Great frauds in history: Helmut Kiener, Germany’s mini-Madoff

The performance of Helmut Kiener’s fund of funds, which invested money from institutions and private investors into hedge funds, seemed too good to be true. It was.

Helmut Kiener © Hannelore Foerster/Bloomberg via Getty Images
(Image credit: Helmut Kiener © Hannelore Foerster/Bloomberg via Getty Images)

Helmut Kiener (pictured) was born in the German town of Wernberg in 1959. After studying statistics at a local technical college, and doing his national service, he studied at various universities, eventually graduating with a diploma in psychology. After briefly working as a social researcher, in 1988 he set up an investment fund, Kiener Company (later named K1 Group), with his friend Dieter Frerichs. This “fund of funds” used money raised from institutional and private investors to invest in other hedge funds, based on their past performance.

What was the scam?

Kiener claimed that his investment criteria would enable K1 to select funds that would continue to beat the market. In reality, most of the funds that he selected were shell companies, with the money either returning to the main fund in order to pay off past investors, or used to enable Kiener to buy luxury homes and aircraft. Some of the cash was siphoned off into overseas bank accounts. To convince investors to stick with the fund, he falsely claimed the fund had posted a cumulative return of 855% between 1996 and 2009.

What happened next?

As early as 2002, German regulators were demanding that the fund be shut down due to a lack of official documentation. In response, Kiener simply re-registered the fund in the British Virgin Islands. In the summer of 2008, however, his major institutional investors started to demand the return of their money. In 2009 investigators at JPMorgan, who had taken over Bear Stearns, one of Kiener’s investors, spotted irregularities and complained to the authorities, who shut him down. Despite claiming that he was immune from prosecution as a diplomat for the African country of Guinea-Bissau, Kiener was eventually sentenced to more than ten years in jail.

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Lessons for investors

At the fund’s peak in 2008, Kiener claimed that the fund had assets of around $900m, though actual investor losses have been put at around $500m. He was dubbed “Germany’s mini-Madoff” by the press. Amazingly, much of the money flowed after the original attempts to shut the fund down were widely reported in the media. As with Bernie Madoff’s Ponzi scheme, the stability of the fund’s performance should have been a big red flag. It had reported only a handful of losing months between December 2002 and August 2009.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri