The (alleged) fraud at German fund of hedge funds firm K1 Group is an embarrassment of riches for the schadenfreude set. Today, for example, we glean new evidence for two well-established facts--that regulators are simply no good at catching fraud on their own, and that Bear Stearns was a disaster waiting to happen--and learn that diplomatic immunity may apply to trans-Atlantic fraud cases.
Let's start there: Helmut Kiener, who has been arrested on suspicion of fraud by German police but not yet charged with anything, wants to get out of jail. But apparently there's only one way to do that at this particular stage in a German legal proceeding, and that's if you are a bonafide diplomat.
Now, we have no idea whether Kiener is such a diplomat, or what country or international organization he claims to represent. But we'll find out if the German courts buy it "before next week," according to the prosecutor's office.
Kiener, of course, is suspected of having left his banks and brokers with some $400 million in losses. None of them seemed to have any idea what he may have been doing, except for one. Because even though German and U.S. authorities have spoken of the K1 probe as a shining example of international regulatory and law enforcement cooperation--the FBI arrested the two U.S.-based suspects in the case in a sting operation--it seems the driving force behind the investigation was JPMorgan Chase.
You see, when JPM swooped in to buy the collapsing Bear Stearns, they learned a lot about their erstwhile competitors. Like the fact that Bear had been giving money to a German psychologist-turned-money-manager who had a penchant for investing in hedge funds no one had ever heard of. About $100 million, as it turned out.
So JPM did what no one else bothered to: a little digging. And wouldn't you know it, it had never heard of the "hedge funds" that Kiener was investing with, and giving most of his money to. After their investigation, there were seven suspicious firms, three of which were apparently run by the totally-believably-named Oceanus Asset Management. Oh yea, and Oceanus was allegedly just a front for none other than Helmut Kiener, diplomat.
Most of the money that K1 allocated to Oceanus' Nauticus I, Nauticus J and Silverback seems to have gone right back into Kiener's pocket, according to prosecutors. It's also mostly lost.
JPMorgan Said to Detect Kiener Scam That Stung Banks [Bloomberg]
K1's Kiener Claims Diplomatic Status in Release Bid [Bloomberg]