No one seemed to buy the sales pitch coming out of Allianz Global Investors US more than Jamey Sharpe.

Over the years, Sharpe helped steer billions into several hedge funds inside an affiliate of Allianz SE that claimed they’d thrive in any market. In time, no investor was in deeper than his employer, the Blue Cross and Blue Shield Association.

Now, Sharpe -- a retired pension functionary who operated far from the glare of Wall Street -- has been thrust into an uncomfortable legal spotlight. He’s one of a cast of characters enmeshed in the drama over who’s to blame in the fallout from the multibillion-dollar Allianz Structured Alpha funds collapse. 

Fingers are pointing everywhere. The US investment subsidiary of Allianz SE has pleaded guilty to securities fraud related to the funds. Federal authorities say three former portfolio managers from Allianz misled investors. Two have pleaded guilty to securities fraud and investment adviser fraud, among other charges. The third, Structured Alpha’s chief investment officer Greg Tournant, is fighting criminal charges.

A Blue Cross and Blue Shield Association benefits committee says an adviser that was supposed to help investors vet their risks fell down on the job. And now that adviser, Aon Investments USA, claims Sharpe and others at Blue Cross failed to do their jobs.

A spokesperson for Aon declined to comment.

This much is certain: Blue Cross bet big on Structured Alpha. In the process, it appears to have ignored a fundamental rule of investing: Diversify. By the time it was over, Blue Cross -- a federation with more than 100 million customers -- had sunk $3 billion into the Allianz funds. That was as much as 62% of its entire pension portfolio. Now, it’s the biggest loser, by far, among the 114 institutions that collectively invested $11 billion in Structured Alpha.

Allianz has agreed to pay $6 billion to clean up the mess. In recent weeks, it’s settled with the authorities and about two dozen investors, including Blue Cross.

Lawsuits
But its deal didn’t cover all of the Blue Cross losses. Blue Cross has sued Aon, and Aon has responded by suing five Blue Cross executives, including Sharpe, who retired in January after three decades at Blue Cross. One of those Aon sued was Sharpe’s boss, claiming he failed to oversee him. Hundreds of millions of dollars are potentially on the line in the legal fight.

The key question is how and why the Blue Cross pension office ended up investing so much of its portfolio into Structured Alpha, offered by a relatively small, obscure unit inside the giant German insurer’s US investment subsidiary. The portfolio managers there said they would use options to make money no matter which way the markets went. Authorities say they criminally concealed the risks they were taking.

Aon blames Sharpe, who it says “was central to the Committee’s management of the Trust” and others. In a lawsuit filed May 17 in New York federal court, the adviser alleges Sharpe, the Blue Cross chief investment executive, encouraged the committee that oversees pension investments to repeatedly commit more to Structured Alpha. It also claims he fired a senior employee who disagreed with his strategy.

Sharpe denies Aon’s allegations and says the lawsuit is baseless. His lawyers also say Aon is trying to take advantage of the fact that Sharpe, who’s in his late 60s, is fighting cancer.

“As Aon and its counsel knew when they sued him, Mr. Sharpe is undergoing treatment for advanced cancer and would prefer to focus on his health rather than responding to Aon’s abusive, unnecessary, and baseless attempt to shift the blame for their bad advice on Structured Alpha personally to him,” Sharpe’s attorney, Sean Gallagher, said in a statement to Bloomberg.

‘Catastrophic Losses’
The Blue Cross and Blue Shield Association National Employee Benefits Committee sued Allianz and Aon in 2020, after Structured Alpha plunged during the market mayhem of the early pandemic. The committee claimed Aon touted Structured Alpha as late as 2019 as one of its “highest conviction strategies,” even as it failed to properly monitor the Allianz funds or find fraud under its nose.

“Aon never alerted the committee that Allianz had strayed from the hedging strategy that should have been in place, leaving the portfolio exposed to catastrophic losses,” Blue Cross claimed. “Instead, Aon repeatedly (and falsely) described Structured Alpha as operating just as Allianz said it would.”

Blue Cross claimed Aon failed to monitor Allianz and “obscured the truth from the committee that the entire investment could be at risk.” Aon advisers gave the committee written analyses in 2011, 2013 and again in 2018 putting “buy” recommendations on Structured Alpha, Blue Cross claimed. It said Aon’s advice was a “primary basis” for its investment decisions.

In its May 17 lawsuit against Sharpe, Aon alleges he “masterminded and aggressively promoted” the investments in Structured Alpha. It also alleges Sharpe withheld information, including details about how Allianz had created funds solely for Blue Cross’s benefit, according to the court filing.

‘Like a Salesman’
“Instead of acting like a trusted fiduciary, he acted like a salesman,” Aon said of Sharpe. Aon filed a similar complaint against Blue Cross and Blue Shield Association on May 27.

Whatever the case, Blue Cross invested in the funds to an extraordinary degree. In 2013, it had 4.6% of its pension money in Structured Alpha. By late 2016, that figure had jumped to 62%, according to the Aon court filings.

Aon, in its suit, goes further. It claims Sharpe fired a senior employee who challenged “his authority over Structured Alpha and replaced her with more junior subordinates whom he kept in the dark about Structured Alpha and its risks.” He allegedly told Aon that for Structured Alpha, “the buck stopped with him.”

Aon also has sued Terrence Cooney, Sharpe’s superior, claiming he breached his fiduciary duty by failing to supervise Sharpe.

Gallagher, Sharpe’s attorney, said he “relied upon Aon for its professed expertise and trusted their advice. Never once during the decade of their work together did Aon raise any concerns about the allocation to Structured Alpha, nor any concerns about Mr. Sharpe impeding their work. To the contrary, Aon claimed to have extensive knowledge about Structured Alpha and was a big champion of the strategy.”

Fiduciary Duty
Gallagher also represents the Blue Cross pension committee, which he said is “appalled that Aon does not stand behind the advice it gave the NEBC; that Aon conducted no meaningful diligence on Structured Alpha; and that Aon seeks to deflect blame for its own failures to a client.”

Cooney didn’t have a separate statement beyond the NEBC response, according to Gallagher.

Aon’s legal assault on longtime clients is a peculiarity of a pension law known as Erisa, or the Employee Retirement Income Security Act of 1974. Erisa, which governs private-sector retirement plans, spells out how various parties involved in managing pensions are fiduciaries with a legal duty to act in the interests of workers and retirees.

Aon claims that if it’s found to have breached its fiduciary duty under Erisa, the Blue Cross Blue Shield Association is more liable and should indemnify it for any damages.

A substantial portion of Aon’s lawsuits are redacted because of a protective order. The criminal case against Allianz and the portfolio managers has further complicated the litigation. Prosecutors charged, for instance, that Tournant, the chief investment officer for the hedge funds, spent years “smoothing” performance data, lying about market hedges, and pretending risk managers at Allianz Global were monitoring his every move.

Tournant’s lawyers have said the case against him is “meritless” and an “ill-considered attempt by the government to criminalize the impact of the unprecedented, Covid-induced market dislocation.” Tournant pleaded not guilty Thursday to the charges against him.

With lawsuits now flying, prosecutors asked last month to temporarily bar civil attorneys from interviewing current and former employees because they said it would interfere with their case. The judge overseeing the case halted the depositions for 30 days.

This article was provided by Bloomberg News.