Nov. 9 (Bloomberg) -- Helmut Kiener, the K1 Group hedge- fund founder, accused German prosecutors of relying on “unfounded” allegations made by Barclays Plc before his arrest on suspicion of fraud last month.

Kiener may be the victim of an unfair hunt organized by banks, Kiener attorney Lutz Libbertz said in a Wuerzburg, Germany, court filing obtained by Bloomberg News. Kiener lost his first request to be released from jail today based on the filing, said Dietrich Geuder, a spokesman for Wuerzburg prosecutors.

K1 Group is embroiled in an international criminal probe after saddling banks, including Barclays, JPMorgan Chase & Co., and BNP Paribas SA, with about $400 million of losses, people with knowledge of the probe said. European and U.S. authorities are examining whether K1, which manages funds of hedge funds, deceived the banks when borrowing money to inflate investments.

Barclays sent Kiener a letter several weeks ago, seeking $140 million, Libbertz wrote. “Unfounded” allegations from this document and from letters by other banks were adopted by prosecutors, he wrote. The filing doesn’t identify which other banks sent the letters.

Kiener never violated investment rules and each investment step was approved by the banks concerned, Libbertz wrote. Kiener never improperly used any of the money banks invested for himself, he added.

Barclays is cooperating with the ongoing investigations and will continue to do so, said Daniel Hunter, a bank spokesman.

Guinea-Bissau Diplomat

As part of the request seeking his release from prison, Kiener also argued he was registered in the Netherlands as a diplomat from the African nation of Guinea-Bissau.

A letter supposedly sent by a Brussels-based Guinea-Bissau ambassador, supporting Kiener’s immunity claim, was added to his filing, according to Roland Stockmann, the spokesman for the Wuerzburg local court.

A number listed for the Guinea-Bissau embassy in Brussels was disconnected.

Kiener is listed as an “attaché” for Guinea-Bissau on the Web site of the Netherlands Ministry of Foreign Affairs. While Kiener’s credentials are valid, they would grant him immunity in the Netherlands only, a ministry spokesman who declined to be identified said in an e-mail.

A diplomat can only claim immunity in the country where he was accepted as a diplomat, the German Foreign Office said.

Libbertz argued in the warrant that under European Union rules, the immunity must be extended to Germany. A spokeswoman for Libbertz rejected a report by Der Spiegel magazine that Kiener may have bought the credential for a price of $30,000 to $400,000.

Misunderstandings

Geuder declined to comment on the details of the request. His office is confident that Kiener won’t be able to invoke diplomatic immunity, he said.

Stockmann said the judge who issued the arrest warrant against Kiener upheld her decision and declined to release him from jail. The request will be now heard by a three-judge panel at the Wuerzburg Regional Court.

Kiener had “the best intentions” when investing the money entrusted to him and because of his “secure” financial situation didn’t need to commit crimes, Libbertz wrote. He may have made bad investment decisions, but didn’t act illegally, Libbertz said.

Allegations made in the warrant for Kiener’s arrest were either inaccurate or based on misunderstandings, wrote Libbertz. Kiener didn’t have control over a network of companies in the Caribbean, as claimed by prosecutors, his lawyer said in the filing.

Cayman Islands

Kiener may have duped Barclays out of as much as $220 million and BNP Paribas out of $60 million, according to the arrest warrant. Funds were diverted through a network of Cayman Islands-based companies and part of the money was used to acquire properties in Florida and aircraft, the warrant said.

The money was invested in companies and funds independent of Kiener, who also had no influence on the people who ran them, Libbertz wrote. Kiener only acted as an adviser and had no legal relation to the network of fund companies into which the money flowed, according to the filing.

No harm was caused because the assets aren’t lost even if they may not now be liquid, the lawyer said.

The aircraft were used to generate income for the funds and not for Kiener’s personal use, Libbertz said in the filing. Kiener paid rent of $20,000 to $40,000 a week when using a property in Florida, he wrote.

To contact the reporter on this story: Karin Matussek in Berlin at kmatussek@bloomberg.net.

Last Updated: November 9, 2009 14:06 EST