(Bloomberg) -- In the week before Christmas 2019, H2O Asset Management made a trade with a little-known London broker that is leaving French regulators scratching their heads.

H2O concluded a buy-and-sell back operation with a London firm called Brandon Hill on Dec. 19, Lauriane Bonnet, an official at the prosecuting body of the Autorité des Marchés Financiers, said during a hearing in Paris on Friday. 

The trade valued Tennor Finance notes, issued by a company controlled by controversial German entrepreneur Lars Windhorst, at a price nearly three times higher than they were marked in H2O’s funds just a day earlier. The discrepancy, noted by the AMF at the hearing, is difficult to explain.

H2O and Its Founders Risk Big Fines on Windhorst Investment 

“There’s no document or analysis that explains or justifies that price difference,” Bonnet said.

While the deal with Brandon Hill was singled out by French regulators, it wasn’t specifically linked to any wrongdoing. 

The valuations H2O put on securities linked to the German financier have raised eyebrows in the past. The trade highlights the opacity of investing in illiquid securities. In 2019, H2O halved the value of some of the notes it held in its funds, while large chunks of the debt were trading at par. The notes rarely traded hands and the asset manager was the largest holder for a long time. 

Windhorst is well known in debt markets because he’s used lots of borrowed money to try to turn around ailing companies. He’s a divisive figure, though, not least because of his occasional involvement in so-called repo bond arrangements, according to people who’ve dealt with him. This is where you sell debt and buy it back at a higher prearranged price, creating a flattering picture of demand.

The AMF is going after H2O for having stuffed its funds, which offered daily redemptions to clients, with thinly traded notes. The company and its two founders now risk €93 million ($97 million) in fines. A lawyer for the asset manager said at the hearing on Friday the requested fines are “totally out of proportion” and questioned whether the AMF even had jurisdiction to issue the penalties. 

H2O told investors it had set aside money to cover the maximum fine it could be forced to pay in a statement on Monday. A decision from the AMF’s enforcement committee, an independent panel, is expected in the coming weeks.

--With assistance from James Hertling and Peter Chapman.

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