H2O Asset Management has reported hundreds of millions of euros in new illiquid bond trades with a small wealth management firm that denies any involvement in the transactions.
The disputed transactions are fuelling a clash between the two firms that has drawn scrutiny from regulators in three countries, threatening to cause further difficulty for a former star of European asset management.
A document seen by the FT shows that H2O, a subsidiary of French bank Natixis with €22bn under management, recorded more than €370m of new “buy and sell back” bond trades last month with Merit Capital listed as broker. Some of these transactions are dated after the FT reported Merit Capital’s chairman had denied trading these bonds with H2O.
Other documents show that H2O received trade confirmations — which validate that a transaction has happened — for these trades from a different broker, Shard Capital, a London-based business with close ties to controversial businessman Lars Windhorst.
H2O’s substantial investments in illiquid bonds linked to Mr Windhorst’s businesses prompted French regulators to force a six-week fund suspension on the firm, an unprecedented intervention that ended last week.
In another document, Shard confirmed that it acted as a broker on these deals for an unnamed third party — which was not Merit Capital — and said it reported the transactions to UK regulators as “agency trades”.
Shard Capital told the FT that it “cannot comment on trades that H2O may or may not have undertaken with third parties”.
H2O declined to comment. Merit Capital did not respond to requests for comment.
The FT has reported a series of reporting anomalies relating to H2O trades over the past year.
The National Bank of Belgium is currently scrutinising H2O’s claimed transactions with Merit Capital, while another Belgian regulator has been reviewing investments by one of Merit Capital’s funds in bonds issued by Mr Windhorst’s businesses, according to several people familiar with the matter.
Three board members representing Merit Capital’s owner, Duet Group, resigned last week. “We resigned to ensure that [Merit’s] board can operate independently” said Amit Haria, Duet’s chief financial officer, who was among those who left the board.
He added that an inspection of Merit’s Capital’s records had not revealed any trades booked against H2O.
However, H2O claims the trades are valid because of an agreement the Belgian firm apparently signed last year that allowed the transactions to take place, according to people familiar with the dispute.
Merit Capital announced last week that H2O had presented it with what it called a “framework agreement” that set out general bond trading terms.
However, Merit Capital’s chief executive Jan de Coninck said the firm disputed the validity of the document because its board had not previously seen or approved it and Merit Capital did not hold the required licence.
“We were convinced that the disclosures in H2O’s annual accounts were an error because on our side with H2O there is no agreement and there are no transactions”, Mr de Coninck said in a press release last week, adding that Merit Capital would “take legal action”.
After the FT revealed H2O’s significant exposure to bonds linked to Mr Windhorst last year, the asset manager said it had sold some of these securities. Last month it emerged this sale had never closed. H2O then entered into complex buy and sell back trades in a move that some commentators saw as an effort to make its balance sheet look less risky.
H2O’s auditor KPMG flagged that several of its funds breached counterparty risk limits because of these trades, which included transactions with Shard. H2O said in fund filings that it has taken “necessary measures since mid-October  to limit the exposure” to Shard.
Following the fund suspension in August, H2O revealed that up to a third of its funds were invested in the illiquid securities linked to Mr Windhorst, which it has written down by 60 per cent.
Since the fund suspension ended last week, investors have withdrawn more than €400m from H2O’s most liquid funds.