Sigrún Davíðsdóttir's Icelog

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of the Special Prosecutor had asked for the court rulings on the custodial sentences of two ex-Kaupthing managers not to be published the charges have been seeping into the Icelandic media through the day.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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