French regulator fines H2O AM and executives $99 million

France's financial regulator fined London-based H2O Asset Management, its group CEO and CIO a total of €93 million ($99 million) for breaches in the management of certain strategies.

Autorite des Marches Financiers said in a news release Tuesday that its enforcement committee decided on the fines and disciplinary sanctions Dec. 30. It imposed a €75 million on H2O AM, a €15 million fine on Group CEO Bruno Crastes and a €3 million fine on Group CIO Vincent Chailley. The fines were imposed "for several breaches committed in the management of French funds relating to investments in financial instruments," the AMF said.

The fines relate to seven French UCITS funds and investments in financial instruments issued by companies of the Tennor Group. The AMF said investments in the securities were not eligible due to a lack of necessary liability to meet redemption requests, that the securities "were not within the scope of the investment policy set out in the fund prospectuses, as they were not rated by a rating agency or issued by an issuer rated by a rating agency," and because H2O AM "did not have enough inflation to value these financial instruments reliably."

The AMF also said the manager had not complied with an investment ratio for these UCITS funds, with some holding more than 10% of debt securities issued by a single issuer in the Tennor Group.

Alongside the fine, Mr. Crastes was given a five-year ban on operating as a manager in France, directly or by delegation, or as an executive on certain legal entities. Mr. Chailley was also reprimanded, the AMF said.

"An appeal may be lodged against this decision," the AMF said.

The fines follow an investigation launched by the AMF in November 2019 over the company's compliance with investment rules in relation to private debt exposure. The firm froze several funds at the AMF's request in August 2020 over uncertainties in valuing illiquid assets that H2O AM was selling back to German financier Lars Windhorst at a steep discount, Bloomberg reported at the time. H2O created a side-pocket structure for seven strategies, the manager said.

Spokeswomen for H2O AM could not immediately be reached for comment. However, on Nov. 28, the firm issued a news release following a public hearing on the matter with the AMF.

H2O said it "firmly and factually contested" allegations of non-compliance with investment rules and highlighted "the complete absence of any fraud or intentional error on the part of H2O AM, Bruno Crastes and Vincent Chailley; both in the notification of grievances and in the rapporteur's report" on the matter.

Also in the Nov. 28 release, H2O said it had set aside a reserve to cover the maximum fine "as a precaution," such that any financial penalty would not impact on its activities.

In a further news release dated Jan. 3, H2O said it would start the reimbursement phase of the side-pocketed strategies in the next few days.

The seven strategies are the H2O Adagio, Allegro, Moderato, Multibonds, Multistrategies, Multiequities and Vivace funds.

H2O AM had €12.3 billion in assets under management as of June 30. The firm was part-owned by Natixis Investment Managers, which in November 2020 decided to end its 10-year relationship and divest its 50.01% stake.

Natixis said in March that it would unwind its stake in two stages: It immediately disposed of 26.61% of the capital and said it would divest the remaining 23.4% in four years' time and no later than six years.