Sigrún Davíðsdóttir's Icelog

The Kaupthing case – the beginning

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The Office of the Special Prosecutor in Iceland has only stated in general terms the offences under investigation in the Kaupthing case. It’s thought that the starting point in the investigation were deals connected to a Qatari investor, His Highness Sheikh Mohammed Bin Khalifa Al-Thani. When the bank announced in September 2008 that the investor had bought 5% shares in Kaupthing this was taken as a sign of confidence in the bank. Olafur Olafsson, now living in Lausanne and a major shareholder in the bank knew Al-Thani and was instrumental in bringing the Qatari on board. It later turned out that Kaupthing had lent Al-Thani the money to buy the shares, arranging the buying in such a way that Al-Thani couldn’t lose – a typical characteristic of so many of the dealings in the Icelandic banks: only the banks could lose, not the favoured clients.

Olafur Hauksson from the OSP said last night that information from the report of the Investigative Commission had also been crucial. Magnus Gudmundsson’s name only appears four times in the report, in connection to a share deal that Gudmundsson and Sigurdsson planned together with Armann Thorvaldsson (author of ‘Frozen Assets’, on his life at Kaupthing) ex-CEO of Kaupthing Singer & Friedlander and Kaupthing’s chairman Sigurdur Einarsson.

The report publishes an email where the discussion is on how to arrange Kauthing share ownership for the managers so that their personal risk will be limited. On Dec. 12 2006 Gudmundsson and Thorvaldsson sent an email to Einarsson and Sigurdsson as to how this could be arranged:

“Hi Siggi and Hreidar, Armann and I have discussed this (association of loyal CEOs) and have come to the following conclusion on our shares in the bank: 1. We set up a SPV (each of us) where we place all shares and loans. 2. We get additional loans amounting to 90% LTV or ISK90 to every 100 in the company which means that we can take out some money right away. 3. We get a permission to borrow more if the bank’s shares rise, up to 1000. It means that if the shares go over 1000 we can’t borrow more. 4. The bank wouldn’t make any margin calls on us and would shoulder any theoretical loss should it occur. We would be interested in using some of this money to put into Kaupthing Capital Partners [an investment fund owned by the bank and key managers] Regards Magnus and Armann”

In the report this is taken as an example of a certain attitude among Kaupthing’s managers showing how they gave themselves the possibility of pocketing a personal gain by putting more risk on the bank and its shareholders.

Another speculation relates to sub-prime loans, bought through Kaupthing Singer & Friedlander. When the loans incurred heavy losses they were bundled together in Black Sunshine, a SPV set up. When Black Sunshine surfaced Sigurdsson said that this hadn’t been an attempt to hide losses. The losses had been properly accounted for in the accounts.

These are only speculation from the Icelandic media. A Kaupthing insider tells me that as far as he knows there is nothing new in the cases under investigation. Most likely, the case against Kaupthing is more extensive than these examples indicates. The Icelandic Financial Services Authority, FME, has been conducting an extensive investigation into market manipulation related to all the banks. The FME investigation relating to Kaupthing is probably part of the OSP investigation. It is now highly likely that other top managers from Kaupthing will be drawn into the investigation. It’s also interesting to see if the Serious Fraud Office will make any moves soon though the SFO’s investigations tend to take a very long time.

According to Icelandic news, both Sigurdsson and Gudmundsson spent the night in prison. Whether they will be kept in custody is still unclear. The Reykjavik County Court is expected to rule on their custody now around lunch time. It’s also unclear if the two will fight the investigation with an army of lawyers or if they will choose to cooperate with the OSP.

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Written by Sigrún Davídsdóttir

May 7th, 2010 at 10:12 am

Posted in Iceland

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