German prosecutors revealed on Wednesday they are investigating possible fraud and breach of duty by the founder of a hedge fund group known as K1.

Prosecutors in the southern city of Würzburg confirmed they were looking into the affairs of Helmut Kiener, founder of the K1 Group, but refused to comment further.

The move came after Bloomberg had earlier reported that authorities in Europe and the US were investigating whether a group of banks had been deceived in dealings with K1.

Barclays, JPMorgan and BNP Paribas are among a group of banks that are believed to have lost tens of millions of dollars by providing K1 with credit. All three said they are co-operating with law enforcement authorities, while declining to comment further. Bafin, the German financial regulator, declined to comment on the current investigation. The US Federal Bureau of Investigation also declined to comment.

Between 2001 and 2004 Bafin published at least four prohibitions against either Mr Kiener or funds linked to K1 for carrying out unauthorised business in Germany. Two of those bans, involving companies based in the British Virgin Islands, were overturned after court appeals, Bafin said on Wednesday.

JPMorgan is thought to have inherited its exposure to K1 through its acquisition of Bear Stearns, the collapsed US investment bank that did business with the fund manager.

Some of the banks said to be affected, including JPMorgan and Barclays, are believed to have already recognised their potential losses, limiting any impact on the bottom line.

A search of Mr Kiener’s home and office in the town of Aschaffenburg took place on Wednesday, according to someone answering the phone there who described himself as a K1 employee. Mr Kiener was said to be unavailable.

Mr Kiener – described on the group’s website as psychologist and the creator of the ”K1 fund allocation system” – is a relative unknown in hedge fund circles.

According to the website, the K1 Group manages several fund of funds – specialist funds that themselves make investments in an underlying portfolio of hedge funds. The website says the group manages some €800m ($1.2bn) of assets.

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