Sigrún Davíðsdóttir's Icelog

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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Tonight, the High Court confirmed the Reykjavik County Court’s custodial sentence of 12 days over ex-CEO of Kaupthing Hreidar Mar Sigurdsson and 7 days over Magnus Gudmundsson ex-manager of Kaupthing Luxembourg and manager of Banque Havilland until last week.

Over the weekend other former employees of Kaupthing have been called in to give evidence. Two other ex-managers, now both living in Luxembourg, are expected to be called to give evidence later this week. The two are most likely belonging to a group of six ex-Kaupthing managers who run a company in Luxembourg, Sigurdsson being one of the six. The company, Consolium, is registered in Iceland but doesn’t seem to be registered in Luxembourg though the Kaupthing ex-managers have been operating out of Luxembourg for about a year.

According to Icelandic media ex-executive chairman of Kaupthing Sigurdur Einarsson has been called by the Office of the Special Prosecutor to give evidence but has been unwilling to come to Iceland for this purpose. Einarsson, who has been living in London since earlier this decade, is said to have been awaiting the results of Sigurdsson and Gudmundsson’s appeal. Special Prosecutor Olafur Hauksson hasn’t confirmed news in Icelandic media that Einarsson has been un-cooperative and that he’s adamant to secure that he won’t follow Sigurdsson and Gudmundsson into custody.

Quite exceptionally, the OSP has asked the High Court, contrary to custom, not to publish its ruling on the Court’s website. Consequently, details about the investigation that would have become public remain unknown to the general public. It’s known though that two judges, Olafur Borkur Thorvaldsson and Hjordis Hakonardottir ruled in favour of confirming the County Court ruling whereas Jon Steinar Gunnlaugsson was against – seen in Iceland as highly indicative of where these judges could possibly stand in later cases related to the banks.

Now that the OSP has conducted the case successfully so far, getting the custody through the two Courts it’s clear that the case has been well prepared so far. Like elsewhere, custody and isolation is seen as grave measures by Icelandic courts. The fact that the custodial sentences have been confirmed indicate the gravity of the charges that will eventually rise from the investigation.

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No further news on the two ex-Kaupthing managers now in custody in Iceland. Hreidar Mar Sigurdsson and Magnus Gudmundsson appealed the custody to the High Court. Its ruling was expected today but nothing happened.

In Iceland there are wild speculations as to how the three High Court judges will rule on the custody. It’s very likely that there will be other demands for custody in similar cases so this ruling will set an important example.

Exactly why the Office of the Special Prosecutor wanted custody over the two mangers isn’t clear so what it is that the High Court has to take into consideration isn’t known either.

Most High Court judges have been appointed by ministers from the Independence Party. In the highly politicised atmosphere in Iceland the influence of this is a hotly debated topic. Two of the three judges who will rule on the custody are known to be closely connected to the Independence Party and its former leader David Oddsson. Oddson resigned as a leader in 2005, became governor of the Icelandic Central Bank and then an editor of Morgunbladid when he was forced to resign from the Central Bank last year due to his part on the collapse of the Icelandic banks in October 2008.

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The two ex-Kaupthing managers, CEO Hreidar Mar Sigurdsson and Magnus Gudmundsson manager at Kaupthing Luxembourg, have appealed the Reykjavik County Court ruling on custody to the High Court. The court is expected to rule on the appeal tomorrow. Following the County Court ruling Sigurdsson’s custody is 12 days while Magnusson is to stay in custody for 7 days. Both are kept in solitary confinement.

Since the investigation has been ongoing for about a year many are wondering why custody is necessary now. People familiar with investigation of this sort point out that the two managers might have been shown evidence or introduced to certain aspects of the case that the investigators don’t want them to share with others who are no doubt at the heart of the investigation.

It seems that the investigators still haven’t had the material from the searches in Luxembourg delivered. Authorities in Luxembourg have to sift through and decide what can be delivered. According to sources close to the searches the material seized was a lot more than originally planned for. Part of this material might also be of interest to Luxembourg authorities. This part of the investigation will be of great interest to those who fight for greater transparency in the world of finance. Consequently, the case is somewhat of a test for Luxembourg: how eager is Luxembourg to have its finance sector scrutinised?

Iceland is small, and so far a closed world. Luxembourg has the same characteristics. Why would all the banks in the world seek to operate in Luxembourg, not to forget accountants and incorporation services if it weren’t for the secrecy there? There are clearly not that many clients in this lilliputian country.

It’s still not clear who the lawyers are on the Kaupthing managers’ defence team. Sources familiar with the case indicate that the managers will turn to the legal team that managed to have the charges against Jon Asgeir Johannesson and others connected to his investment company Baugur whittled down to a few charges that in the end brought Johannesson a suspended sentence of three months since the most serious charges were thrown out. It is thought that both the two in custody and others from the Kaupthing top management who might be called soon to the OSP have already been briefed by their lawyers.

The Baugur investigation that ran for several years is taken as an example of how the legal heavyweights who ran the Baugur case managed to smash the prosecutor’s case. However, the Office of the Special Prosecutor is a different institution and the staff there has been on a crash course for the last year on how to conduct an investigation of serious financial crimes. The OSP has been guided through this task by the Norwegian French ex-magistrate Eva Joly who shook the French establishment by getting close to 30 people convicted in the Elf investigation in the 1990s. Madame Joly is now a member of the European Parliament, very much focusing on means to fight financial crimes.

Without an outsider specialist it’s difficult to see how this investigation, and others to come, could have been undertaken in a convincing way, both because there isn’t enough expertise in Iceland to take on investigations on this level – and also because in a society with a dense political penetration everywhere where there is power and money it’s difficult to see how the investigation could be beyond any doubt of political interference.

The OSP overcame the first legal hurdle when the County Court ruled in favour of the OSP on the custody. The second hurdle is tomorrow at the High Court. These first official steps of the OSP will be seen as an indication of how firm its grip is on this case and what can then be expected as this investigation, and others that will do doubt follow, proceeds.

It’s a convincing first step to start with Kaupthing but the OSP won’t convince Icelanders until it’s clear that the management of the two other banks, Glitnir and Landsbanki together with their major shareholders, are also placed under investigation.

The truly staggering thing is that the three main banks, the investment bank Straumur together with most of the smaller financial institutions followed the same pattern of suspicious dealings. How the financial system of a whole Western European country could be infected by alleged fraudulent behaviour is something that will take time to explain. The feeling is that it’s not enough to look at the banks in isolation. Most likely, there are political fingerprints here and there.

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With two of Kaupthing’s key managers in custody the question is how the investigation will move from here. According to sources in Iceland, Kaupthing’s former executive chairman Sigurdur Einarsson has been called in next week by the Office of the Special Prosecutor but it will not be clear until it happens if the OSP makes a further move this time.

With the ex-manager of Kaupthing Luxembourg now in custody and recent extensive house searches in Luxembourg, under the auspice of the Luxembourg police, the sphere of the investigation has now moved beyond Iceland. It’s been clear to everyone who has studied Kaupthing’s operations that the subsidiary in Luxembourg played an important role.

Wealthy Icelandic clients were encouraged to set up companies there in order to make use of tax avoidance schemes. In several cases the bank’s main shareholders seem to have had companies there in order to hide ownership, i.a. to avoid take-over regulations. In other cases that have raised questions in Iceland money and ownership often seems to disappear in Luxembourg since the tiny country can so easily be the gate to off-shore jurisdictions. Many of the big loans that Kaupthing gave its main shareholders and core clients went through Luxembourg.

With the importance of Luxembourg in mind and the fact that Kaupthing is already being investigated in Iceland and by the Serious Fraud Office it would make sense if an investigation would also be set up in Luxembourg. A combined investigation in the three countries where Kaupthing had its core operations would no doubt speed up the process in an otherwise lengthy and time-consuming investigation.

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Banque Havilland announced earlier today that Magnus Gudmundsson has been dismissed as the bank’s CEO. The move comes after Gudmundsson was remanded into custody in Iceland following an investigation into Kaupthing by the Office of the Special Prosecutor in Iceland. Gudmundsson has been replaced by Jonathan Rowland who with his father David owns Havilland.

When the Rowlands, through Blackfish Capital, took over Kaupthing Luxembourg, following the collapse of Kaupthing Iceland it came as a surprise that they retained Gudmundsson though, as Jonathan Rowland said in an interview, they were keen to break with the past. Gudmundsson, Rowland said in another interview, would just continue to manage his people. The rumours about Kaupthing didn’t seem to worry the Rowlands. Nor did they change their mind when the Serious Fraud Office in London declared it had opened an investigation into Kaupthing. It was also clear that the bank was being investigated in Iceland.

From sources close to the bank I heard that the Rowlands had initially intended to move away from everything Icelandic, both Icelandic clients and staff. However, they soon discovered that there were good Icelandic clients who fitted well the new owners’ target clients, i.e. wealthy individuals. They were also happy with Gudmundsson’s talents, thought he had done a good job for the bank and would be valuable, at least while the bank’s operation was stabilised.

Because of this continuity it was rumoured that Kaupthing’s executive chairman Sigurdur Einarsson, and possibly other key owners, was linked to the new owners. However, this connection has always been flatly denied on both sides. Havilland is the administrator of Kaupthing’s bankrupt part and have not shown any mercy in its dealings with the bank’s debtor. No sooner had the Rowlands taken over the bank than Havilland stripped Jon Asgeir Johannesson of his private jet. It’s also reported that other wealthy Icelanders, among them Lydur and Agust Gudmundsson owners of Exista Kaupthing’s largest shareholder, have their property loans and other private loans with the bank and that the bank will is preparing to take assets when payments can’t be met.

In view of the latest events it’s understandable that Havilland has now dismissed Gudmundsson – but it’s much harder to understand why Gudmundsson was ever appointed Havilland’s CEO.

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The Reykjavik County Court has confirmed two weeks’ custody over Kaupthing’s ex-CEO Hreidar Mar Sigurdsson and the ex-manager of Kaupthing Luxembourg Magnus Gudmundsson, now manager of Banque Havilland. The owners of Banque Havilland, David and Jonathan Rowland through their investment company Blackfish Capital, are meeting in Luxembourg. They haven’t yet decided on what action, if any, will be taken against Gudmundsson.

Sigurdsson’s term in custody is 12 days, Gudmundson’s 7 days. Both have appealed the custody ruling. They will be kept in isolation, either in Reykjavik or in a prison ca. 45 km from Reykjavik.

It appears that the two, who both live in Luxembourg, were called in by the Office of the Special Prosecutor. This wasn’t the first time and neither of them expected to be detained. Sigurdsson met up yesterday morning. After lunch he was told he would be detained and that a custody was being sought.

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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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