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H2O Asset Management has been hit with a lawsuit in Paris from a group of aggrieved investors claiming that they incurred more than €700mn of losses due to its investments in illiquid assets.
The group of more than 6,000 investors claims that H2O, as well as its former majority owner Natixis Investment Managers, the auditor of its funds KPMG, and the funds’ custodian CACEIS, are jointly liable for the losses investors incurred. The court case marks the first major litigation relating to the illiquid asset scandal.
Once a star of European investment 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 illiquid securities tied to the controversial financier Lars Windhorst.
France’s Autorité des Marchés Financiers levied a record €75mn fine against H2O earlier this year as punishment for “serious” rule breaches related to the illiquid investments, while banning its founder Bruno Crastes from managing funds for five years.
Collectif Porteurs H2O announced the litigation on Wednesday, which it said was “based on months of in-depth investigation” that had gathered evidence “demonstrating the responsibility of the H2O group companies concerned, but also the control failures of the trusted third parties”.
“H2O fund managers invested €2.3bn in illiquid private debt securities, despite the fact that this type of investment was not only prohibited, but moreover completely at odds with the management strategy proposed to investors,” the investor association said, estimating that the loss to its 6,077 members stood at €717mn.
The Collectif’s decision to include other parties in the lawsuit threatens to widen the fallout from the scandal beyond H2O itself.
Natixis, which is part of French banking co-operative BPCE, initially gave H2O its support in the wake of the FT’s exposé. However, it then announced in 2020 that it would dump its majority stake in the firm after French regulators stepped in and forced H2O to freeze a number of its funds. Natixis said it believed the claims were without merit and would “contest them vigorously”.
KPMG gave H2O’s funds clean audits prior to the FT’s exposé. However, it later flagged serious issues around the illiquid exposure, warning in 2021 that the accounts at several of its funds had become “impossible to certify” due to valuation uncertainties and rule breaches.
CACEIS, meanwhile, is a custody and asset servicing business jointly owned by European banks Crédit Agricole and Santander and was the longtime custodian of H2O’s funds. The AMF ruled in January that H2O’s illiquid bond investments were never eligible for funds open to retail investors.
H2O, KPMG and CACEIS did not immediately respond to a request for comment.
The lawsuit comes as H2O has continued to write down the value of its investments linked to Windhorst, who is battling insolvency proceedings against some of his companies in multiple jurisdictions.
H2O valued its illiquid investments linked to Windhorst at €1.6bn when it hived them off into so-called “side pockets” three years ago and trapped investors’ funds.
H2O announced in January it had received a €250mn repayment from Windhorst’s investment firm Tennor. However, its fund disclosure later showed that a significant portion of this amount was repaid with new bonds rather than cash. H2O in September marked down the value of the remaining investments in these funds to just over €300mn.
The Collectif last week won a legal victory in the Paris court ahead of its main filings, when a judge ruled that H2O had “failed to provide complete and exhaustive disclosure” of communications between Windhorst and H2O’s founders. The court imposed fines of €600,000 for past disclosure failings and €30,000 a day for any further delays in providing the communications.
The ruling noted that a court-appointed expert had found a number of specific examples of “incomplete” disclosures, such as “encrypted” messages and a reference to a letter “sent via an undisclosed Google address”.
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