H2O Asset Management has agreed to pay €250mn to investors after the UK’s Financial Conduct Authority found it committed “extremely serious” breaches in relation to illiquid investments.
Once a star of the European investment industry that oversaw more than €30bn at its peak, H2O was plunged into crisis in 2019 after the Financial Times revealed it had substantial exposure to hard-to-sell securities tied to the controversial financier Lars Windhorst.
The FCA said on Wednesday the firm had “failed to carry out proper due diligence” on these investments, while also failing to declare hospitality that included “the use of a superyacht and private jet”.
The regulator also said H2O had provided it with “false and misleading statements and documentation” including “fabricated records and minutes of meetings”.
The FCA said it would have imposed a “substantial fine” on the asset manager but instead agreed that H2O would make a €250mn payment to investors whose funds have been trapped for years.
H2O will also apply to cancel its UK regulatory authorisation by the end of the year.
“H2O’s job was to manage its funds properly and protect investors. It failed to do this and, to make matters worse, it repeatedly provided misleading information to the FCA,” said Steve Smart, joint executive director of enforcement and market oversight at the FCA.
Loïc Guilloux, H2O’s chief executive, said: “Over the past few years, we have significantly improved and consolidated our organisation and strengthened our risk management and compliance teams, governance and internal procedures. These changes ensure that lessons from this period are embedded in our corporate culture.”
In choosing not to levy a fine against H2O, the FCA said it had taken into account a previous financial penalty imposed on the asset manager by France’s market regulator. H2O last year received a record €75mn fine from the Autorité des Marchés Financiers, which also separately fined and struck off the firm’s co-founder and former chief executive Bruno Crastes from managing funds for five years.
H2O froze €1.6bn of investor funds in 2020 after the AMF raised concerns about the valuations of its hard-to-sell assets. At the time, it had already taken substantial writedowns to its original investments. The €250mn payment will add to €229mn already returned to these investors.
The FCA noted that investors who relinquish their rights to pursue litigation against H2O will receive these funds earlier, noting that payments to those who hold out “may take up to six years”.
H2O is subject to a lawsuit in France from a group of 9,000 investors seeking more than €800mn in damages. The investor group is also suing H2O’s former majority shareholder, the French bank Natixis, as well as the auditor of its funds KPMG, and the funds’ custodian Caceis, alleging that they are jointly responsible for the losses incurred.
Collectif Porteurs H2O, the investor group behind the lawsuit, said that it “considers the low level of reimbursement agreed by the FCA to be shocking”, noting that H2O paid its shareholders €1.2bn in dividends in previous years.
“It seems astonishing that the Financial Conduct Authority did not impose a fine in view of the number and seriousness of the breaches observed,” the group said, adding that it had not been consulted on the FCA’s settlement with H2O.
Windhorst shot to fame as a teenage “wunderkind” of German business in the 1990s.
But by the time H2O invested heavily in his Tennor Group of companies in the 2010s, Windhorst’s career had already been plagued by scandal and legal troubles. Notably, he received a suspended prison sentence for “breach of trust” in Germany in 2010.
However, the FCA said that several members of H2O’s risk and compliance committee had “never heard of Mr Windhorst nor heard of any concerns relating to the Tennor Group prior to the 2019 FT Article”.
The FCA added that during the course of its investigation, H2O had provided it with records and minutes of meetings “many of which had not taken place at all” and due diligence reports that purported to show contemporary analysis “but which had been prepared subsequently”.
H2O then “took more than a year to admit that these due diligence materials had in fact been created retrospectively”.
The regulator noted that H2O “had no records of any due diligence analysis being conducted at the time” for half of the investments it made that were linked to Windhorst.
The FCA also said that “deficiencies” in H2O’s record keeping and trading records were “so significant” that it was “unable to determine with certainty the precise exposure” the firm had to these investments throughout the period under investigation.
H20 had also “failed to disclose and provided misleading information as to the close relationship and receipt of hospitality between Mr Crastes and Mr Windhorst”, the FCA said.
In response to a request from the FCA in 2019, H2O initially disclosed some business meetings that had taken place between senior management and Windhorst, while providing details of “two specific overseas trips by more junior H2O LLP staff”.
But this disclosure omitted a raft of trips senior staff took “on Mr Windhorst’s private jet, helicopter and superyacht”.
This included “a 2018/19 New Year’s trip” that Crastes took to the Caribbean with his family, which included being flown on Windhorst’s private jet to Saint Martin.
The FCA said that in November 2019 H2O told the regulator that there were “no personal relationships” that existed between H2O staff and those of Windhorst’s companies.
“However, there was in fact a close personal relationship between Mr Crastes and Mr Windhorst, in contrast to the purely professional relationship characterised to the Authority,” the regulator said.
The FCA noted that Crastes thanked Windhorst for the Caribbean trip in an email titled “Thank you my friend”, writing: “We feel like having a new family with [ . . . ] you and it goes straight to our heart.”
Windhorst replied: “It’s more than just close friendship between us. It does feel like extended family for me also!”
Aside from the London branch that H2O is now closing, the asset manager has offices in Paris, Monaco, Geneva and Singapore.
While London-based H2O AM LLP was previously the group’s main unit, the asset management firm has in recent years shifted staff to mainland Europe and restructured its operations in 2022, selling the UK entity’s key subsidiaries to its Luxembourg parent company.
The auditor of H2O’s Luxembourg holding company warned earlier this year that its most recent accounts “do not give a true and fair view” of its financial position.
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