German Hedge Fund Faces Fraud Probe Over Leverage

Oct 28 2009 | 3:34pm ET

A German fund of hedge funds group may find itself in trouble on both sides of the Atlantic for allegedly misleading banks to win greater leverage for its fund, leading to about US$400 million in losses.

K1 Group, which manages nearly than US$900 million, is the subject of a joint U.S.-German investigation into whether the firm used circular transactions to artificially inflate the amount of collateral it had. German authorities raided K1 founder Helmut Kiener’s home near Frankfurt today, and prosecutors in both Germany and the U.S. could announce the first charges in the case this week.

K1’s alleged malfeasance may have left its lenders, including Barclays, BNP Paribas and JPMorgan Chase, with losses of about US$400 million, Bloomberg News reports. JPMorgan’s potential losses come from Bear Stearn’s exposure to K1.

Kiener, a psychologist who founded K1 in 1995, faces a probe for fraud and breach of trust by German prosecutors. The U.S. Federal Bureau of Investigation have been working with German authorities on the K1 case since earlier this year. Both the U.S. Internal Revenue Service and Immigration and Customs Enforcement are also participating in the investigation.

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