The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A psychologist dubbed Germany’s ‘mini-Bernard Madoff’ and a co-conspirator have been accused by the US government of using Bahamas-domiciled hedge funds to defraud some of the world’s top banks out of $219 million.

Indictments unveiled last week in Pennsylvania’s eastern district court allege that German national Helmut Kiener, and John Tausche, head of a Kansas-based financial consultancy, with defrauding UK-headquartered Barclays Bank PLC of some $137 million.

The duo were also accused of using the same Bahamas-domiciled hedge funds to swindle the now-defunct US investment bank, Bear Stearns, out of a further $82 million.

The two indictments, as Kiener and Tausche have been charged separately, allege that the German marketed his K1 funds group as a ‘fund of funds’ structure, meaning that they invested their assets into funds run by other, independent managers.

Both Barclays and Bear Stearns entered into investment management agreements where they agreed to provide leverage to K1 at a three-to-one ratio, meaning they would loan Kiener $3 for every $1 invested.

However, rather than adopt the investment strategy presented, Kiener was alleged to have invested all K1’s assets into the Bahamas-domiciled Oceanus Funds controlled by Tausche.

Using a ‘magic circle’ structure, Tausche then allegedly transferred the invested money from Oceanus back to K1, giving the appearance that the latter’s value and investments were increasing. In turn, this kept inducing both Barclays and Bear Stearns to keep investing more money.

In the Tausche indictment, the US attorney for eastern Pennsylvania alleged that from June 2006, Barclays began selling leveraged certificates linked to the performance of the K1 funds to its clients.

It guaranteed that these certificates would produce a minimum rate of return, and also invested its own monies.

“Rather than invest the aforementioned funds into diverse, non-leveraged, multi-strategy funds of funds via arm’s length transactions, [Kiener] invested into the Oceanus funds and then directed John Tausche to transfer the money back to the K1 funds, thereby creating a circular flow of money,” the indictment alleged.

“By creating this circularity, [Kiener] and Tausche knowingly and intentionally fostered the false appearance that the K1 funds were increasing in value, in order to induce Barclays to continue to provide leverage to the K1 funds.”

Between May-December 2008, Tausche was alleged to have “provided false and misleading information” to Barclays over its inquiries about the K1 and Oceanus Funds, representing the Bahamas-domiciled funds as “diversified funds of funds with exposure to over 250 underlying funds”.

This was allegedly done to hide the extent to which Oceanus was channelling funds back to K1, actions that allegedly cost Barclays some $137 million,

The same pattern repeated itself with Bear Stearns. The Oceanus Funds, according to the indictment against Kiener, included the Nauticus Fund (Class I and Class J) and the Silverback Fund, all domiciled in the Bahamas.

Bear Stearns invested into K1 at the same ‘three-to-one ratio’ as Barclays, with Tausche then recycling monies invested with Oceanus back to the Kiener-controlled funds.

Tausche was also alleged to have paid Kiener sales agent fees, calculated as a percentage of the monies invested with Oceanus.

As a result of all this, Bear Stearns was alleged to have lost $82 million.

Kiener is already serving an 11-year prison sentence in Germany, having been found guilty of fraud, forgery and tax evasion over his alleged $497 million Ponzi scheme.