouraged the committee to invest larger portions of its pension funds into the purportedly risky funds.
"Had Aon informed the committee of the actual risks posed by Structured Alpha, the trust would have avoided the staggering losses it sustained in February and March 2020," the suit says.
The suit seeks to recover all losses caused by the alleged misconduct, plus interest, along with any fees that were incurred due to the misconduct and attorney fees and costs.
According to the suit, plans that suffered losses include plans sponsored by BCBSA, Hawaii Medical Service Association, NASCO, Triple-S Management Corp., BCS Financial Corp., Blue Cross Blue Shield of Florida and Blue Cross Blue Shield of other states.
Allianz said in a statement Thursday that the losses at issue from the market downturn in late February and March were "disappointing," but the company believes the allegations in the lawsuit are "legally and factually flawed" and any risks involved with its investment strategy were fully disclosed.
"We will defend ourselves vigorously against these claims," the company's statement says.
A representative for Aon declined to comment Thursday.
Counsel for the committee didn't immediately respond Wednesday to a request for comment.
The committee is represented by Daniel Z. Goldman of Petrillo Klein & Boxer LLP and Sean W. Gallagher, Adam L. Hoeflich, Mark S. Ouweleen, Abby M. Mollen and Nicolas L. Martinez of Bartlit Beck LLP.
Counsel information for Allianz and Aon wasn't immediately available Wednesday.
The case is Blue Cross Blue Shield Association National Employee Benefits Committee v. Allianz Global Investors US LLC et al., case number 1:20-cv-07606, in the U.S. District Court for the Southern District of New York.
--Editing by Michael Watanabe.
Update: This story has been updated to include comment from Allianz.
For a reprint of this article, please contact reprints@law360.com.
