Friday, February 8, 2013

Charges Allege $311 Million Global Hedge Fund Scheme

The U.S. Justice Department released the below information on February 7th:

PHILADELPHIA—An indictment was filed and an information unsealed today charging two business associates in the hedge fund management industry with defrauding institutional investors and causing collective losses of more than $311 million, announced United States Attorney Zane David Memeger. Helmut Kiener, 53, of Aschaffenburg, Germany, is charged by indictment with four counts of wire fraud, two counts of bank fraud, and three counts of money laundering, based on allegations that he devised and directed various investment fraud schemes in concert with his partner John C. Tausche. Tausche, 61, of Blowing Rock, North Carolina, is charged by information with one count of bank fraud and one count of money laundering, based on his alleged involvement in the scheme.

Kiener, a German national, controlled several hedge funds—including K1 Global Limited and K1 Invest—which he marketed to international investors. Tausche, a U.S. citizen, controlled several offshore hedge funds collectively called the Oceanus Funds. According to the charges, between March 2005 and December 2008, Kiener allegedly devised a scheme to defraud Bear Stearns entities by representing to Bear Stearns that, under Kiener’s management, Bear Stearns investment funds would be diversified and independently managed. However, the indictment alleges that Kiener actually funneled Bear Stearns money from K1 through the Oceanus Funds and back to K1, so as to give the false impression that the funds were growing in size and were viable investments. Kiener and Tausche, it is alleged, knowingly and intentionally fostered the false appearance that the K1 Funds were increasing in value in order to induce Bear Stearns to continue to invest in the K1 Funds. Both defendants allegedly provided false and misleading information to Bear Stearns in response to inquiries regarding the K1 and Oceanus Funds, repeatedly and falsely representing that the funds were diversified and independently managed. The indictment alleges that, as a result of the scheme, Kiener earned sales agent fees all while Bear Stearns invested and lost approximately $82 million.

The information filed against Tausche alleges a similar scheme against Barclays Bank, involving the K1 Funds and the Oceanus Funds. The information alleges that this scheme caused losses to Barclays Bank of $137 million.

It is further alleged that starting in 2007, Barclays Bank, Bear Stearns, and BNP Paribas (BNPP) invested with Kiener in two offshore funds named Consistent Return Ltd. and Mezzanine Financing Ltd. Kiener represented that both Consistent Return Ltd. and Mezzanine Financing Ltd. were legitimate investment funds, and the indictment alleges that the three institutional investors together invested more than $100 million in these funds. However, the indictment alleges that Kiener actually directed a third party to create these offshore funds and that Kiener then used the funds for his own purposes including, but not limited to, the purchase of: oceanfront real estate in Delray Beach, Florida, valued at over $21 million; a Bombardier executive jet; a Bell helicopter; luxury cars such as a Bentley, a Mercedes, and a Maybach; two luxury watercraft; and more than $8 million in upgrades to his real estate.

If convicted of all charges, Kiener faces a maximum possible statutory sentence of 200 years in prison, restitution, and a maximum possible fine of $7.936 million; Tausche faces a maximum possible statutory sentence of 40 years in prison, restitution, and a maximum possible fine of $1.974 million.

The case was investigated by the Foreign Corruption Investigation Group, Homeland Security Investigations, Miami Field Office, the Federal Bureau of Investigation, the Internal Revenue Service-Criminal Investigations, and the German police force Kriminalpolizeiinspektion Unterfranken, with assistance from Barclays Bank, BNP Paribas, and Bear Stearns/J.P. Morgan Chase Bank. It is being prosecuted by Assistant United States Attorneys Jennifer Arbittier Williams and Suzanne Ercole.

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