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 (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.

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.

Recommended

The after effects of the gas-price shock
Economy

The after effects of the gas-price shock

In the wake of the recent spike in the natural gas price, we can expect slower growth, an industrial recession – and a newly assertive Russia, says Ma…
17 Oct 2021
The charts that matter: bond yields slip while bitcoin tops $60,000
Economy

The charts that matter: bond yields slip while bitcoin tops $60,000

Cryptocurrency bitcoin soared to over $60,000 this week, while government bond yields fell back. Here’s how that has affected the charts that matter m…
16 Oct 2021
Whistleblower allegations – where now for Facebook?
Tech stocks

Whistleblower allegations – where now for Facebook?

The social-media giant has come in for some fierce criticism following revelations from a former employee. Just how much damage has been done?
16 Oct 2021
Inflation, energy crisis, strikes – have we gone back to the 1970s?
Investment strategy

Inflation, energy crisis, strikes – have we gone back to the 1970s?

Merryn and John talk about rising prices, productivity and the state of the labour market, plus are bond investors really the adults in the room, and …
15 Oct 2021

Most Popular

Why the world’s most important economic data release has unnerved markets
US Economy

Why the world’s most important economic data release has unnerved markets

The US added only 194,000 jobs in September, far shorter than the 500,000 that were expected. John Stepek explains why markets didn't react as they no…
11 Oct 2021
How to invest in SMRs – the future of green energy
Energy

How to invest in SMRs – the future of green energy

The UK’s electricity supply needs to be more robust for days when the wind doesn’t blow. We need nuclear power, says Dominic Frisby. And the future of…
6 Oct 2021
Inflation is still one of the biggest threats to your personal finances
Investment strategy

Inflation is still one of the biggest threats to your personal finances

Central bankers and economists insist inflation will be gone by next year. We're not so sure, says Merryn Somerset Webb. So if you haven’t started to …
1 Oct 2021