(Bloomberg) -- Troubled fund manager H2O Asset Management will repay its investors €250 million ($273 million) to settle a UK investigation after the regulator targeted the “close personal relationship” between then-Chief Executive Bruno Crastes and German financier Lars Windhorst.
The Financial Conduct Authority found that H2O AM LLP failed to carry out appropriate due diligence when investing in “highly illiquid” companies tied to Windhorst between April 2015 and November 2019. The authority also criticized H2O’s lack of safeguards surrounding conflicts of interests, saying that it found more than 50 occasions where hospitality or gifts weren’t properly declared, including when Crastes and his family went sailing on Windhorst’s superyacht.
The FCA was ready to impose a fine on H2O, but agreed that the firm should release €250 million to its investors who haven’t been able to access their funds, according to a statement on Wednesday. The funds have been frozen since 2020, when they amounted to around €1.6 billion.
Bloomberg News reported in April that H2O was seeking to avoid the UK fine by offering payouts to its clients.
The regulatory probes are part of the fallout from a crisis of confidence among H2O clients after the Financial Times wrote in 2019 about the scale of illiquid investments in companies linked to Windhorst. As the crisis deepened with the start of the Covid pandemic, H2O was forced by France’s Autorité des Marchés Financiers to freeze some of its funds.
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Britain’s markets watchdog is following in the footsteps of its counterpart in France, which in early 2023 issued a record €75 million penalty for H2O — whose relevant funds were regulated under French law.
In a separate statement, H2O confirmed the settlement with the FCA and said that the funds will be paid without an admission of liability. Windhorst declined to comment.
H2O repeatedly provided misleading information to the FCA, said Steve Smart, the regulator’s joint head of enforcement. The authority detailed how the fund had denied a close relationship between Crastes and Windhorst. But the FCA said the contact went beyond that of a “purely professional relationship.” In one email from 2019, Crastes thanked Windhorst for hosting him in the Caribbean over New Year.
“We feel like having a new family with […] you and it goes straight to our heart,” Crastes wrote.
Windhorst replied: “I feel exactly the same it´s more than just close friendship between us it does feel like extended family for me also!”
Investors who sold their units in October 2020 when the funds reopened will recover between 87% and 93% —including previous repayments — of their investments at the time of suspension in August 2020.
H2O has “significantly improved and consolidated our organization and strengthened our risk management and compliance teams, governance and internal procedures,” said Loic Guilloux, chief executive officer of H2O Asset Management Group.
(Updates with details throughout.)
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