(Bloomberg) -- H2O Asset Management risks a multimillion-euro fine from French market regulators who are poised to accuse the London-based fund of making unauthorized investments in securities owned by controversial German financier Lars Windhorst.

Allegations against H2O -- and a request for penalties -- are due to be made public at a Nov. 25 hearing at the the enforcement committee of France’s Autorité des Marchés Financiers. A spokesperson for H2O confirmed the hearing in response to questions from Bloomberg News. 

The accusations put forward by the regulator’s prosecuting body will also target H2O co-founders Bruno Crastes and Vincent Chailley, people familiar with the matter said, who asked not to be identified while the matter remained confidential.

The case is part of the fallout from a crisis of confidence among clients that saw them pull billions of euros from H2O’s suite of funds after the Financial Times wrote in 2019 about the scale of illiquid investments in companies linked to Windhorst. In 2020, H2O was forced by the AMF to freeze some of its funds, reopening them only after segregating the Windhorst-linked notes from other assets and placing them in vehicles known as side pockets. H2O clients saw around €1.6 billion ($1.65 billion) of their holdings placed in the side pockets.

AMF fines for firms found to have breached French market rules are capped at €100 million, while the maximum is €15 million for individuals. Additional penalties can include industry bans. The enforcement committee -- an independent panel in charge of assessing AMF cases -- is likely to announce its final decision several weeks after the hearing. 

Read More: H2O Makes a Strong Comeback After Plunging on Russian Wagers

The French watchdog is not the only regulator scrutinizing the firm, with the UK’s Financial Conduct Authority also investigating H2O for compliance breaches, according to the money manager’s most recent accounts.

H2O and the AMF “will plead their case to the AMF Enforcement Committee on the basis of the report issued by the rapporteur on our investments on private assets,” a spokesperson for the money manager said in an emailed statement. “The potential financial impacts have already been anticipated and financial reserves increased as a consequence.”

AMF representatives declined to comment. The regulator’s website specifies that a hearing of its enforcement committee is scheduled on Nov. 25 but provides no details on the case or the defendants. 

H2O noted that both sides will have the right to appeal any decision. A spokesperson for the firm also said that liquidating the Windhorst-linked notes while generating returns from other assets remains its priority, pointing to recent strong performance in its Multibonds and Allegro funds. 

Stellar Returns

At one point H2O was one of the most revered names in European fund management, achieving stellar returns by making leveraged bets on macro trends. The firm’s dalliance with Windhorst -- a one-time wunderkind of German industry who then suffered a series of reversals -- has cost H2O dearly. Windhorst eventually agreed to buy back the notes in several steps, and said earlier this year that he planned to pay H2O at least €550 million.

At its height, the firm managed more than €30 billion. That had declined to €12.3 billion in June, according to the firm’s website. The affair also precipitated Natixis SA’s decision to sell its majority stake in the asset manager. The French lender disposed of just over half of its stake earlier this year, and intends to sell the remainder in a few years’ time, according to a March press release.

While he’s not directly concerned by the French case, Windhorst is facing criminal prosecution in Germany over allegations he conducted banking activities without a license. The German probe is focusing on a financing vehicle Windhorst set up to raise money and buy back bonds from H2O.

H2O is also under pressure from several investors, grouped together in the “Collectif Porteurs H2O,” who have initiated litigation with the ultimate goal of seeking compensation for their losses. They won a first round in June when the Paris Commercial Court ordered a third-party examination to be carried out.

Dominique Stucki, a lawyer for Collectif Porteurs H2O, told Bloomberg that the litigation will be funded by Deminor, a Brussels-based firm focused on monetizing legal claims. The attorney said the expert examination is due to be finalized in the coming weeks. With that report in hand, Deminor and Stucki then aim to file a claim for compensation.

--With assistance from Karin Matussek.

(Updates with detail of Natixis’s sale of H2O stake. An earlier story was corrected to reflect peak H2O assets under management reached more than €30 billion rather than nearly €40 billion.)

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