In the summer of 2019, H2O Asset Management faced a dilemma.
The UK’s Financial Conduct Authority had just asked the firm to hand over documents relating to a series of controversial investments it had made that were linked to a racy financier with a criminal past.
The regulator’s demand capped a torrid month for the asset manager. An investigation by the Financial Times had recently revealed that it had poured substantial amounts of investor money into these illiquid securities, which led nervous clients to withdraw €8bn from the €34bn of funds it managed.
While the investor exodus had slowed, the request for evidence of the research and valuation work H2O had carried out posed a major problem: the firm had often performed little or no due diligence before buying the bonds and stocks, the FCA later found, while a valuation committee that was supposed to scrutinise the investments had not met for months.
Rather than owning up to these lax checks and balances, however, certain H2O employees falsified documents and even fabricated minutes of meetings that had never taken place, according to findings the British regulator published last week after a five-year investigation.
At the same time, H2O tried to hide from the regulator that its senior managers had for years been wined and dined by Lars Windhorst — the notorious financier behind its illiquid investments — who had lavished the firm’s top brass with trips around the world on his private jet and superyacht.
When the FCA initially probed its dealings with the financier, H2O indicated that it had received no gifts and entertainment from Windhorst, the regulator revealed last week.
The alleged cover-up burst into public view when H2O last week agreed to pay €250mn to investors to help avoid a fine from the FCA, which described its regulatory breaches as “extremely serious”. The FCA accused H2O of attempting to “conceal certain matters” in order to “hide the severity of its due diligence and systems and controls failings”.
While H2O said last week that it has since overhauled its “risk management and compliance teams, governance and internal procedures”, the FCA’s findings, along with further internal correspondence and other documents seen by the FT, paint a stark picture of the lengths H2O went to conceal its risky dealings from both the authorities and its investors.
Blurred lines
On a spring day in 2018, Bruno Crastes sat down to enjoy a birthday meal like no other.
The then 53-year-old Frenchman’s buccaneering approach to trading government bonds and currencies had made H2O — which he had co-founded with backing from French bank Natixis at the start of the decade — one of the most revered investment firms in Europe.
That evening, according to people familiar with the event, Crastes celebrated his birthday aboard a superyacht moored in Monaco belonging to the man who would ultimately prove central to his downfall: Windhorst.
The German financier possessed an uncanny ability to attract deep-pocketed backers despite a career defined by scandal. Yet H2O handed Windhorst unprecedented financial firepower, providing him with funding to buy everything from luxury lingerie maker La Perla to German football club Hertha Berlin.
These hard-to-value private debt deals were a major departure for H2O, whose name alluded to the liquidity and transparency it was supposed to offer clients. By the time French and British regulators restricted H2O from investing more with Windhorst in 2020, it had well over €2bn of exposure to his businesses.
Over the years, Crastes’ professional and personal relationship with Windhorst became increasingly blurred. In addition to his 2018 birthday meal, Crastes took numerous trips on the financier’s 240ft-long superyacht, Global, even bringing his family along for the ride on sojourns to the Mediterranean and Caribbean.
Then, in February 2019, Windhorst announced to executives at La Perla that Crastes’ wife would become general manager of a new flagship store in Monaco. That same day, according to correspondence seen by the FT, Windhorst emailed Crastes to let him know he had purchased 32 bottles of 1982 vintage Château Latour wine, which the H2O chief replied they needed “to celebrate La Perla Monaco”.
Crastes’ wife did not end up taking a job at La Perla, however, which ultimately shelved plans for the Monaco store.
At the time, few people at H2O knew the full extent of Crastes’ personal entanglements with the financier, with the FCA noting that several members of H2O’s risk and compliance committee had “never heard of Mr Windhorst” before the FT’s reporting.
That was all about to change.
‘Purely business’
In June 2019, the FT published an investigation detailing the extent of H2O’s illiquid investments linked to Windhorst, sparking a market panic that led investors to withdraw billions of euros from its funds.
In video messages to clients following publication, Crastes described H2O’s relationship with Windhorst as “purely business”, while the firm’s chief investment officer Vincent Chailley assured investors that the firm applied “strict internal limits” to illiquid assets.
Just two weeks earlier, however, Chailley had emailed Windhorst complaining that H2O had been “breaching [risk limits] for more than six months on a number of funds” due to their exposure to his debt, adding that two of its funds were now “struggling with liquidity”.
While H2O’s calming words assuaged many concerned clients, the following month the FCA began requesting various documents from H2O relating to its due diligence and valuation processes.
While H2O’s funds had several different portfolio managers, the FCA later found that Crastes and Chailley in practice “made all the decisions” to invest in the Windhorst-linked deals.
They often agreed to invest with little of the documentation investors usually require for high-risk bonds. Some of the underlying businesses were little more than shell companies when H2O funded them, with few restrictions on how Windhorst spent the proceeds.
H2O had already started to backfill some of these gaps before the regulator’s request, according to both correspondence seen by the FT and the FCA findings. One of its portfolio managers emailed Windhorst’s investment company, Tennor, in late June to request prior financial statements and corporate presentations “following the FT article”.
Then in the second half of 2019, H2O provided the FCA with due diligence reports and other documents that it said had been prepared when it invested. However, the FCA later identified that all of these documents had been “prepared retrospectively”, either directly in response to its requests or during what it called a “repapering exercise” after the FT story.
The FCA said that these efforts were led by an unnamed member of H2O’s senior management — dubbed “Senior Manager A” in the regulatory findings — who “knowingly made the false statements and provided the falsified documents”.
The executive in question was in charge of H2O’s risk and compliance function, according to people familiar with the matter, and left the firm in 2021 after being suspended following an internal investigation into the matter.
The FCA said that Senior Manager A also provided the regulator with retrospectively created minutes for meetings of H2O’s valuation and risk and compliance committees, in some instances when meetings had never taken place.
The FCA noted that there was “extensive discussion” at H2O “regarding the retrospective creation of documents”, with one former employee even suggesting the use of “specialist software to amend metadata” on files. However, the FCA noted that H2O did not ultimately make use of this software.
Another employee warned others about the danger of backdating documents, writing: “If the FCA has a way of finding out that we have changed these dates, the risk is obviously considerable.”
H2O also tried to stonewall the regulator as it probed the extensive hospitality Windhorst had bestowed upon its staff.
H2O initially told the FCA in October 2019 that its gifts and entertainment register showed that “nothing was given or received” from entities linked to Windhorst.
When the FCA then asked H2O to provide details of any trips taken with Windhorst — specifically requesting details of “meetings on yachts, airplanes and private properties” — H2O only listed business meetings mostly in Windhorst’s London offices and “two specific overseas trips” more junior staff took to visit some of his companies.
After a third-party review mandated by the FCA began to uncover details of many of the trips senior staff took aboard Windhorst’s superyacht and private jet, the regulator instructed H2O to carry out another targeted search.
This returned over 50 instances of H2O staff “receiving hospitality (and occasionally gifts)” from the financier — such as “Mr Crastes being flown to Barbados to play golf with Mr Windhorst” — and 18 more times where Windhorst had offered hospitality but there was “no confirmation of its acceptance or receipt.”
H2O also initially denied to the FCA that “any personal relationships (such as friendships)” existed between its staff and Windhorst.
But the regulator later uncovered a January 2019 email in which Crastes thanked Windhorst for arranging a family holiday in the Caribbean, describing the financier as “my friend” and akin to a “new family” member.
Windhorst declined to comment for this article.
H2O said that “the lessons from the 2015-2019 period are fully embedded in our corporate culture and organisation”
It added: “The FCA has distinctly acknowledged H2O’s significant enhancements in its governance, systems, and controls. These improvements include adoption and implementation of a new governance model with changes to senior management roles and responsibilities and undertaking a culture review and change programme, as well as enhancements to policies and procedures.”
As part of its settlement with the FCA, H2O will apply to cancel its UK regulatory authorisation, although it still intends to maintain a London office with staff in non-regulated functions.
While the UK capital was once H2O’s main base, it has restructured in recent years and shifted staff to Paris and Monaco.
French regulators last year struck off Crastes from managing funds for half a decade. Monaco-based Crastes is no longer chief executive of the firm but he has continued to play an active role at the firm as its “corporate and market strategy director”. H2O also received a record €75mn fine from the Autorité des Marchés Financiers. Both Crastes and H2O are appealing against their AMF sanctions.
Meanwhile, Windhorst has only repaid a fraction of his debts to H2O, which has heavily written down the rest. He recently unveiled a new high-profile backer: British financier Nathaniel Rothschild last month agreed to take a minority stake in his investment firm and become its executive chair.
“I’ve never seen anyone who works quite as hard as Lars,” Rothschild told an audience at Windhorst’s Mayfair offices. “It’s quite remarkable.”
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