H2O faces 75 mn fine.

France’s financial regulator is seeking to fine H2O Asset Management a record €75mn and ban its chief executive from the investment industry for a decade over the firm’s extensive investments in illiquid bonds tied to German financier Lars Windhorst.

At the hearing of the French regulator’s enforcement committee, an AMF (Autorité des Marchés Financiers ) official alleged that there had been «grave deficiencies» in H2O’s investment process, arguing that the firm was not authorised to invest in such illiquid bonds in funds open to daily withdrawals from retail investors. The regulator’s recommendations come more than three years after the Financial Times exposed the scale of the firm’s outsized bet on Windhorst in 2019. Windhorst, a flamboyant financier who turned 46 this week, made his name in the 1990s as a teenage entrepreneur and was hailed as a wunderkind by then-German chancellor Helmut Kohl. In 2020, H2O was forced temporarily to halt redemptions on its core funds after the AMF raised concerns about its investments linked to the financier.

Two years later, investors’ money is still stuck in the so-called side pockets that H2O set up to house €1.6bn of these hard-to-sell assets. Once a well-respected money manager that oversaw €30bn of assets, H2O has lurched from crisis to crisis since the FT revealed the scale of its ties to Windhorst. The sum AMF seeks from H2O would exceed any previous fines it has levied, eclipsing the €32mn handed down to investment manager Amundi last year. The scale of the fines would also dwarf the provisions that H2O has so far disclosed for the case.

The recommendations were made to the AMF’s enforcement committee, an independent panel of judges and investment professionals. H2O and its co-founders defended themselves at the hearing, with a firm representative describing the proposed fines as «disproportionate». Bruno Crastes (co-founder of H2O) told the committee that «everything was done in the interests of investors» and noted that he also has a significant amount of his wealth invested in H2O’s funds. In addition, the firm disclosed in its 2021 accounts that it has not yet booked a provision concerning an FCA probe for «alleged non-compliance» with several of the regulator’s principles.

German authorities are investigating whether Windhorst breached the country’s banking law when he tried to raise money to repay H2O through a new investment vehicle in 2020. Windhorst denies wrongdoing.

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