Oct. 28 (Bloomberg) -- K1 Group, the German hedge fund firm, is embroiled in an international criminal investigation after saddling banks, including Barclays Plc, JPMorgan Chase & Co., BNP Paribas SA and Societe Generale 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 ratchet up the size of its investments, according to the people, who declined to be identified because the investigation isn’t public. German and U.S. prosecutors may announce the first charges in the case as soon as this week, they said. JPMorgan inherited its exposure to K1 after acquiring Bear Stearns Cos., which did business with the fund manager.

The inquiry focuses on whether K1, founded by German psychologist Helmut Kiener, 50, engaged in circular transactions with a network of investment firms in the U.K., the U.S. and other countries to create the illusion that K1 had more money available to backstop loans from the banks, the people said. The K1 Web site says Kiener’s investment system generated an 825 percent return from 1996 through last June.

U.S. regulators are boosting scrutiny of international investment advisers after money managers Bernard Madoff and R. Allen Stanford were accused of moving funds off-shore to obscure multibillion-dollar frauds. Earlier this month, federal investigators used wiretaps for the first time to crack alleged insider trading by hedge funds, filing charges against billionaire Raj Rajaratnam and five others. Rajaratnam and Stanford have denied wrongdoing. Madoff pleaded guilty.

‘Fully Cooperating’

Prosecutors in Wuerzburg, Germany, are investigating Helmut Kiener for fraud and breach of trust, their spokesman, Dietrich Geuder, said in a telephone interview today, declining to provide more details.

Kiener’s home near Frankfurt was raided today by prosecutors and police, who could be seen in the afternoon carrying boxes from the building. A woman at the home declined to identify herself and asked reporters to leave.

There was no answer today at one phone number listed for Kiener. Another phone listed in his name was disconnected.

“We are fully cooperating with law enforcement,” said Daniel Hunter, a spokesman for London-based Barclays, the U.K.’s second-biggest bank. David Wells, a spokesman for New York-based JPMorgan, the second-biggest U.S. bank by assets, declined to comment.

“Societe Generale has negligible exposure to this risk,” the company, France’s second-largest bank by market value, said in an e-mail sent by spokeswoman Stephanie Carson-Parker.

Hong Kong, Virgin Islands

“We are not in a position to comment on any pending investigation,” Carine Lauru, a spokeswoman for Paris-based BNP Paribas said by telephone today. “We co-operate with law- enforcement authorities.”

Calls to K1’s phone numbers listed in Germany today weren’t answered or were disconnected. There was no immediate response to a message left at one number. A K1 executive in Hong Kong said he couldn’t immediately comment because he first needed to speak with Kiener. A call to a K1 phone number listed for its office in the British Virgin Islands, where some of its funds are based, was answered by an employee who said she was in Spain and that an executive wasn’t immediately available to talk.

Swaantje Dirks of law firm Graf Praschma, Hess & Rottloff Rechtsanwaltsgesellschaft mbH, which has represented the K1 Global Ltd. unit in past German litigation, declined to comment, and wouldn’t say whether the Frankfurt-based attorneys still represent the company.

FBI, IRS

Agents at the Federal Bureau of Investigation have been working on the case with German counterparts since at least the early part of this year, according to the people familiar with the matter. Investigators at the Internal Revenue Service and Immigration and Customs Enforcement are also involved in the probe, the people said. FBI spokesman J.J. Klaver declined to comment.

A K1 Group executive in Hong Kong was quoted by Hedgeweek in February as saying K1 had almost $1 billion under management.

Germany’s financial regulator, known as BaFin, has tried since 2001 to prevent Kiener and companies associated with him from soliciting German investors, BaFin spokesman Sven Gebauer said. The regulator initially ordered Kiener to stop collecting capital in Germany for a K1 fund company, arguing that it lacked a license.

In 2003 and 2004, BaFin issued orders against K1 companies based in Germany and the British Virgin Islands, on the grounds that they lacked proper authorization. The firms challenged the orders in court, and two of them, K1 Global Ltd. and K1 Invest Ltd., had BaFin’s order overturned, Gebauer said.

Lending to Funds

After Germany’s highest administrative court held in a similar case that such funds don’t need a license to operate in the nation, the regulator dropped its appeal, according to Gebauer.

Lending to firms that invest in a variety of hedge funds is considered safer because risks are spread among a variety of managers, said Michael Statz, founder of Fiducia Capital in Munich, a hedge-fund consultant. Banks typically use the fund stakes as collateral. If one of those funds loses money, banks can force the sale of other stakes to avoid losses on their own books.

Kiener received a psychology degree from Johann Wolfgang Goethe University in Frankfurt in 1987, where his studies included “statistical chance theory,” according to K1’s Web site. He developed what the Web site describes as a “semi- automatical allocation system” using statistics to help pick hedge-fund investments. He founded his firm in 1995 and advises the firm’s off-shore hedge funds, according to the site.

“By his far-reaching contacts all over the world he has succeeded in building up a value-consistent investment portfolio with successful and well-known money managers,” the Web site says.

To contact the reporter on this story: David Scheer in New York at dscheer@bloomberg.net; Josh Fineman in New York at jfineman@bloomberg.net; Karin Matussek in Berlin at kmatussek@bloomberg.net.

Last Updated: October 28, 2009 17:41 EDT