Sigrún Davíðsdóttir's Icelog

Magnus Gudmundsson ex-manager of Kaupthing Luxembourg and Banque Havilland was today released from custody but is forbidden to leave Iceland for the time being. Ingolfur Helgason, also an ex-Kaupthing manager, is now in custody since Tuesday. After an unsuccessful appeal to the High Court his week-long custody is now confirmed. Kaupthing’s ex-CEO Hreidar Mar Sigurdsson is still in custody. The fourth ex-Kauthing manager, Steingrimur Karason, living in Luxembourg, has also been questioned and is now forbidden to leave Iceland.

No news of ex-executive chairman Sigurdur Einarsson’s whereabouts. He had originally been asked to come for a hearing today but the date was then moved forward. When his former colleagues were put into custody he is said to have been unwilling to come since he couldn’t get any guarantees as to what would happen to him. Interpol has now issued an international arrest warranty for him.

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Jon Asgeir Johannesson and his wife have now been served the court papers related to Glitnir’s winding-up committee that had an international freezing order passed on Johannesson at a London Court. The freezing order is part of the WuC’s action to claim back $2bn through a court case in New York, estimated to be the amount that Glitnir Banks lost on loans and favours to ‘a cabal of businessmen led by a convicted white collar criminal’ Johannesson. According to The Guardian Johannesson, who hadn’t been willing to divulge his whereabouts when contacted by Icelandic media, was at one of his two New York flats. This version however doesn’t seem to be the correct one: according to the Icelandic State Broadcaster, Ruv, the court papers were handed over to Johannesson’s lawyers in London today at 1pm. Johannesson will now have 48 hours to hand over a complete list of his assets though the time might be prolonged over the weekend.

Many Icelanders will be curious to know the extent of his assets since he and his family enjoyed more favours than any other living Icelander (in the end Robert Tchenguiz outdid him by loans from Kaupthing only, another story) in the three failed Icelandic banks and in other parts of the Icelandic financial system, most of which has failed. By the end of 2007 he and his family (father, mother, wife) was the biggest debtor to the banks, owing €2,6bn, at the time about a fifth of the country’s GDP.

Johannesson has long claimed that he’s been hounded by political forces connected to the Independence Party that’s ruled Iceland together with the Progressive Party since Iceland became a republic in 1944.* The intriguing fact is that in spite of what Johannesson has called political persecutions, i.a. an investigation that went on from 2002-2008 after which Johannesson was convicted to conditional three months in prison, Johannesson, his family and his closest associates kept on getting loans.

Kaupthing was instrumental in the late 90s when Johannesson was constructing his supermarket chain Bonus with his father and then when his investment vehicle Baugur was floated on the stock market. After buying companies left right and centre, first in Iceland, then in Scandinavia and in the UK, Kaupthing seems to have lost faith Baugur in 2006 when Baugur led a consortium to by the UK retailer House of Fraser. But Johannesson didn’t need to worry because then Landsbanki stepped in to fund the takeover bid. Landsbanki funded the Johannesson’s enterprises lavishly and also his private vanity buys like a chalet in France and the not one but two flats at 50 Gramercy Park, a prestigious NY location.

Although there is no indication that Johannesson ever put a penny into the NY flats – he simply wasn’t in the habit of paying anything himself, even his spectacular wedding in November 2007 left a trail of unpaid bills in Iceland – the Landsbanki resolution committee seems to have granted him free use of the flats he never paid. The ResCom hasn’t been forthcoming with any answers as to the status of the flats (I’ve asked them several times; the answer is that they don’t comment but will in due course). The rumour goes that Landsbanki, in lending Johannesson the $25m to buy the flat, took no collaterals, either because they forgot or didn’t bother. Johannesson is the largest debtor in Landsbanki.

By mid 2007 Johannesson was finally in the position that he had sought since 1998: to be a majority shareholder of a bank, Glitnir. Although his loans already filled page after page in the Glitnir loan book he kept adding to his loans, using ever more crooked ways to hide that his standing with the bank was beyond all rhyme and reason, that all rules in the book were broken, crushed and ignored – and remains to be seen if not the law as well. Glitnir WuC is now trying to claw back assets bought with the looted money.

So far, Landsbanki hasn’t touch a hair on Johannesson’s head. PriceWaterhouseCooper, the administrator of one of Johannesson’s failed UK companies, has kept Johannesson on the board of Iceland and House of Fraser. Kaupthing is struggling to make sense of the fact that the Johannesson family still has ties to Hagar, the holding company that owns their retail empire in Iceland. Glitnir has been the first to take a decisive step to wrest assets, bought for loans that were never repaid and never meant to be repaid, out of Johannesson’s possession. Glitnir does it by simply going for the money, leaving others, i.e. the Office of the Special Prosecutor, to deal with eventual criminal charges.

Over more than a decade Johannesson was allowed to overstep all sensible law of competition and go well over 50% market share in important markets such as food and media. And he still owns a media company in Iceland, though now in his wife’s name, through a murky web of companies. When the Icelandic banks went abroad and netted some of the floods of cheap money filling international money markets he netted the most, through all the banks.

Foreign banks were dying to lend him – only they were clever enough to make margin calls, no later than early spring 2008. At that time, Baugur was de facto bankrupt but the Icelandic banks divided this between them and chipped in – he was too large for them to fail – and, if not merrily they did at least pile more on Johannesson’s already sizeable Icelandic debts. The sad thing is that Johannesson was extremely good at securing funding and equally bad at making sensible use of the money. Nothing of any worth has been built up in Iceland for all this money.

Money was too easy to get, no hard thought put into using it either. Overpaying – paying price way beyond the asking price – was the rule. When I once asked a Baugur executive why they continuously overpaid he explained that time is money and it can sometimes pay to pay more because it saves time… and time is money. Now, I wonder. Interestingly enough it wasn’t just Johannesson who was in the habit of overpaying. All the Icelandic high-flyers and the banks did. Yes, I do wonder why.

Time was money and there was apparently no lack of money to buy time. Plenty of it. In the end, too late, Iceland woke up to the fact that what these ‘viking raiders’ had really been buying all along was debt. Debt that now stays with the Icelanders as those who left them the debt refuse to shoulder their responsibility and are holed up in their never-paid-for abodes far from Iceland.

It’s still a mystery to me, that if Johannesson was, as he claims himself (last in an interview with Bloomberg earlier this week), indeed the victim of a continuous political persecution in Iceland he did jolly well for himself. Who needs friends if being a victim of a persecution brings you all the riches… if not of the world then at least of Iceland?

*An Icelandic friend pointed out to me that naming only these two parties was an over-simplification – and that might be true. There have of course been other parties in power or with influence such as various shades of left/socialist parties and social democrats.

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It’s not only Sigurdur Einarsson ex-chairman of Kaupthing who prefers to stay away from Iceland. Glitnir’s winding-up committee hasn’t been able to hand over to Jon Asgeir Johannesson a summon regarding the court case the WuC has filed in New York. At a press conference today its chairman, Steinunn Gudbjartsdottir, said that the WuC doesn’t known Johannesson’s whereabouts. After he receives the summon he has 48 hours to hand over a complete list of his assets. A court in London issued yesterday an international freezing order for Johannesson’s assets, up to ISK6bn. The freezing order only touches his assets, not the assets of his wife, Ingibjorg Palmadottir. Her wealth stems from a supermarket chain her father built up and that Johannesson later bought though her assets have been greatly diminished if not entirely wiped out by her husband’s business operations.

The freezing order means that Johannesson can’t dispose of his assets anywhere in the world and has a wide-reaching and extensive effect. If he doesn’t produce a list of his asset a prison sentence could follow. The actions taken regarding Johannesson follow an investigation by Kroll that also advices on how to proceed. On May 28 a court in London can hear the case if Johannesson wishes to. Through the Icelandic website pressan.is, run by people close to Kaupthing and others who used to be among the newly rich, Johannesson made it known today that this case was only brought to slander him. In an interview with Bloomberg Johannesson says that there isn’t much he can do now, claiming that lawsuit is ‘just politics.’ He personally threatened that Gudbjartsdottir would be sued for the WuC action. At the press conference today, Gudbjartsdottir was asked what he reaction was to Johanesson’s remarks. ‘I didn’t expect him to be happy about our action,’ was her laconic answer.

Whether or how Johannesson will be sought via formal channels isn’t clear. Today, it transpired that Scotland Yard had refused to arrest Sigurdur Einarsson as Iceland isn’t a signee of two international conventions, European Arrest Warrant and the UN Convention against Corruption. It’s an intriguing question as to why Iceland hasn’t signed this agreement. However, Interpol is now looking for Einarsson who said to the Icelandic business paper Vidskiptabladid that he had no intention to go to Iceland to participate in the Special Prosecutor’s ‘theatre.’ This action against him hadn’t been necessary, he said, and he hoped that the civil liberties in the UK would protect him from these actions. – It will be interesting to follow what happens since it’s not clear the civil liberties in the UK are meant to protect those who should be brought to court in other countries.

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I’m just starting to read the Glitnir’s complaint, filed in New York, against Jon Asgeir Johannesson, his wife, business partners Palmi Haraldsson, Thorsteinn Jonsson, Hannes Smarason and ex-FL Group manager Jon Sigurdsson. It’s 79 pages and the beginning of the Introduction makes a compelling read:

“Between April 2007 and February 2008, the individual Defendents, a cabal of businessmen led by a convicted white collar criminal, Defendent Jón Ásgeir Jóhannesson … engaged in a sweeping conspiracy to wrest control of Iceland’s Glitnir banki hf … and fraudulently draw over $2 billion out of the bank to fill their pockets and prop up their failing companies. To finance these diversions, the Defendants relied heavily on funds which Glitnir raised through the sale of medium term notes … to investors located in New York and elsewhere in the United States. The Defendants never reapaid the sums they took from the bank.”

No coincidence that so many US lawyers turn to writing thrillers – what a description!

According to the press release the case includes:

*How a cabal of businessmen led by Jóhannesson conspired to systematically loot Glitnir Bank in order to prop up their own failing companies

*How Jóhannesson and his co-conspirators seized control of Glitnir, removing or sidelining experienced Bank employees – and abused this control to place the Bank in extreme financial peril

*How Jóhannesson, Welding and the other Defendants facilitated and concealed their diversions from the Bank by overriding Glitner’s financial risk controls, violating Iceland’s banking laws, and orchestrating a blizzard of convoluted stock “parking” transactions

*How the individual Defendants, with the complicity of Glitnir’s auditor PwC, raised  $1bn from investors in New York without revealing the truth about the Bank’s financial exposures to Jóhannesson and his co-conspirators

*How the Defendants’ transactions cost Glitnir more than $2bn and contributed significantly to the Bank’s collapse

After the collapse of the Icelandic banks Johannesson wrote an article to counter the rumours regarding his role in the demise, under the headline ‘Did I bankrupt Iceland?’ His answer was ‘no’ – it seems that in relation to Glitnir the winding-up committee begs to differ. And since Johannesson is the largest Icelandic debtor. His debts combined with those of his family run up to ISK250bn, roughly $2bn.

The very interesting angle of this new case is that the winding-up committee is also suing PriceWaterhouseCooper for ‘malpractice and negligence.’ That will no doubt send some shiver through the world of accountancy – in Iceland there is a profound sense that nothing of what went on had been possible hadn’t it been for the role played by the accountants.

There is a press conference on these matters in Reykjavik today at 14.30 local time (GMT).

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The Glitnir winding-up committee has obtained an international freezing order of Jon Asgeir Johannesson through a court in London. It means that Johannesson doesn’t have any access to any of his assets. Among them is the flat in New York, bought with a loan from Landsbanki. The rumour goes that Landsbanki didn’t ask for any collaterals against that loan. The price was $25m at the time. It seems that the flat, at 50 Gramercy Park, has been put twice on the market but hasn’t sold so far. Icelog has earlier mentioned the flat and Johannesson’s ownership.

Johannesson rose to fame in the UK business community through drastic buying into high street retailers such as House of Fraser and a long line of famous fashion shops such as Karen Millen, bundled together in his Mosaic Fashion, all under the ownership of his private equity company Baugur. There is a growing sense that at the core Johannesson’s operations there was extensive fraud.

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It seems that the Icelandic banks are turning into the most investigated banks in the world. The Office of the Special Prosecutor is conducting investigations, whereof the one into Kaupthing is clearly well underway. Market manipulation and breaches of fiduciary duty in the other banks are no doubt being investigated as well.

Glitnir’s resolution committee hired Kroll to poke around in the ruins of Glitnir. Recent cases against major shareholders and ex-managers of Glitnir are based on Kroll’s work. There is more to come, from the bank’s ResCom and winding-up committe. The findings of Kroll will be made public when it’s finished, probably in early summer.

The ResCom and the winding-up committee of Kaupthing has also organised an extensive investigation into possible malpractice at Kaupthing with a team from PriceWaterhouseCooper. The present OSP investigation is partly based on material from the ResCom. Glitnir is already bringing charges. The same is to be expected from Kaupthing. Their tactic will most likely be to bring a whole raft of charges at once.

Landsbanki has hired a team from Deloitte to investigate possible fraud. Nothing is known of possible charges. The feeling has been that the Landsbanki committees haven’t been as energetic in their investigations and little is heard of what’s going on there.

The Icelandic Financial Authorities, FME, are also investigating the old banks, in cooperation with the OPS. In Iceland there is a State Prosecutor. After the collapse of the banks the OPS was set up to investigate and process cases that might arise from the failed banks’ operations. The OPS deals with cases of eventual criminal behaviour. The administrators of the failed banks act in order to recoup assets.

In addition to Icelandic investigation the UK Serious Fraud Office is investigating Kaupthing. The banks all had important operations in Luxembourg – the  question is if authorities in Luxembourg will make any move towards investigation.

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Although the Office of the Special Prosecutor had asked for the court rulings on the custodial sentences of two ex-Kaupthing managers not to be published the charges have been seeping into the Icelandic media through the day. The most extensive leak throws light on the charges against Magnus Gudmundsson ex-manager of Kaupthing Luxembourg and manager of Banque Havilland until his arrest last week. Most likely, it’s the defense team of those arrested who are responsible for the leaks that are clearly against the interest of the OSP.

The OSP is investigating five separate issues of what they call ‘extensive, calculated and unparalleled fraud.’ Gudmundsson appears to be at the centre but it’s highly likely that these issues involve at least Hreidar Mar Sigurdsson Kaupthing’s ex-CEO as well as Sigurdur Einarsson ex-executive chairman.

1 Gudmundsson is being investigated for involvement in dealings with the sole purpose of increasing the bank’s share value. This market manipulation is thought to have been going on from June 2005 until the demise of Kaupthing in October 2008.

It’s known that the Icelandic Financial Authorities, FME, has been investigating what is thought to be an extensive market manipulation in all the banks, not only Kaupthing.

The report of the Althingi Investigative Committee, published on April 12, also throws light on this issue. According to the report the bank bought 29% of the bank’s shares, issued on June 30 2008. The bank’s own trade in its shares amount to 60-75% of all trade on the Icelandic Stock Exchange from June to October 2008.

The OSP seems to suspect that managers and certain key employees responsible for the bank’s proprietary trading carried out these trades in a calculated way in order to influence the share price. It then became a major problem for the bank what to do with all the shares it bought. Gudmundsson seems to have played a key role in ‘parking’ the shares.

This throws light on the extensive loans that Kaupthing issued to key employees and many of its major shareholders and clients with the bank’s shares as collateral. It was almost a rule that the bank’s clients bought shares in addition to what other business they had with the bank, i.e. extra money was thrown into the loans for the purpose of buying Kaupthing shares. A foreign employer of the bank recently explained to me that he had been very surprised when he realized, some years ago, how the bank mildly insisted that any big client/borrower also bought shares in the bank – shares that the client wouldn’t need to pay for but that the bank financed with loans.

2 Issues related to alleged market manipulation and breach of fiduciary duty on behalf of Gudmundsson in relation to several companies. One of them is Holt Investment Ltd, a company related to Skuli Thorvaldsson, an Icelandic businessman living in Luxembourg and a major client of Kaupthing but otherwise not very visible. Thorvaldsson was the biggest borrower in Kaupthing Luxembourg. Another company is Desulo Trading Ltd, registered in Cyprus in October 2007. Desulo’s manager is an Icelandic businessman, Egill Agustsson. From mid 2008 until the collapse of Kaupthing Desulo Trading Ltd borrowed ISK13,4bn to buy shares in Kaupthing. Companies related to Kevin Stanford seem to be part of these suspicious trades. Loan agreements and other documents related to Kaupthing’s dealings with these companies are found to be in breach of the bank’s own rules, made without proper documentation and with insufficient collaterals. It’s alleged that it was clear to the managers that these loans were contrary to the interests of the bank as a listed company.

Most likely, the dealings with these companies are only the tip of the iceberg – it’s clear that this extensive ‘parking’ explains many otherwise inexplicable loans to key employees and trusted clients. The OSP mentions deals going back to 2005 – I’ve heard that signs of market manipulation can be traced as far back as to 2004.

3 It’s clear from earlier reports that Kaupthing, advised by Deutsche Bank, tried to influence its CDS spreads. The investigation focuses on two companies, Chesterfield United Inc. and Partridge Management Group, that Kaupthing fed a loan of €260m through four other companies, Trenvis Ltd., Holly Beach S.A., Charbon Capital Ltd and Harlow Equities S.A. in order to trade in the bank’s CDS and influence the spread. The companies were connected to the bank’s major shareholders/clients Olafur Olafsson and Skuli Thorvaldsson. Loans from Deutsche Bank formed a part of this package. When DB made margin calls Kaupthing lent money to these companies to meet the calls. Kaupthing did in the end lose €510m on these transactions and DB refuses any responsibility.

During its last hours, on Oct. 6 2008, Kaupthing got a loan from the Icelandic Central Bank of €500m. Though Kaupthing already seems to have been doomed there was still a belief among Icelandic regulators that Kaupthing might survive though Landsbanki and Glitnir would fail. It now seems that some of this loan was used to lend these companies used to give entirely wrong information about the bank’s standing. – The investigation aims at clarifying who was responsible and whether it was i.a. a question of a breach of fiduciary duty.

4 Two companies, Marple Holdings S.A., owned by Skuli Thorvaldsson and Lindsor Holdings Corporation, owned by Kaupthing’s key employees, bought Kaupthing bonds, issued in 2008 when Kaupthing, as many other banks, ran into financing difficulties. The aim seems to have been to remove any risk of a falling bond price from the beneficial owners of these companies to the bank itself. Documents related to these companies seem to have been falsified so as to indicate that the deals had been done earlier than was the case.

5 In September 2008 Kaupthing announced that the Qatari investor Sheik Sheikh Mohammed Bin Khalifa Al-Thani was buying 5% of the bank. The OSP is investigating if a Kaupthing loan to companies related to the Sheikh and Olafur Olafsson were intended finance the deal so that the Sheikh was actually not putting any money into the deal, done only to make the bank look stronger than it was. (Olafsson owns a food company, Alfesca, that had announced in summer of 2008 that the Sheikh was buying shares in the company. That deal was never finalized but it’s unclear if Kaupthing was also here the lender of a loan that was never going to be repaid.)

In short: the issues investigated relate to deals between Kaupthing and major shareholders/big clients that favoured the key employees and affiliated clients but dumped any losses onto the bank. The investigation focuses on breach of fiduciary duty, counterfeiting and market manipulation and involves billions of kronur.

Kaupthing operated in Luxembourg for eight years and in London since 2005. It operated in all the Scandinavian countries and in the US. In the UK the FSA was warned: the board of Singer & Friedlander, the bank that Kaupthing bought in 2005, repeatedly made it clear to the FSA that it didn’t think the mangers of Kaupthing were ‘fit and proper’ – and yet, nothing was done and in none of these countries the regulators saw anything questionable. Yet, the meteoric growth of the band and ‘incestuous’ relationships with major shareholders should have been an indication, as well as persistent rumours. The good thing is that Serious Fraud Office is now conducting its own investigation of Kaupthing.

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The resolution committee of Glitnir, the failed Icelandic bank, is seeking to recover more than $2bn by filing a complaint in New York State Supreme Court in Manhattan Reuters reports. The ResCom has sued six ex-officials and affiliated investors who the ResCom concludes committed fraud ‘to fill their pockets and prop up their own failing companies’ by engaging ‘in a sweeping conspiracy.’

The defendants are Jon Asgeir Johannesson, a well known retail investor in the UK through his private equity company Baugur, Ingibjorg Palmadottir his wife, Johannesson business partners Palmi Haraldsson and Hannes Smarason and Thorsteinn Jonsson, Glitnirs ex-CEO Larus Welding and ex-director Jon Sigurdsson. The highly interesting aspect of this case is that Glitnir’s auditor PriceWaterhouseCoopers hf is also a defendant, alleged to be complicit in the fraud.

The case is filed in the US because Glitnir raised money there by issuing bonds. It now seems that the winding-up committee is of the opinion that this money was then siphoned into the pockets of Johannesson and the others.

As reported earlier on Icelog the ResCom is also suing Johannesson, Haraldsson and Welding in a separate case in Iceland where a loan of ISK6bn appears to have been sold off for 1 krona. Johannesson’s business partners in the UK have been Sir Tom Hunter, Don McCarthy now CEO of House of Fraser where Johannesson was a major investor, Malcolm Walker a CEO of Iceland, another Baugur investment and Kevin Stanford.

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The Office of the Special Prosecutor has asked Interpol to issue an international arrest warrant for Sigurdur Einarsson ex-executive chairman of Kaupthing’s board. After news in Icelandic media that Einarsson was unwilling to come to Iceland where four of the banks ex-managers are imprisoned it’s now clear that the OSP has lost patience with Einarsson. It’s also clear that the OSP is prepared to use all necessary means to secure the interests of the ongoing investigations. Einarsson has lived in London since earlier this decade and is, as far as is known, still living there.

The Interpol website related to Einarsson’s arrest warrant is here. The offences listed are counterfeiting, forgery and fraud.

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Ingolfur Helgason ex-manager of Kaupthing Iceland and Steingrimur Karason former head of the bank’s risk management were both arrested when they arrived in Iceland late last night. This is part of an ongoing investigation into Kaupthing by the Office of the Special Prosecutor in Iceland. The investigation accelerated last week when two other Kaupthing insiders, ex-CEO Hreidar Mar Sigurdsson and ex-manager at Kaupthing Luxembourg Magnus Gudmundsson were arrested. A custodial sentence over them was confirmed last night by the Icelandic High Court.

It’s now become abundantly clear that the OSP has a major case going against the Kaupthing management. Helgason and Karason were brought briefly in for questioning early this morning before they were sent to prison. It’s still not clear whether the OSP intends will request a custody for the two though judging from the procedure so far it’s more than likely. Helgason and Karason were, as Sigurdsson and Gudmundsson, both living in Luxembourg where they run a company called Consolium together with Sigurdsson. The company is said to be a financial consultancy, i.a. giving advice to bondholders in the collapsed Icelandic banks. The three moved to Luxembourg last year.

Now there is only one left on free foot from the five Kaupthing managers who are very much seen to have been in charge of the bank, ex-executive chairman of Kaupthing’s board Sigurdur Einarsson. According to Icelandic media Einarsson, who lives in London, has resisted requests to come in for questioning because he would have liked to make sure that he will not be imprisoned as well. According to unconfirmed sources Einarsson has offered to be questioned in London. It seems that the OPS isn’t up for any negotiations. If Einarsson does not agree to travel the OPS will no doubt seek assistance from UK authorities to take action against Einarsson and have him handed over to the OPS. That process might already be on track.

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