Echoing shades of the deceased Jeffry Picower and Rene-Thierry Magon de la Villehuchet in the Madoff scandal, Mr. Frerichs proved to be an interesting character in the K1 scandal whose full story will never be revealed. He

Mr. Frerichs, 72, died of a gunshot wound on Saturday after police officers went to his home in Palma, Majorca to serve a warrant for extradition to Germany, the Spanish police said Monday.

According to a police spokeswoman, three officers went to Mr. Frerichs’s home on the island at 11:30 a.m. on Saturday and found him sunbathing nearby on rocks overlooking the sea. When the officers identified themselves, they said, Mr. Frerichs took a gun from a bag that was lying beside him and leapt into the water.

Mr. Frerichs fired two shots, the spokeswoman said. The first, presumably to test the gun, the authorities said, was fired in the air; with the second, he shot himself in the head. Mr. Frerichs was picked up by a rescue boat and taken to the Son Dureta hospital in Palma. He died not long after arrival.

According to the New York Times, the case has sent shock waves through Spain, where Mr. Frerichs’s stepdaughter, Fiona Ferrer Leoni, initially told the media that the police had shot Mr. Frerichs. She also questioned the police account of him sunbathing with a gun.

Ms. Ferrer, a prominent television personality and model, is married to Jaime Polanco, a Spanish tycoon whose family controls Promotora de Informaciónes, or Prisa, the media group, whose assets include the newspaper El País.

She also told the Spanish news media that Mr. Frerichs had been sought only for his relationship to K1 Group executives and that he was innocent of any fraud.

The police spokeswoman, who cannot be identified because of department policy, denied that officers had fired at Mr. Frerichs. She said his weapon had been retrieved and would be used, along with an autopsy, to determine the exact circumstances of his death.

“It is not normal to be sunbathing with a bag that has a gun,” the spokeswoman said. “But that’s what he did.”

Dietrich Güder, the state prosecutor in Würzburg, declined to comment beyond confirming that the Spanish police had informed him of the events.

Lutz Libbertz, a lawyer in Munich for Mr. Kiener, argued in a November court filing that Mr. Kiener could “at the most be accused of making bad investment decisions, but not of actions constituting breach of trust.” Mr. Libbertz declined to comment on Monday, saying through an associate that “he had nothing to add to what’s already been said.”

Mr. Kiener promoted the power of his “K1 Fund Allocation System,” and is accused of taking advantage of lax lending oversight by banks during the credit boom. He claimed his investments had returned more than 700 percent from 1996 and the end of 2008.

Mr. Kiener, K1′s founder, is equally interesting. He was a former telephone book salesman and psychologist (who graduated from Johann Wolfgang Goethe-University in Frankfurt, Germany in 1987) who founded a seemingly successful and large asset management organization.

The case has been an embarrassment for Germany, as BaFin, the market regulator, had several times sought to stop Mr. Kiener’s activities because of significant legal questions but had its enforcement overturned on appeal.

Mr. Kiener has been in custody in Würzburg, Germany, since October on suspicion of operating a pyramid scheme, defrauding thousands of privat

e investors and banks including JPMorgan Chase, Barclays and BNP Paribas of more than 300 million euros, or $375 million. The F.B.I. is also investigating the group; so are authorities in the British Virgin Islands, Liechtenstein and Switzerland.

The two highly leveraged funds had a combined 421 million euros ($529 million) of liabilities when the accounting firm Grant Thornton was retained in November to liquidate them. The authorities say the prospects for recovering most of the money are poor.

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The study, ‘The Madoff Effect – An Analysis of Operational Due Diligence Trends’, is available for download at www.Corgentum.com or directly here.

For this study Corgentum collected data from over 200 global hedge fund allocation organizations including fund of hedge funds, endowments, foundations, corporate pensions, family offices, large independent financial advisory practices, ultra high net worth investors and private banking organizations. “The data shows that frauds such as Madoff are an important, but potentially misleading guiding light around which investors tend to focus their due diligence on hedge funds” said Jason Scharfman, Managing Partner.

Investors, influenced by recent hedge fund failures, have refocused their due diligence efforts on operational risk areas where leading operational red flags were present. In particular, since the Madoff scandal broke, this study shows that the number of fund of hedge funds reviewing hedge funds cash management policies and controls increased by almost 60%.  Other operational risk areas covered in the Corgentum study that have realized double-digit increases in attention from investors include transparency in reporting and the role of service providers such as auditors and administrators.

Corgentum’s analysis also demonstrates that certain operational risk areas continue to be dangerously neglected during the investor due diligence process. Less than 2% of the fund of hedge funds included in this study considered the independence of a hedge fund’s board of directors during the due diligence process. Other frequently overlooked operational risk areas included information technology infrastructure, personnel turnover and the quality of overall operations management.

“Investor’s must not only understand historical red flags, but be prepared to anticipate new ones. By incorporating proprietary benchmark studies of hedge fund fraud and models of operational inefficiency into our evolving operational due diligence process, Corgentum’s approach ensures investors keep up with the changing nature of hedge fund operational risk” said Scharfman. “Corgentum will continue to partner with fund of hedge funds, pensions, family offices and other investors to create tailored comprehensive hedge fund operational due diligence and ensure that their operational due diligence reviews are not misguided by fraud.”

Opalesque, published an article regarding the study . The article is entitled, “Madoff Effect continues to see investors focus more on fraud risk than operational risk” and is available at www.Opalesque.com or via direct link here (subscription required). Additionally, the press release regarding this study is available  here. HedgeCo.Net and HedgeWeek also covered the study in this post.

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In their article on Madoff’s prison life, New York magazine also provides insight into how other inmates view Bernie with this sketch by fellow inmate (and convicted bank robber K.C. White):

The article goes on to quote Madoff in prison as follows:

“F— my victims,” he [Madoff] said, loud enough for other inmates to hear. “I carried them for twenty years, and now I’m doing 150 years.”

Oh by the way, here is a video that sort of flew under the radar, J. Ezra Merkin allegedly employed a convicted felon named Victor Teicher who reportedly advised Merkin from jail in 1994 not to invest with Madoff. These allegations came out of New York University’s lawsuit against him:

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And a profile from earlier this year on CNBC’s American Greed:

Mr. Israel is in jail until 2030 (two years were added to his 20 year sentence as a result of his faked suicide attempt).

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It’s worth noting that in a separate case, Kovachev in 2006 was ordered to pay $350,000 in a civil suit brought by the U.S. Securities and Exchange Commission accusing him and 11 others of defrauding more than 600 investors of more than $28 million in a Ponzi scheme. The SEC said that Kovachev and others sold unregistered securities structured as hotel timeshare rental interests.

Mr. Dreier was a graduate of  Yale as well as Harvard Law School. He previously ran Dreier LLP which had offices in five cities, employed over 250 lawyers and annual revenues of over $90 million. the firm’s client’s included Bill Cosby, Andy Pettitte and Justin Timberlake. The firm is now defunct.

Notable quotes from the video, which investors might want to keep in the back of their mind during the operational due diligence process include:

“The more money you look for the fewer questions people ask sometimes.”

“It was clear to me the more you showed people you didn’t need money, the easier it was to attract money”

“A $20 million dollar mistake had grown into a $100 million mistake”

“Do I have chutzpah? Yes!”

He further goes onto describe part of the reason he finally was caught was that a potential investor, who was attempting to defraud, had acted diligently and made some phone calls (i.e. – performed due diligence) which had raised his suspicions.  If that isn’t an endorsement for operational due diligence I don’t know what is.

The video describes how Dreier lived a lavish lifestyle to create the illusion that he already was a billionaire before his empire crumbled. Some of his assets included an $11 million ocean front compound in the Hamptons, his $10.5 million apartment, an art collection that included a Picasso, three Matisse’s and 12 Warhol’s. Also just like Madoff, Dreier had a yacht. His was a 120 foot yacht called “Seascape” staffed by a full-time crew of 10, which Dreier paid $18 million for.

The video also describes how Dreier tried to further add an air of credibility to his persona by hosting charity events with former New York Giants (American football) player turned actor Michael Strahan, which were attended by such celebrities as Diana Ross, Jon Bon Jovi, Alicia Keys and William Shatner.

Dreier is serving 20 years at a Federal Correctional Institution in Sandstone, Minnesota. He is scheduled for release on October 26, 2026.

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To refresh memories, initial arrests were made last year in regards to an on-going fraud investigation into the K-1. Most notably the firms founder (and former telephone book salesman), Helmut Kiener, was arrested. He still remains behind bars. Perhaps Helmut is lucky, at least he is safe in prison from disgruntled German investors.

K1 Group is at the center of an international criminal probe after saddling banks including Barclays Plc, JPMorgan Chase & Co. and BNP Paribas SA with losses. European and U.S. authorities are examining whether Kiener deceived the banks when he borrowed money.

Now there have been two new arrests. Dieter Frerichs, the managing director of K1′s two British Virgin Island-based funds, and David Zuendorf, who worked with the funds’ administrator Treukapital Treuhandverwaltung AG, were arrested on April 13.

Prosecutors in the southern German city of Wuerzburg said in a statement that these arrests were reportedly the result of renewed searches of foreign premises linked to the original K1 fraud investigation.

“There is a suspicion that investors may have been hit by around 90 million euros in fraud damages,” the statement said, adding that the investigation indicated the investment companies were a “snowball system with no objective of earning a profit”.

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Perhaps these investors were influenced by a wave of new U.S. vigilante movies such as Kick-Ass? (clip below):

Perhaps this will usher in a new age of activism, where instead of seeking board seats like other activist investors, people who suffer losses simply  obtain recompense via more forceful means. This new modern code of Hammurabi, could be would have certain rules of course.

Yes, rather than the abject street justice of doled out by vigilante’s such as Charles Bronson in Death Wish, there would be some sort of structure. It could be Gladitorial combat for the entertainment of investors and the financial media, popularized recently by such films as the aptly named Gladiator or the popular television program Spartacus: Blood and Sand. Or perhaps it would be something more civilized such as when Spock and McCoy fought Gladiators:

Or perhaps it could be a more clandestine individual or groups of vigilante’s fighting for investors rights such as Batman. Unfortunately, though just as not everyone can be a star hedge fund manager, neither can all defrauded investors be Batman. Instead these individuals could form a new type of SEC which protected investors at risk of being defrauded everywhere such as the Justice League or the X-Men.

Fortunately, or not, none of this will happen – nor should it. Hedge fund managers, just as investors both have rights and both should play an active role in the investment process. As Mr. Amburn (and his assailants) story outlines, even a little due diligence before an investment is made can prevent a great deal of litigation, better risk management, and a more thorough understanding of the full pallete of risks being undertaken. So too must a hedge fund manager provide transparency and on-going level of information to facilitate this process. If not, it can unfortunately lead to this type of result…

The Story of James Amburn:

Amburn was ambushed outside his home in Speyer, West Germany, where he was bound with masking tape and bundled into the trunk of a car after being hit over the head with a walker (called Zimmer Frame in the UK) of one of his kidnappers.

Prosecutors charged the two married couples, aged between 60 and 79, as well as the co-conspirator, with carrying out the kidnapping in order to recoup losses amounting to £2.3 million in investments that soured due to the international financial downturn.

Amburn was abducted and driven to a house on the shores of Lake Chiemsee (pictured below):

He was driven 300 miles to a house on the shores of beautiful Lake Chiemsee in Bavaria – but not before escaping at a service station.

His elderly abductors recaptured him and beat him with the walker (aka: Zimmer Frame in King’s English), causing Amburn two broken ribs.

The court in Traunstein, Germany heard prosecutors describe the kidnapping and torture as ‘almost surreal – except it happened.’

For four days Amburn was kept in the cellar of the house in June last year, beaten and tortured by the pensioners who saw their comfortable retirement dreams evaporating before their eyes.

Another couple, retired doctors Gerhard and Iris Fell, aged 63 and 66, who arrived to assist the kidnappers, admitted their roles in the plot. Mr Fell was not in court due to illness. Koenig and his wife Sieglinde, 79, made a partial admission but he, bizarrely, told the court that Amburn was there ‘willingly.’

A Chance Meeting In Florida

He said he and the others had met Amburn in Florida in the 1990′s and they possessed holiday homes in the state. ‘He said he was a business adviser and promised us yields of 18 percent on our savings,’ he told the court. ‘At first that happened – but then he took the p**s.’

They met up co-incidentally with Dehmer who told them Amburn owed him $690,000. Together, say prosecutors, the plan coalesced to ‘teach him a lesson.’ ‘The fear of death was indescribable,’ Amburn said, adding that he was beaten and tortured during four days of captivity in a cellar room where he was held naked. He was rescued when he was ordered to send a fax to release funds from a Swiss bank and managed to scribble a message on it for the recipient to call police.

He said: ‘I told them that if I sold certain securities in Switzerland they could get their money and for this I had to send a fax to a bank.’ Allowed out of the cellar for a cigarette break in the garden while the kidnappers awaited their loot, Amburn attempted to escape over a wall. In the pouring rain he ran down the street pursued by his captors in the Audi A8 they had used to transport him to the house. Several people saw him, but Roland Koening shouted: ‘He’s a burglar!’

Amburn was then dragged back to the cellar.  Shortly afterwards, the Swiss bank telephoned police in Germany and a team of armed commandos stormed the house. His captors now face a minimum of five years in jail each when the trial concludes in March. Their lawyer Harald Baumgaertl insisted before the court that his clients were not ‘big criminals.’

But the prosecution disagreed, saying they showed a ‘high degree of criminal energy.’ Wiley Dehmer (pictured below):

Roland Koenig (pictured below):

According to the prosecutors, kidnappers, Roland Koenig, 74, and Willy Dehmer, 60, attacked Amburn outside his home and bundled him into an oversize cardboard box which they wheeled to the boot of a silver Audi saloon car.

After all this Mr. Amburn is under investigation from German authorities for fraud.

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The Wall St. Journal reports that Mr. Madoff was treated for a broken nose, fractured ribs and cuts to his head and face, according to a felon currently at Butner serving time on drug charges who was familiar with his condition at the time. The former inmate said the dispute centered on money the assailant thought he was owed by Mr. Madoff.

“In December he [Madoff] told staff he was not assaulted, and an investigation was completed following his statements, which corroborated his statements,” said Traci Billingsley, a Bureau of Prisons spokeswoman. “Not one inmate has told staff he was assaulted.”  It’s not uncommon for prisoners to deny being beaten because they don’t want to risk a reputation as a snitch, according to prison experts and prisoner advocates. It’s good to know Madoff’s not a snitch…

In other news Law.com is reporting that an investor, Jermore Goodman, is suing Goldman Sachs over Madoff investments. Goodman alleges that Goldman had an internal ban in place on investing with Madoff since 1999 but didn’t think it was important to share with its investors like Goodman. Assuming these allegations are true, this is just another example of the imperfect nature of operational risk data in the hedge fund market.

Finally, the reportedly shy Harry Markopolos has written a book about his Madoff experiences appropriately entitled, “No One Would Listen.” Here is a video about the book:

Other reported key highlights from the book include:

• The Madoff case is just the tip of the iceberg of his multiple probes of financial shenanigans
• The health care industry “makes Wall Street look honest”
• If he felt threatened, he was prepared to kill Madoff himself
• Markopolos claims he tried to give his Madoff file to then-New York Attorney General Eliot Spitzer; Spitzer says he didn’t get it
• Markopolos slams the media, expressing his incredulity at their lack of initiative and says reporters ignored the story he told them about
• He was devastated by the suicide of friend and french money manager Thierry de la Villehuchet, who remained heavily invested in Madoff despite Markopolos’ warnings

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Essentially if any of the above items are indeed true we can stop this story right here. There are certain basic red flags that should come up during the operational due diligence process. Confirming employment, reputation and education history should be a core part of any basic due diligence process. I would be more interested to learn which “investors” forked over the approximately $4.7 million that Houston in investors gave to Spyglass between 2004 and 2006.

The SEC complaint, filed in Texas, alleges that between in 2004 and 2006, Kim and Spyglass raised approximately $4.7 million from investors located primarily in Houston, Texas using offering materials that contained misleading information relating to Kim’s education, business experience, and compensation. I would hazard a guess to say that if any of those investors knew about any (or even knew about allegation of) any of these red flags (i.e. – educational, employment and reputation discrepancies) they wouldn’t have invested – or at least I hope they wouldn’t. If Mr. Kim’s Spyglass Management, L.P. presented such a compelling investment story that it seemed investors wanted to bear any supposed additional risks or questions that remained unresolved relating to Mr. Kim or Spyglass, at a very minimum investors who would have performed these basic operational due diligence screens, they would at least be mak

ing an informed decision.

The problem was, as is the case in most alleged hedge fund frauds, when everyone was making money operational due diligence took a seat on the back burner. As Hedgefund.net reports, problems arose when Kim’s Collateralized Mortgage Obligations (aka: CMO)  hedge fund counted on an interest rate climb which never came. That misstep

wiped out Spyglass Management, as Kim named his company. He continued his fund, providing misleading performance data, the SEC said. Here is a link to the SEC press release and the complaint. Notable quotes from the complaint include:

• “In reality, Kim was simply a day-trader who lost money.“

• “The offering materials represented that Kim had degrees in finance and economics from the University of Texas, and that he had 12 years of experience in the securities industry with several well-known brokerage firms. Although Kim had a degree in economics from the University of Texas, he did not have a finance degree.“

• “Kim failed to disclose that one of the brokerage firms listed in his biography had terminated Kim for engaging in unauthorized trading.“

• “In November 2006, after the investors became aware of Kim’s other business ventures and the dearth of information concerning the fund, Kim had Spyglass Management produce a false statement valuing the fund at $1.9 million, when in reality the fund only had approximately $1,000.“

And my favorite:

• “In addition, Kim told investors and potential investors that he would not take any compensation until investors in Spyglass Partners received a one-hundred percent return of their original investment.“

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To refresh memories, the Wall St. Journal reported that Nadel said he acted as a trader for three other funds run by Neil V. Moody and his son, Christopher D. Moody, during the period he committed his fraud. The Moody’s have agreed to be barred from associating with any investment adviser for five years as part of a consent agreement with the SEC. They didn’t admit or deny wrongdoing as part of that agreement. “Neil adamantly denies any knowledge that this was a Ponzi scheme,” said James Felman, a lawyer for Neil Moody.

Now it is being reported that while son Chris Moody has cooperated, receiver Burton Wiand says his father, Neil, refuses to go along — even insisting that he should keep cash and property he acquired from the Ponzi scheme.

Wiand, the man appointed to try to recover money for defrauded investors, outlines vastly different approaches taken by the Moodys in his fifth interim report filed Wednesday in federal court.

The Moody’s received $42 million in fees from the six hedge funds they operated with Arthur Nadel in downtown Sarasota.

The Moodys in January settled civil fraud charges brought by the Securities and Exchange Commission. In that agreement, they consented to give up all “ill-gotten gains” from the scheme.

Wiand says Chris Moody has “cooperated fully” in turning over his assets. In January Moody even gave Wiand power of attorney to help transfer those assets.

“Neil Moody, on the other hand, has not cooperated with the receiver,” Wiand said.

“Neil Moody has taken the position that he would like to maintain some of the assets he owns although they were purchased with misappropriated funds,” he said.

Moody is trying to hold on to bank and brokerage accounts, personal property, real estate and some corporate interests, he said.

Wiand has already seized Moody’s seventh-floor bayfront condo in La Bellesara, a lavish three-bedroom, two-bath unit he bought in 2006 for $2.16 million.

The receiver also has sued Moody and wife Sharon over $28.3 million in profits and redemptions they took from the funds.

Taken earlier from the Moodys was $675,000 in jewelry they owned through their former part-ownership in the Queen’s Wreath Jewels store on St. Armands Key.

From Chris Moody, Wiand said he has recovered cars and a boat, two rental properties and an interest in a third, bank and brokerage accounts and various corporate interests. The receiver will detail those assets in his next report.

The receiver has filed more than 120 lawsuits to recover $32 million in so-called “false profits” from hedge-fund investors. That represents profits they took out that exceeded their actual investments.

It will be interesting to see if the Moody’s will be able to hold onto anything or if investors will be able to recoup their Nadel losses from him.

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