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Allianz SE shares sank after the German financial giant said the Justice Department is investigating its hedge funds that caused investors significant losses during the pandemic-related market downturn early last year.

Allianz on Sunday said its future earnings could be materially hit by the current investigations, which include the DOJ’s inquiry as well as a probe launched by the U.S. Securities and Exchange Commission last year. The insurer said it couldn’t estimate the size of any potential fines and therefore hasn’t set aside provisions.

Several large investors have also filed civil lawsuits against Allianz following the losses.

The Justice Department’s interest in the case raises the stakes for Allianz and the asset-management division whose stock-options trades racked up huge losses when the market swung violently in early 2020. Stocks soon recovered, but not before Allianz Global Investors moved to liquidate two of its funds, locking in losses for their investors.

Shares in Allianz were down more than 7% early Monday. If sustained, the decline would be the company’s biggest one-day share price loss since the early days of the Covid-19 pandemic in March 2020, according to FactSet.

S&P Global Ratings on Monday said it believes potential costs related to the DOJ investigation “could be substantial and might lead us to reconsider our view of the group’s earnings or capitalization." It considers Allianz generally financially sound.

Allianz said it is cooperating with the DOJ and the SEC and has launched its own review. The Munich-based company is one of the largest asset managers in the world with nearly 2.4 trillion euros under management, equivalent to $2.85 trillion. Besides its insurance business, it controls Allianz Global Investors and bond giant Pacific Investment Management Co.

Allianz Global Investors’ Structured Alpha funds had been a big seller of insurance against a market selloff in the short term and a buyer over the longer term. The strategy produced a steady income, as the fund collected premiums from investors hedging against a downturn.

“We are acting like an insurance company, collecting premiums," Greg Tournant, the funds’ portfolio manager, said during a May 2016 marketing video. “When there is a catastrophic event, we might have to pay—very much like an insurance company. The positions we buy to protect ourselves from those catastrophic shocks—you could label those as reinsurance."

As options contracts swung dramatically in March 2020, Allianz managers scrambled to restructure their trades. They struggled to keep up. Stocks fell sharply that month as investors responded to news on the spread and economic impact of the coronavirus, with market volatility reaching a record high.

Later that month, Allianz moved to shut two of its most-aggressive Structured Alpha funds, locking in huge losses. The two funds managed close to $2.3 billion. But many of the other Structured Alpha funds, including those held by U.S. pension plans, were sitting on year-to-date losses well in excess of their benchmark indexes.

The regulatory scrutiny comes after several private lawsuits were filed against Allianz by institutional investors over the Structured Alpha funds. Plaintiffs who have sued Allianz in New York federal court include the Blue Cross and Blue Shield Association, which said its retirement trust lost $2 billion of its $2.9 billion investment, and Raytheon Technologies Corp., which said its pension fund sustained losses of $280 million on its $375 million investment.

Last summer, the Arkansas Teacher Retirement System sued Allianz, alleging the money manager had violated its fiduciary duties and that the trades had left the Structured Alpha funds “dangerously exposed to even the slightest increase in market volatility." The public pension plan said it had lost nearly $800 million as a result.

Arkansas Teacher alleged that Allianz was negligent in betting the options trades would reverse their February slide despite warnings that market conditions could deteriorate. An Allianz spokesman at the time said the premise of the lawsuit was incorrect and without foundation.

Allianz said in its 2020 annual report that it would defend against the allegations from various lawsuits.

This story has been published from a wire agency feed without modifications to the text

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