REFILE-German watchdog lacks bite in face of K1-type funds

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By Jonathan Gould and Patricia Uhlig

FRANKFURT Oct 30 (Reuters) - The emergence of a multi-million-dollar fraud case surrounding the K1 hedge fund group has exposed the powerlessness of Germany's financial watchdog in dealing with the "grey" capital market.

German authorities arrested Helmut Kiener, founder of the K1 hedge fund group, on Thursday in a corruption probe of a Caribbean-registered fund he ran.

His arrest warrant said Barclays (BARC.L) and BNP Paribas (BNPP.PA) may have lost millions of dollars in the case. [ID:nWEA7731].

German financial market regulator Bafin, which banned Kiener from financial portfolio management in Germany in 2001, said on Friday its power was limited in such cases.

"Bafin can only go as far as the current law allows in dealing with capital market products that are sold outside the licensed banking and financial services sector, such as the Kiener group's products," Bafin said in a statement to Reuters.

The watchdog can check whether a business is required to be licensed under Germany's Banking Act and, if so, it has the power to prohibit it.

"Bafin cannot take steps against the 'grey' capital market," it said, using the term for businesses that neither require licensing under German law nor are specifically prohibited.

OUT OF THE WOODWORK

A colleague of Kiener's said the company had raised about 600 million euros ($890 million) from investors.

Barclays may have lost most of the nearly $220 million it invested with the fund, authorities have said.

Retail investors are also beginning to come forward.

"Every day we are getting contacted by private individuals and institutional investors who have invested money with K1," lawyer Klaus Nieding from the law firm Nieding & Barth said, adding that it was impossible to estimate how much money was involved or how many investors affected.

"The entire construct is extremely opaque and it is not evident where the money was invested in the end," he said.

Some finance professionals said they had already harboured questions about Kiener's business strategy.

"The Kiener products were certainly known in the grey financial market but it was never clear what they actually did," said Ansgar Guseck, board member of umbrella fund Sauren.

One Swiss bank had looked at K1 on the recommendation of a staff member but had concluded that the fund's performance was "too good to be true", a source close to the bank told Reuters on condition that neither he nor the bank be identified.

Authorities are investigating Kiener, 50, over allegations of fraud and breach of trust, Dietrich Geuder, chief prosecutor in the southern German city of Wuerzburg, told Reuters.

FBI agents in Miami also arrested a German wealth consultant and Kiener business partner on money-laundering charges. [ID:nN29357742].

(Additional reporting by Martin De Sa'Pinto in Zurich)