By Tom Cahill, Josh Fineman and Jann Bettinga Oct. 29 (Bloomberg) — Helmut Kiener went from selling advertising for telephone books and getting paid by the ad to starting a German hedge-fund firm that would eventually make bets using millions borrowed from such banks as Barclays Plc , JPMorgan Chase & Co. and BNP Paribas SA . Police and prosecutors yesterday raided Kiener’s ivy- covered villa near Frankfurt, part of a joint German-U.S. investigation into what may be losses amounting to $400 million, people familiar with the probe said. A woman who identified herself as Kiener’s wife declined to comment when a Bloomberg News reporter rang the door bell last night. Neither Kiener nor anyone at his firm, K1 Group , has been publicly accused of wrongdoing in connection with the probe. The firm claimed returns of 825 percent from 1996 through June this year, according to its Web site, compared with a 49 percent gain for the Standard & Poor’s 500 Index over the same period. Germany’s financial regulator, BaFin, had tried since 2001 to stop K1 from soliciting German investors, according to spokesman Sven Gebauer . “Kiener has been grilled several times before, and he always won,” Karl-Heinz Lipsky, a broker at Fluehli, Switzerland-based Fair Mobil Concept GmbH who has done business with Kiener for almost four years, said in a telephone interview. “Kiener was under fire from BaFin for years.” The Kiener investigation comes as regulators in the U.S. and Europe, urged on by Germany, plan to tighten controls on the $1.4 trillion hedge fund industry. It follows the conviction of New York money manager Bernard Madoff and charges against Texas financier R. Allen Stanford , both accused of moving funds off- shore to obscure multibillion-dollar frauds. Billionaire hedge- fund manager Raj Rajaratnam was charged with insider-trading earlier this month. Stanford and Rajaratnam have both denied wrongdoing. Circular Transactions The inquiry focuses on whether Kiener’s firm 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, said the people familiar with the investigation, who declined to be identified because the probe isn’t public. Prosecutors in Wuerzburg, Germany, are investigating Kiener for fraud and breach of trust, their spokesman, Dietrich Geuder, said in a telephone interview yesterday, declining to provide more details. Kiener wasn’t available to comment yesterday. Daniel Hunter, a spokesman for London-based Barclays, the U.K.’s second-biggest bank, said the bank is cooperating with the investigation. David Wells , a spokesman for New York-based JPMorgan, the second-biggest U.S. bank by assets, declined to comment as did Carine Lauru , a spokeswoman for Paris-based BNP Paribas. Kiener’s Strategy Kiener’s firm had almost $1 billion under management, Army Yan, a K1 executive in Hong Kong, told Hedgeweek , a trade publication, in February. “From our point of view, risk is to be managed, but we do not like to put investors’ money at risk,” Yan was quoted as saying. “Our target is to deliver annual returns of 8 to 12 percent with minimal volatility. We see some managers aggressively taking market risk to increase their performance, which is not in line with our style.” Kiener started K1 in 1995 while still working as an advertising salesman for Frankfurt-based Trias Werbeagentur, where he earned commissions on ads he sold for German telephone books, said Juergen Weismueller, who is in charge of the firm’s workforce. Weismueller, 58, said Kiener was an “average” salesman at the firm, where he worked from 1988 to 2000. ‘Nothing Suspicious’ Kiener, 50, received a psychology degree from Johann Wolfgang Goethe University in Frankfurt in 1987, where his studies included “ statistical chance theory ,” according to K1’s Web site, which was taken down yesterday. “He’s among the few guys who have been here for a while and are a factor in the market,” said Andreas Schuermann, head of risk at Conservative Concept Portfolio Management AG , a hedge fund manager based outside Frankfurt. “It was a known fact in the market that he had trouble financing the leverage he was running in his fund. There was nothing suspicious about that, or anything to suggest something criminal.” Kiener developed what K1’s Web site described as a “semi- automatical allocation system” using statistics to help pick hedge-fund investments. He called his technique the “K1 Fund Allocation System,” a term he trademarked in Germany. “He had a pretty good black box to identify good investment opportunities,” said Michael Smolek , head of advisory firm Nito U.K. Asset Management, which helped find salespeople to market K1 funds. “He was pretty good in picking out good investments.” Regulatory Action From 2001, BaFin and its predecessors tried to stop Kiener and companies associated with him from soliciting German investors. The regulator initially ordered Kiener to stop collecting capital in Germany for a K1 fund company, arguing that it lacked a license. In 2003 and 2004, BaFin issued orders against K1 companies based in Germany and the British Virgin Islands, on the grounds that they lacked proper authorization. The firms challenged the orders in court, and two of them, K1 Global Ltd. and K1 Invest Ltd., had BaFin’s order overturned, according to the regulator. Police took away white boxes loaded with documents from Kiener’s home yesterday. The fund manager, who is married and has two daughters, was described as private and “totally secluded” by neighbors who asked not to be identified by name. His house has a castle-like tower and a Mercedes S600 visible in the garage. ‘Locust’ Invasion Germany doesn’t rank among the top five European nations that are homes for hedge funds, and its politicians have often been openly hostile to the industry, referring to the funds as “locusts.” When Werner Seifert , former chief executive of Deutsche Boerse AG, published a book recounting his experience battling a U.K.-based activist firm, the Children’s Investment Fund Management UK LLP, he entitled his account “The Invasion of the Locusts.” “It’s absolutely embarrassing that this happens in Germany, which has always wanted to be tough on hedge funds,” said Jacob Schmidt , founder of Schmidt Research Partners Ltd., a London-based hedge fund advisory firm. To contact the reporters on this story: Tom Cahill in London at tcahill@bloomberg.net Joshua Fineman in New York at jfineman@bloomberg.net ; Jann Friedrich Bettinga in Frankfurt at jebettinga@bloomberg.net .
