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Kiener confesses to running a Ponzi-Scheme
 
  Hedgeweb - FRI, APR 15 2011
Funds & Investment K1 Group founder Helmut Kiener, accused of running a $500m Ponzi scheme, told a court he manipulated account statements and lacked the “courage” to shut his hedge fund after he realized the scale of the losses.

Kiener, 51, admitted that he attempted to make up for losses with funds from new investors in a statement read at his fraud trial today in Wuerzburg, Germany. His lawyer, Achim Groepper, described the testimony after the hearing as “a confession, for the most part.”

“I just didn’t have the courage to liquidate the K1 funds when I saw they got in trouble,” Kiener said in the statement read by Groepper. “I trusted that I could make up losses by investing just more and more new money.”

Barclays Plc (BARC) and BNP Paribas (BNP) SA lost a combined €223m and private investors lost about €122m in the scam, prosecutors said. Previously, Kiener denied any wrongdoing.

Kiener was arrested in 2009 after JPMorgan Chase & Co. (JPM) found suspicious transactions involving K1 when it acquired Bear Stearns Cos., a person familiar with the matter said at the time. Dieter Frerichs, the former managing director of two K1 funds in the British Virgin Islands, shot himself in July to avoid being arrested on the Spanish island of Mallorca.

Kiener’s new lawyer, Groepper, said Kiener regrets his actions and the losses he caused. Big international banks, including Barclays, are at least partly to blame for the mess, he said.

“As the banks approved all my investment suggestions, I felt on the safe side,” Kiener said in today’s statement. “I thought my investment decisions would be equivalent to market practices.”

Kiener is charged with tax evasion, 35 counts of aggravated fraud and 86 counts of forgery. He faces as much as 15 years in prison if convicted.

Kiener said he secretly violated agreements with banks on how to handle funds they entrusted to his operations by using real estate and aircraft for personal purposes.

“I know that this was a conflict of interest and that I violated investment rules I had with the bank -- and I bitterly regret it,” he said in the statement.

While successful when he started his funds, he quickly felt an “enormous psychological pressure” to repeat the profits again and again, he told the court.

“So I came up with the idea to use my computer to forge some of the account statements,” he said. “After getting through with it one time, that nasty habit sort of slipped in.”

His K1 Invest fund eventually developed deficits of 30 percent to 60 percent and his K1 Global fund as much as 25 percent. With the financial crisis in 2008, the spiral accelerated, said Kiener.

“This wasn’t a Ponzi scheme in the classical sense, where you just accept money with one hand and give it out to the next investor with the other hand,” Groepper told reporters. “It had some financial intelligence, as money was indeed invested and some of it made real profits.”

Today’s statement makes up 20 percent of what Kiener intends to tell the court. He will complete his testimony on May 4, Groepper said.

Kiener deceived investors in the funds’ prospectus, which claimed it used a diversification strategy that could produce annual average profits of 10 percent. In reality, the funds used existing money to pay new customers and Kiener forged documents showing K1 invested in other funds, according to the indictment.

The system broke down in the second half of 2008 when Barclays and BNP started asking questions about money they had invested with Kiener, according to the indictment.

K1’s funds are being liquidated in the British Virgin Islands. Kiener’s personal assets were placed in insolvency proceedings in Germany. X1 Fund Allocation GmbH, a Hamburg-based K1 company, is also under administration.

Barclays issued notes in 2005 and 2007 with X1 Fund Allocation as the investment manager. The lender started that program because the bank relied on Kiener’s false statements about K1’s successes, according to the charges.

Kiener started K1 in 1995 while still working as an advertising salesman. The firm claimed returns of 825 percent from 1996 through June 2009, according to its website, which was taken down after the disparities came to light. The Standard & Poor’s 500 Index gained 49 percent over the same period. The charges in the trial relate to actions between 2006 and 2009.

Kiener told the court today that he turned to the financial world after he was unable to find a job as a psychologist.

“It turned out that I wasn’t really suitable for becoming a psychotherapist, all job applications failed,” said Kiener. “So starting in the financial world was sort of a workaround solution.”


Kiener confesses to running a Ponzi-Scheme

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