FRANKFURT, Germany (HedgeWorld.com)–Investors in Phoenix Kapitaldienst GmbH looking to recover their money find themselves steered toward telephone recordings that urge patience.

Problems at Phoenix leaped into the news when a German court on March 14 opened preliminary insolvency hearings regarding the hedge fund manager at the request of that country’s securities regulator, Bundesanstalt f

r Finanzdienstleistungsaufsicht, or BaFin. The municipal court of Frankfurt banned any transactions that didn’t have the approval of the preliminary insolvency administrator, Frank Schmitt, of the law firm of Schultze & Braun.

Although this looks like a hedge fund meltdown, such a term must be employed with some care, because Germany has only welcomed hedge funds, properly speaking, since implementation of the Investment Modernization Act, a little more than a year ago.

A spokesman in BaFin said that Phoenix isn’t a hedge fund in the sense of the new law and has been around since 1992. “It does business in a way that’s quite similar to a hedge fund,” he said, but it is classified as a securities trading bank.

“They have a new management, and they came to BaFin and said that they had a problem with money,” he added, summoning the traditional German facility for understatement. Management change came about because the founder of Phoenix, Dieter Breitkreuz, died in an airplane accident last year.

The firm of Schultze & Braun has set up phone lines in which investors can hear a pre-recorded explanation–one taped in German, another in English. The explanation proves to be in large part a call for patience–it may be 8 to 10 weeks before the administrator can start processing requests for reimbursement. The court’s proceedings are designed “to ensure that whatever assets are still in existence will be made available to all creditors equally,” and to allow the efficient pursuit of that goal, investors and creditors in general are urged not to try to reach the administrator by phone.

A statement available through the Schultze & Braun web site goes somewhat further. It says that Phoenix traded on the futures market and distributed an investment vehicle it called the Phoenix Managed Account. Its account statements for this managed account show a credit balance of more than ?? 1/2 800 million (US$1.065 billion). But, the web site says, these figures “had evidently been manipulated for years ?? 1/2 and for a long time now [the balance] has had only a virtual existence.” Thirty thousand investors are affected.

Germany’s insolvency law, enacted in 1999, was based largely upon U.S. Chapter 11 proceedings, but the pool of qualified administrators is said to be very small. They generally are drawn from one of only four law firms. In addition to Schultze & Braun, that field of four includes Wellensiek Grub, Kbler and Metzeler van Betteray.

According to a story in Germany’s Berliner Morgenpost, March 15, two distinct theories about the case already had emerged. One view held that Phoenix is the latest victim of a rogue trader, analogous to Nick Leeson, the high-roller whose speculations in 1994 to 1995 destroyed the venerable Barings bank . The Morgenpost named Michael Milde, whom it identified as Phoenix’s chief trader and “finance mathematician,” as one possible Leeson stand-in, given this analogy.

The other theory is that Phoenix was what in German idiom is known as a “snowball system,” or a pyramid scheme, in which the older investors were paid off from money newer recruits invested, and the claimed profits were always imaginary. A recent survey of hedge funds and other distressed debt traders by Debtwire, a debt market database, showed that 76% think Germany will provide them with their best opportunities for 2005.

CFaille@HedgeWorld.com

Contact Bob Keane with questions or comments at: bkeane@investmentadvisor.com.