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JPMorgan Chase found an unsettling fact buried in the books of newly acquired Bear Stearns last year: The brokerage had loaned millions of dollars to a German money manager for bets on hedge funds no one had ever heard of.
JPMorgan's efforts to follow Bear Stearns's money, described by a person familiar with the matter, helped spur an international probe of K1 Group that led to the arrest of its founder, Helmut Kiener. JPMorgan, one of at least three banks that loaned to K1, faces about $US100 million ($109 million) of the $US400 million in losses, the person said. The case, if proven, may be among the biggest hedge-fund frauds to target banks, said Thomas Newkirk, a partner at Jenner & Block in Washington and former US Securities and Exchange Commission enforcement official.
``When the economy is flourishing, money is easy'' for hedge funds, said James Ratley, president of the Association of Certified Fraud Examiners in Austin, Texas. A scheme can be ``hidden just beneath the paperwork. It's the skin of truth stuffed with a lie.''
Accounts of people with knowledge of the inquiry and a German warrant for Kiener's arrest offer the clearest picture yet of what authorities suspect K1's funds, which invest in other hedge funds, did with money borrowed from banks on two continents. Kiener, who hasn't been charged, remains in jail after prosecutors in Wuerzburg, Germany had his home and offices raided last week. His firm has yet to announce what will become of his two British Virgin Islands-based funds, K1 Global Ltd. and K1 Invest Ltd.
Beach home, aircraft
Kiener allegedly diverted money to pay $US19 million in cash for a beachfront home in Florida, $US37.1 million for a Bombardier business jet and $US9.4 million for two other aircraft, according to the search warrant and people familiar with the case.
A spokeswoman for Lutz Libbertz, Kiener's Munich-based attorney, said the lawyer can't yet comment on the allegations. K1 Group didn't reply to messages seeking comment this week. Kiener is seeking to be released from jail, arguing that he has diplomatic status, Dietrich Geuder, a spokesman for German prosecutors, said in an interview today. Geuder, who doesn't expect a ruling before next week, said complaints from banks started the German investigation.
As JPMorgan employees scrutinized K1's investments in more than 70 hedge funds last year, they noticed that relatively small allocations had been made to the most reputable firms, while larger stakes went to firms whose names and businesses they didn't know, a person familiar with the matter said. That fueled the bank's concerns that the money was being misused, the person said.
Barclays, BNP
German prosecutors suspect that Kiener, 50, borrowed at least $US280 million from two other banks, Barclays Plc and BNP Paribas SA, besides JPMorgan, while misleading them about what he would do with their money, according to the arrest warrant obtained by Bloomberg. Prosecutors claim a disproportionate amount of borrowed money was steered to funds that recycled it to K1 Global and K1 Invest, or diverted it to support Kiener's lifestyle.
David Wells, a spokesman for New York-based JPMorgan, declined to comment on losses or the bank's role in the probe. Geuder declined to elaborate on the arrest warrant, which outlines the office's preliminary findings.
JPMorgan began tracking its money as the financial crisis intensified in September 2008, a person familiar with its efforts said. Bear Stearns's loan was initially placed in an investment pool, for which HSBC Holdings Plc served as custodian. Under direction of a K1-appointed investment adviser, HSBC, which hasn't been accused of wrongdoing, bought stakes in more than 70 hedge funds.
Oceanous Asset Management
JPMorgan verified dozens of the investments, and winnowed the list to about seven relatively unknown firms that had apparently received almost a third of Bear Stearns's money, the person said. Among them were three firms: Nauticus I, Nauticus J and Silverback Fund Ltd. Silverback isn't associated in any way to Silverback Asset Management LLC of Chapel Hill, North Carolina, said Andrew Chacos, chief operating officer for the US firm.
German prosecutors focused on the same funds, describing in Kiener's arrest warrant what they suspect happened to about $US220 million Barclays loaned to K1. In that case, a K1-appointed investment adviser, X1 Fund Allocation GmbH, steered about $US118 million to the three funds, the warrant says. Though Nauticus and Silverback claim to be run by different companies, all three are operated by Oceanus Asset Management, the warrant alleges. While Oceanus publicly appears to be led by ``a Mr. Tausche,'' it's actually controlled by Kiener, the document said.
Rather than manage Barclays's money, the Nauticus and Silverback funds routed more than 90 per cent of it back to K1, buying stakes in the German firm's two main funds, prosecutors wrote in the warrant. The money Barclays loaned to K1 is ``for the most part'' gone, the document says.
Cayman Islands
X1 Fund Allocation is based in Hamburg and run by Ulrich Mittendorf, according to the warrant for Kiener, who is described in it as a ``co-accused'' in the case. Mittendorf declined to comment yesterday.
John Tausche, who is listed as Wichita, Kansas-based Oceanus' ``managing member'' in a 2006 filing with the US Securities and Exchange Commission, declined to comment last week on the firm's relation to Kiener or K1. Tausche didn't return phone calls seeking comment this week.
About $US56 million of Barclays's money was entrusted to a Cayman Islands investment firm, Mezzanine Financing Ltd., which Kiener had founded in 2007 with help from Stefan Seuss, according to the warrant.
Seuss, a German citizen living Miami, has been on the Federal Bureau of Investigation's radar since at least 2007, when he was targeted in a money-laundering sting, according to an indictment against him unsealed last week at Philadelphia federal court. Before the FBI arrested him in that case last week, Seuss had been helping agents track Kiener's money, a person familiar with the case said Oct. 29. Seuss hasn't entered a formal response to the allegations.
Helicopter, turboprop
Kiener, through Seuss, used the Barclays funds to acquire a Bombardier jet, capable of ferrying 19 passengers non-stop from Frankfurt to New York. He planned to rent it to business travelers, while using it as collateral for a $US26 million loan from Credit Suisse Group AG, the warrant alleges. Some $US13 million of that money allegedly flowed back to his K1 Invest fund.
With Seuss's help, Kiener bought a Bell helicopter for $US4.8 million in 2007 and a Piaggio Avanti turboprop plane for $US4.58 million in 2008, the warrant alleges. Those were mainly intended for Kiener's own use, it claimed.
He also arranged for a firm associated with Seuss, called Consistent Income LLC, to buy a 14,000 square-foot oceanfront mansion in Delray Beach, Florida, people briefed on the matter said. The home is now sale for $US23 million to help K1 repay investors, according to people familiar with the matter.
JPMorgan's efforts to follow Bear Stearns's money, described by a person familiar with the matter, helped spur an international probe of K1 Group that led to the arrest of its founder, Helmut Kiener. JPMorgan, one of at least three banks that loaned to K1, faces about $US100 million ($109 million) of the $US400 million in losses, the person said. The case, if proven, may be among the biggest hedge-fund frauds to target banks, said Thomas Newkirk, a partner at Jenner & Block in Washington and former US Securities and Exchange Commission enforcement official.
``When the economy is flourishing, money is easy'' for hedge funds, said James Ratley, president of the Association of Certified Fraud Examiners in Austin, Texas. A scheme can be ``hidden just beneath the paperwork. It's the skin of truth stuffed with a lie.''
Accounts of people with knowledge of the inquiry and a German warrant for Kiener's arrest offer the clearest picture yet of what authorities suspect K1's funds, which invest in other hedge funds, did with money borrowed from banks on two continents. Kiener, who hasn't been charged, remains in jail after prosecutors in Wuerzburg, Germany had his home and offices raided last week. His firm has yet to announce what will become of his two British Virgin Islands-based funds, K1 Global Ltd. and K1 Invest Ltd.
Beach home, aircraft
Kiener allegedly diverted money to pay $US19 million in cash for a beachfront home in Florida, $US37.1 million for a Bombardier business jet and $US9.4 million for two other aircraft, according to the search warrant and people familiar with the case.
A spokeswoman for Lutz Libbertz, Kiener's Munich-based attorney, said the lawyer can't yet comment on the allegations. K1 Group didn't reply to messages seeking comment this week. Kiener is seeking to be released from jail, arguing that he has diplomatic status, Dietrich Geuder, a spokesman for German prosecutors, said in an interview today. Geuder, who doesn't expect a ruling before next week, said complaints from banks started the German investigation.
As JPMorgan employees scrutinized K1's investments in more than 70 hedge funds last year, they noticed that relatively small allocations had been made to the most reputable firms, while larger stakes went to firms whose names and businesses they didn't know, a person familiar with the matter said. That fueled the bank's concerns that the money was being misused, the person said.
Barclays, BNP
German prosecutors suspect that Kiener, 50, borrowed at least $US280 million from two other banks, Barclays Plc and BNP Paribas SA, besides JPMorgan, while misleading them about what he would do with their money, according to the arrest warrant obtained by Bloomberg. Prosecutors claim a disproportionate amount of borrowed money was steered to funds that recycled it to K1 Global and K1 Invest, or diverted it to support Kiener's lifestyle.
David Wells, a spokesman for New York-based JPMorgan, declined to comment on losses or the bank's role in the probe. Geuder declined to elaborate on the arrest warrant, which outlines the office's preliminary findings.
JPMorgan began tracking its money as the financial crisis intensified in September 2008, a person familiar with its efforts said. Bear Stearns's loan was initially placed in an investment pool, for which HSBC Holdings Plc served as custodian. Under direction of a K1-appointed investment adviser, HSBC, which hasn't been accused of wrongdoing, bought stakes in more than 70 hedge funds.
Oceanous Asset Management
JPMorgan verified dozens of the investments, and winnowed the list to about seven relatively unknown firms that had apparently received almost a third of Bear Stearns's money, the person said. Among them were three firms: Nauticus I, Nauticus J and Silverback Fund Ltd. Silverback isn't associated in any way to Silverback Asset Management LLC of Chapel Hill, North Carolina, said Andrew Chacos, chief operating officer for the US firm.
German prosecutors focused on the same funds, describing in Kiener's arrest warrant what they suspect happened to about $US220 million Barclays loaned to K1. In that case, a K1-appointed investment adviser, X1 Fund Allocation GmbH, steered about $US118 million to the three funds, the warrant says. Though Nauticus and Silverback claim to be run by different companies, all three are operated by Oceanus Asset Management, the warrant alleges. While Oceanus publicly appears to be led by ``a Mr. Tausche,'' it's actually controlled by Kiener, the document said.
Rather than manage Barclays's money, the Nauticus and Silverback funds routed more than 90 per cent of it back to K1, buying stakes in the German firm's two main funds, prosecutors wrote in the warrant. The money Barclays loaned to K1 is ``for the most part'' gone, the document says.
Cayman Islands
X1 Fund Allocation is based in Hamburg and run by Ulrich Mittendorf, according to the warrant for Kiener, who is described in it as a ``co-accused'' in the case. Mittendorf declined to comment yesterday.
John Tausche, who is listed as Wichita, Kansas-based Oceanus' ``managing member'' in a 2006 filing with the US Securities and Exchange Commission, declined to comment last week on the firm's relation to Kiener or K1. Tausche didn't return phone calls seeking comment this week.
About $US56 million of Barclays's money was entrusted to a Cayman Islands investment firm, Mezzanine Financing Ltd., which Kiener had founded in 2007 with help from Stefan Seuss, according to the warrant.
Seuss, a German citizen living Miami, has been on the Federal Bureau of Investigation's radar since at least 2007, when he was targeted in a money-laundering sting, according to an indictment against him unsealed last week at Philadelphia federal court. Before the FBI arrested him in that case last week, Seuss had been helping agents track Kiener's money, a person familiar with the case said Oct. 29. Seuss hasn't entered a formal response to the allegations.
Helicopter, turboprop
Kiener, through Seuss, used the Barclays funds to acquire a Bombardier jet, capable of ferrying 19 passengers non-stop from Frankfurt to New York. He planned to rent it to business travelers, while using it as collateral for a $US26 million loan from Credit Suisse Group AG, the warrant alleges. Some $US13 million of that money allegedly flowed back to his K1 Invest fund.
With Seuss's help, Kiener bought a Bell helicopter for $US4.8 million in 2007 and a Piaggio Avanti turboprop plane for $US4.58 million in 2008, the warrant alleges. Those were mainly intended for Kiener's own use, it claimed.
He also arranged for a firm associated with Seuss, called Consistent Income LLC, to buy a 14,000 square-foot oceanfront mansion in Delray Beach, Florida, people briefed on the matter said. The home is now sale for $US23 million to help K1 repay investors, according to people familiar with the matter.
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