Don't perpetrate financial fraud in spreadsheets

Photo by Mika Baumeister on Unsplash

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The twitter thread starts here:

JohannesBorgen @jeuasommenulle

Time to go back to the incredible Allianz story that broke yesterday: how did a boring German insurer end up paying 5.8bn$ in fines & client compensation? A thread + what I think are important lessons at the end – but before you ask, why they did it, here’s the answer.

Key tweets:

JohannesBorgen @jeuasommenulle

Easy to bullshit anyone that doesn’t understand the maths. But Tournant was a McKinsey guy, not a French quant 😊So his technique was rather simpler: he received the Excel files with the risk metrics and would just remove a number : 42.1505489755747% would become 4.1505489755747%

JohannesBorgen @jeuasommenulle

You know the drill by now. Manually change the Excel files. But seriously, this is tedious! So many files to doctor. So much work. Tournant had a great team. So, one of his guys sent him a password protected Excel file with detailed instructions to alter the data!

From the legal filing:

Next tweet:

JohannesBorgen @jeuasommenulle

Imagine being caught because your client sees your Excel formula saying =if(Risk>5%, Risk =3.0314%, Risk = 2.1235%)

Image again:

SEC press release of the fine:

https://www.sec.gov/news/press-release/2022-84

Defendants reduced losses under a market crash scenario in one risk report sent to investors from negative 42.1505489755747% to negative 4.1505489755747% -- by simply dropping the single digit 2.  In another example, defendants “smoothed” performance data sent to investors by reducing losses on one day from negative 18.2607085709004% to negative 9.2607085709004% -- this time by cutting the number 18 in half.    

Reuters coverage:

Architect of Allianz fraud made $60 mln as he lied to investors, U.S. says

Tournant, with Allianz Global Investors since 2002, founded the so-called Structured Alpha funds in 2005. They were marketed in particular to typically conservative U.S. pension funds, from those for labourers in Alaska to teachers in Arkansas and subway workers in New York.

The funds used complex options strategies to generate returns.

…..

Tournant "deceived the funds and their investors by understating the risk," the indictment reads.

In one example, Tournant and another fund manager took daily risk reports provided by a sister company and altered 75 of them before they went to investors. The effect was to reduce projected losses in stress scenarios.