US and European criminal investigators are examining the case of German hedge fund firm K1 Group, which is accused of deceiving banks including JP Morgan, Barclays and BNP Paribas, leaving banks with about $400 million of losses, reports Bloomberg, citing unnamed sources.

Authorities are examining whether K1, which manages funds of hedge funds, deceived the banks when borrowing money to amplify the size of its investments, the news agency said. German and US prosecutors may announce the first charges in the case as soon as this week, it said. JPMorgan inherited its exposure to K1 after acquiring Bear Stearns, which did business with the fund manager.

K1, founded by German psychologist Helmut Kiener, allegedly engaged in circular transactions with a network of investment firms in the UK, the US and other countries to create the illusion that K1 had more money available to backstop loans from the banks, the report said. The K1 Web site says Kiener’s investment system, called K1 Fund Allocation System, generated a total return since inception of 844 per cent in the period to July this year. The auditor for this product is listed on the website as PricewaterhouseCoopers and the custodian as HSBC.

Family Wealth Report  was unable to reach K1 for comment. The website appeared to carry no contact phone numbers or mailing addresses. Bloomberg said in its report that it had also tried but failed to make contact with the organisation.

Financial markets have already been rocked by the $65 billion Ponzi scheme fraud of Bernard Madoff, the US investment figure now serving a 150-year jail term after admitting his crimes. Billionaire Raj Rajaratnam, founder of Galleon Group, has been charged with insider dealing (he denies the charges.)

The report said prosecutors in Germany are investigating Mr Kiener, but made no further comment.

JP Morgan declined to comment, the news agency said. Barclays was quoted as saying “we are fully cooperating with law enforcement”, while BNP Paribas made no comment.