Another Hedge Fund Fraud?

Fraud knows no boundaries.

I strongly believe we will see dozens of hedge funds, fund of funds, and other financial frauds revealed over the coming months. In fact, I addressed this likelihood last April in writing, “Low Tide Will Reveal Rats Scurrying Amidst The Garbage“:

Additionally, do not forget that many hedge funds suspended redemptions in the latter half of 2008. Ponzi schemes, like rats, only thrive given a steady source of food and water in the form new investments. Suspending redemptions is akin to a rat rationing its food supply. While plenty of those suspensions could be legitimate, it would be naive to think that all of them are.

What do we learn today?

Breaking news indicates that a German fund of funds, K1 Group, may very well be the next rat exposed by the global market meltdown. A legitimate fund of funds company allocates capital across a wide array of different hedge funds. We certainly know that did not happen with the funds feeding Madoff. What happened with K1 Group?

Initial reports indicate that K1 engaged in circular trading which gave the appearance of K1 managing more capital than it actually did. In the process, K1 was able to use the perceived funds as collateral for bank loans. These banks will likely take significant hits. Who are the banks? Bloomberg reports, K1 Hedge Fund Snared in Probe as Barclays, JP Morgan Face Losses:

K1 Group, the German hedge fund firm, is embroiled in an international criminal investigation after saddling banks, including Barclays Plc (BARC), JPMorgan Chase & Co. (JPM) and BNP Paribas SA (BNP), with about $400 million of losses, people with knowledge of the probe said.

European and U.S. authorities are examining whether K1, which manages funds of hedge funds, deceived the banks when borrowing money to ratchet up the size of its investments, according to the people, who declined to be identified because the investigation isn’t public. German and U.S. prosecutors may announce the first charges in the case as soon as this week, they said. JPMorgan inherited its exposure to K1 after acquiring Bear Stearns Cos., which did business with the fund manager.

The inquiry focuses on whether K1, founded by German psychologist Helmut Kiener, 50, engaged in circular transactions with a network of investment firms in the U.K., the U.S. and other countries to create the illusion that K1 had more money available to backstop loans from the banks, the people said. The K1 Web site says Kiener’s investment system generated an 825 percent return from 1996 through last June.

Some comments and questions:

1. Do you think Jamie Dimon is wondering what other exposures he may have inherited from Bear Stearns that have yet to be exposed?

2. Just what exactly was the nature of Bear’s relationship? Did Bear invest in K1? Did Bear merely act as custodian and clearing agent?

3. Who are the firms with which K1 transacted? In ‘following the money,’ how many of those firms are also frauds? This trail will be very interesting.

4. Let’s focus on K1. Who was on the K1 team? The K1 Group management team consists of Mr. Helmut Kiener and . . . and . . . nobody else is listed. MAJOR RED FLAG!!

While Kiener and everybody connected with K1 are presumed innocent and entitled to due process, call me suspicious. Why? Phone calls into K1’s offices were not being answered. Interesting.

As I reviewed the K1 site, there was no depth to the material presented. A high school student with decent web designing skills could have formatted it.

Jamie Dimon must be seething.

About Larry Doyle 522 Articles

Larry Doyle embarked on his Wall Street career in 1983 as a mortgage-backed securities trader for The First Boston Corporation. He was involved in the growth and development of the secondary mortgage market from its near infancy.

After close to 7 years at First Boston, Larry joined Bear Stearns in early 1990 as a mortgage trader. In 1993, Larry was named a Senior Managing Director at the firm. He left Bear to join Union Bank of Switzerland in late 1996 as Head of Mortgage Trading.

In 1998, after 15 years of trading and precipitated by Swiss Bank’s takeover of UBS, Larry moved from trading to sales as a senior salesperson at Bank of America. His move into sales led him to the role as National Sales Manager for Securitized Products at JP Morgan Chase in 2000. He was integrally involved in developing the department, hiring 40 salespeople, and generating $300 million in sales revenue. He left JP Morgan in 2006.

Throughout his career, Larry eagerly engaged clients and colleagues. He has mentored dozens of junior colleagues, recruited at a number of colleges and universities, and interviewed hundreds. He has also had extensive public speaking experience. Additionally, Larry served as Chair of the Mortgage Trading Committee for the Public Securities Association (PSA) in the mid-90s.

Larry graduated Cum Laude, Phi Beta Kappa in 1983 from the College of the Holy Cross.

Visit: Sense On Cents

1 Comment on Another Hedge Fund Fraud?

  1. 1. Of course

    2. The provided a loan through options.. it is said, they had 3 times leverage, Bear was know of being one of the best accessible leverage provider for Fund of Funds… they would sell an Option receiving the monies from the FoFs and investing it themselves into the target funds…

    3. There was K1 Invest and K1 Global.. not so sure about the circular things.. I assume most of the target funds became illiquid (Gates, redemptions suspended).. maybe they just could not deleverage as quick as the banks wanted.. maybe the selection was really that poor, that more then 30% on the portfolio was lost so leaving a debit because of 1:3 leverage….

    4. Kiener was the main guy.. but as his funds grew he had set up with some outside partners (i.e. Nito that had FSA registration) constructs so that he got regulatory approvals as he was in a fight with German BaFin for years.. but they mostly lost in court… I assume he has a due diligence team of 3-4 people with some administrative staff as well..

    On most HF sites you will only receive limited informations, often only contact information and then you get presentations by e-mail.. has to do with regulatory issues as mostly not able to publicly advertise in most jurisdictions… and K1 was a product mostly directed at German retail investors.. so they had nice brochures… some online content seems also to be down at the moment..

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