the times | Saturday May 28 2022 2GM 55

Business

Dominic O’Connell

Sometimes criminals turn up in

suits offering respectable returns

who would question Madoff,

sufficiently well regarded by his peers

to have served as chairman of the

Nasdaq market for three years, who

sat on committees of the Securities

and Exchange Commission (SEC), the

US market regulator?

The whole thing unravelled after

the banking crisis in 2007. Madoff

confessed, was put on trial and was

sentenced to 150 years in jail. It was

perhaps the largest financial swindle

ever. He managed about $65 billion of

clients’ money, most of which just

disappeared; some investors have

seen some returns, mainly thanks to a

deal between the US authorities and

Madoff’s bank, JP Morgan.

Never again, you might think.

Madoff was a one-off and no

professional investor would now be

rooked in such a simple manner.

Think again. A fortnight ago the SEC

filed a lawsuit against three fund

managers who worked for a division

of Allianz, the German insurance

company, which is one of the largest

financial services companies in the

world. Not only are the Allianz

operations enormous in their own

right but the company also owns

Pimco, the world’s largest bond

investor. In total it manages about

€2.5 trillion of clients’ money.

The three, Gregoire Tournant,

Trevor Taylor and Stephen Bond-

Nelson, worked for Allianz Global

Investors. They sold a set of funds

that held out that Madoff-style

promise of steady, better-than-

average returns. The 114 investors

were not members of the public but

experienced institutional bodies,

including big pension funds and

professional money managers. The

“Structured Alpha” products (why do

funds always have such pompous

names?) took in $11 billion and used

what the SEC called “a complex

options trading strategy” to generate

profits, including hedges to protect

against market falls.

The hedges were not quite what

they seemed. According to the

SEC, rather than protecting

against a 10 per cent or 15 per cent

market fall, the Allianz funds bought

much cheaper insurance against

There are few things

more enjoyable than

a good heist movie.

A gang get together:

the charismatic

ringleader, the muscle, the brainy tech

person, the master of disguise and the

love interest, whose presence will add

many plot complications.

They are going to steal £10 billion

from the Bank of England. The brainy

tech person says: “But no one has

ever taken down the Bank of England

before. It can’t be done!” With a

roguish smile, the charismatic leader

replies: “That’s why we’re doing it.”

After days of fiendishly clever

deception and derring-do they

succeed, and ride off into the sunset

with bags of cash. Unless, of course,

the love interest double-crosses them,

which can never be ruled out.

It would be great if financial

services frauds were like that. Billions

of dollars lost — but only after

superhuman exertions by experienced

criminals. However, the evidence

suggests no such effort is required.

Even sophisticated investors have a

habit of being taken in by frauds so

basic they scarcely merit the

description. All the scammers have to

do is promise steady, slightly-above-

average returns and the money men

and women beat a path to their door.

The slam-dunk proof of this was

Bernie Madoff, the New York

investment manager who died just

over a year ago. Bernard L. Madoff

Investment Securities won legions of

followers, including some big names

in the Square Mile, by promising, and

delivering, steady returns. Madoff said

this was down to his brilliant

execution of a trading strategy called

split-strike conversion, better known

in the UK as collar trading. It is a well

understood technique where a money

manager uses derivatives to limit

potential losses on the stock market

and cap potential gains. It can

produce smooth returns.

But Madoff did not use it. He didn’t

trade shares at all. He simply took

clients’ money and put it in a bank

account. He paid out investment

returns from that account and topped

it up with new clients’ cash. A team of

his staff invented share deals and sent

them to investors, sometimes making

mistakes, such as putting a Saturday

as the closing date for a trade, when

in fact the market is closed. No one

looked too closely. The returns were

steady and better than average. And

No easy fix

to aircraft’s

paint woes,

says Airbus

Jonathan Ames Legal Editor

There is no “simple fix” to the peeling

paint problem afflicting airliners sold to

Qatar Airways in advance of the World

Cup, Airbus has acknowledged in the

High Court.

The Gulf airline has alleged in a

£1.3 billion claim that issues with the

paint render its A350s unsafe. The

manufacturer has countered that the

cracking is simply a maintenance issue.

A source close to the litigation said

“there was no permanent solution” and

that the judge had accepted “it is not

just a paint problem”.

That view was noted in a judge’s

interim ruling in the legal battle, which

relates to 24 grounded aircraft. In the

ruling published yesterday, Mr Justice

Waksman set a rough date for a full trial

in the 17-month legal dispute between

the airline and the European manufac-

turer. It is understood from lawyers

involved with the hearing that the trial

will take place next summer.

In his ruling at the Royal Courts of

Justice in London, the judge summa-

rised Airbus’s position regarding the

fleet of A350s that had been delivered

to Qatar Airways, adding that “there is

no simple fix to the problem”. He said

Airbus officials had acknowledged “the

only thing that can be done” was for

engineers to apply up to 900 patches to

all affected areas of peeling paint.

The judge said a core issue at the trial

would be to determine whether the use

of a new design of airframe made of

carbon fibre-reinforced polymers

instead of a metal — typically alumini-

um — triggered the problem.

Qatar Airways said it was pleased with

the High Court ruling. “We entered into

this process to secure an expedited trial

and early disclosure from Airbus that

will give us an insight into the true

nature of surface degradation affecting

the A350s,” the airline said. However, it

is now impossible to resolve the dispute

before the football World Cup starts in

Qatar in November.

Airbus said it was pleased that “the

matter can now proceed with all due

speed to focus on the main topic of the

misrepresentation by Qatar Airways of

safety and airworthiness of the A350 —

which we will continue to defend”.

It added that “a thorough assessment

of the surface degradation was con-

ducted and shared with EASA [the EU

Aviation Safety Agency], which con-

firmed that there is no airworthiness

impact on either Qatar’s aircraft or the

A350 fleet, and no technical impedi-

ment to continued operation”.

a fall of 35 per cent to 50 per cent.

Naturally enough, investors wanted

reassurance about how risky these

funds were. Reports were drawn up

that showed the likely level of losses if

the market slumped. Before they were

passed to clients, however, the SEC

alleges that the trio rewrote the

numbers in the spreadsheet. A 22 per

cent loss became 12 per cent, a 42 per

cent fall became 4 per cent.

There was no science involved; it

was just fiction. More than 80 risk

reports were rewritten, daily returns

were altered to “smooth” the funds’

performance, and a long list of other

metrics that measured their true

position were redone. There were

even crib sheets, the SEC says, with

instructions on how best to change

the spreadsheets quickly, and a

warning not to leave the cursor

hovering over altered cells during

presentations to clients.

Why? For money. The more

investors were lured into the funds,

the more Allianz paid the managers.

Between 2016 and 2020 Tournant

received just under $50 million in

bonuses, Taylor the same, and Bond-

Nelson just under $11 million.

All was fine until Covid came along,

US markets slumped and the true

position could no longer be obscured.

The SEC started investigating and

called in Bond-Nelson for an

interview. He had discussed with his

colleagues what he should say and

held the line until partway through

the second day of cross-examination,

when he went for a lavatory break

and didn’t come back. Eventually he

decided to “co-operate and assist the

investigation”, as did Taylor. Tournant

maintains his innocence; his lawyers

said they were confident the courts

would dismiss “this meritless and

ill-considered attempt by the

government to criminalise the impact

of the unprecedented, Covid-induced

market dislocation of March 2020”.

If it comes to trial, it will be an

interesting hearing. How could

professional fund managers be so

easily taken in by such a simple ruse?

The late Madoff could probably

provide the answer: just promise

steady, decent

returns and

investors will come

running, few

questions asked.

‘‘

’’

Dominic O’Connell is business

presenter for Times Radio