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The hedge 'plunder'

Date: Monday, November 2, 2009
Author: James Doran, New York Post

Federal agents this week are zeroing in on a $20 million Florida beachfront mansion owned by a hedge-fund titan who, law enforcement authorities believe, financed a lavish lifestyle -- complete with two corporate jets, a helicopter and the posh seaside home -- with cash he diverted from JPMorgan Chase, Barclays, PNB Paribas and other large global banks.

The fraud, which went on for years, began to unravel this spring after banks, on heightened alert for suspicious investors in the wake of the arrest of Bernie Madoff, re-examined the hedge-fund trader's moves and started to withdraw some money, sources said.

The hedge-fund titan, Helmut Kiener, was arrested in his native Germany last week, after authorities there got wind of his alleged $400 million bank fraud.

Kiener runs the K1 Fund family and it flagship K1 Global Sub Trust hedge fund of funds -- that is, it uses investor cash to invest in other hedge funds -- which said it managed a net return of 844 percent over the past 13 years, more than 15 times better than the S&P 500 Index. The handsome returns no doubt helped bring in deep-pocketed investors.

The money raised was initially used to buy stakes in a number of hedge funds, including at least one managed by a firm Kiener controlled. At least $100 million was sent to a pair of British Virgin Islands-based K1 funds, while other money supported Kiener's lifestyle, it is believed.

Kiener could not be reached for comment.

In one specific incident, the 50-year-old Kiener raised $20 million allotments each from JPMorgan Chase, Barclays and others to invest in a fund called Consistent Income, sources tell The Post.

Kiener's manse on Ocean Boulevard in Delray Beach, Fla., is owned by a company called Consistent Income, records show.

The FBI is looking into whether Kiener diverted investor cash to purchase the house and other goodies.

Barclays may have lost a total of $200 million in the fraud.

Also last week, FBI agents in Miami took into custody Stefan Seuss, who ran a company that acted as Kiener's agent in the US, after the US Attorney in Philadelphia unsealed an indictment charging Seuss and a third German national with attempted money laundering.

Seuss is listed as the managing agent of Consistent Income.

What is more, sums similar to the amount paid for the house are understood to have been transferred from at least one of the banks to a company called Consistent Income around the same date the house was purchased, an FBI source said.

Investigators believe the mansion is just one luxury item Kiener may have bought with cash that was supposed to be invested in hedge funds.

One of the jets owned by the German investor is a $37 million Bombardier Global Express long-distance jet which he used to bring his family to the US last Easter.

Across the street from his Florida digs Kiener also owns an empty lot worth several million dollars -- upon which he has built an expansive dock, big enough for a huge luxury yacht. Neighbors, like 78-year-old Lenny Rittenberg, say Kiener often talked of buying such a boat.

"He also tried to buy my house last time he was here at Easter," Rittenberg said. "He told me he was having some trouble with people withdrawing money from his hedge funds but that he still wanted to buy up more property."

Kiener, who was seen from time to time on the South Florida charity circuit, liked to keep a low profile. The land on which his house sits? Not so much.

In 2002, the mansion that stood on the site was blown up as a special effect in Mi chael Bay's 2003 film "Bad Boys II."

Kiener bought his mansion, built on the same land, in 2007 and spent millions refur bishing it.

Among the most expensive additions made by the Ger man hedge-fund magnate are two giant 8-by-5-foot flat- screen TVs hidden in the lawn on either side of his swimming pool. The Jumbo tron-style sets are mounted on hydraulic lifts that are raised from beneath the lawn using a remote control.

The tops of the TVs are planted with turf so the con traption cannot be seen when it is not in use.

"He has spent millions re modeling this place," Ritten berg said. "Those outdoor TV's are like something out of a James Bond movie. I mean, it is not a TV, it is in sanity."

JPMorgan also lost tens of millions as it inherited the Kiener investments through its acquisition of Bear Stearns. A JPMorgan insider said the losses had already been written off and posed no threat to the bank or its cli ents.

Still, the alleged losses to Kiener highlight the issue of Wall Street and the general investing public's ignoring red flags in the pursuit of fat returns. That fact was driven home in the Bernie Madoff case, and will likely be an issue here.

Kiener was fingered by Germany's financial regulator and was censured for improprieties related to his marketing investments. He may have successfully appealed the censure and calm investors' anxieties.

Kiener's arrest comes in a post-Madoff environment where civil regulators and criminal investigators are stepping up pressure on hedge funds.

Earlier this month, Raj Rajaratnam, who ran Galleon Group hedge fund, was arrested for running a $20 million insider-trading fraud. He has pleaded not guilty.

Meanwhile Seuss's lawyer, David Raben, said his client is disappointed that prosecutors brought criminal charges.

"This investigation has been ongoing, and he has offered his full cooperation," he said. "We look forward to the truth coming out."