Sigrún Davíðsdóttir's Icelog

The eruption in Eyjafjallajokull has diminished considerably. After heavy ash fall recently, threatening to bury some of the best farmland in Iceland under a thick layer of ash, the volcanic activity has now all but died out, no lava flowing and very little ash.

Is that it, then? That’s impossible to say, this is the third time that that volcano seems to be expiring – so far it’s only been a short period before the volcano has woken up again. Tonight, Icelandic geologists have flown over the crater. When the glacier was erupting with full force the plume rose 8km up into air. Now it’s no higher than 3,5km.

Martin Rietze is a photographer who specialises in landscape photos, taking a particular delight in volcanos. Here are some of his Eyjafjallajokull videos, taken in early May. Icelander with a good knowledge of the glacier and its surroundings wonder how he manages to get the views he does – he must have been climbing glaciers and mountains in the neighbourhood to get his views though some of the routes have been closed. However he did it, the result is spectacular. It’s also fascinating that you can here the thundering of the volcano but you also sense the presence of the photographer because though he remains invisible his shuffling movements can be hear.

Contrary to what foreigners might think it’s only a tiny part of the island that’s affected by the ash and the eruption. Other parts of the country are unaffected. Traveling in Iceland is always a thrilling experience. With the volcano adding to the thrill it’s an even greater experience than usual. Since the ash has affected travel in other countries there’s no need to avoid Iceland. On the contrary, an active volcano is a considerable addition to the wonders and thrills of Iceland!

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It’s as if Icesave has completely evaporated from the agenda in the three countries involved – Iceland, the UK and the Netherlands – but the accounts haven’t yet be settled. Iceland still owes money to the UK and the Netherlands as the two countries compensated the deposit holders according the EU insurance guarantee regulation.

The IMF has recently passed fund’s programme on Iceland to the next level. The prerequisite had been to solve the Icesave dispute – since it is a major economic variable – but Iceland found a way to satisfy the fund’s demand though nothing has been resolved. As so often, Iceland seems hell-bent on wriggling out of the Icesave fetters rather than solving the matter. It remains to be seen how the matter evolves now that there is a new government in place in the UK.

I’m not convinced that a Tory + LibDem government will make a difference for Iceland. According to a source who has raised the Icesave dispute with a leading Tory minster the answer was that the Tories shared Labour’s view on Icesave and didn’t really see any reason for a special lenience towards Iceland.

The report of the Althingi’s Investigative Commission tells a rather aggravating story of how Icesave was handled but in Landsbanki and elsewhere. Contrary to Kaupthing that founded its internet accounts as a UK subsidiary that consequently was guaranteed by the UK deposit guarantee scheme Landsbanki established Icesave as a branch. That gave Landsbanki greater freedom to move the Icesave money around, i.a. to lend it out in Iceland, exactly what the UK FSA was worried about but didn’t hinder.

The report shows very clearly that Landbanki’s management was time and again asked to change the Icesave set up. In early July the FSA thought it had an agreement in place with Landsbanki, intended to be fulfilled by the end of 2008: the bank promised to move Icesave into a UK subsidiary, to cap interest rates – and to limit Icesave to £5bn.

But Landsbanki thought otherwise. The Landsbanki management was willing to consider moving the accounts into a subsidiary but unwilling to cap to either interest rates or the amount they took in. The Landsbanki management seemed to be sure that Icesave was under the Icelandic deposit guarantee scheme that according to EU rules guaranteed deposits up to €20.000.

FSA now threatened the bank to use its powers to protect UK deposit holders. The Icelandic Central Bank and the Icelandic Financial Services Authorites, FME followed these exchanges of view. Some Icelandic civil servants contemplated whether Icelandic authorities could intervene, no action as taken and at a political level the problem didn’t seem to exist.

Early September 2008 trade minster Bjorgvin G Sigurdsson and chairman of the FME Jon Sigurdsson met with the Chancellor of the Exchequer Alistair Darling. Darling’s impression was that the Icelanders didn’t understand the gravity of the situation. And probably they didn’t: although there were different views on Iceland’s legal obligations to to guarantee the €20.000 that EU rules demanded nothing was done in Iceland to clarify the issue – an utterly shocking disregard of the alarming effects that Icesave cave to have for the Icelandic economy.

But FSA didn’t make use of any drastic means, only kept threatening Landsbanki that sought legal opinion on the FSA’s power to coerce the bank into seting up a subsidiary. The bank’s legal advicers doubted that the FSA had the authority to order the bank to take action and the bank continued to resist the FSA demands. In the end the HM Treasury did inded take action and made use of an anti-terrorist legislation to freeze all Icelandic assets though the intention was only to freeze Landsbanki’s assets.

The report shows clearly that Icelandic regulators didn’t pursue the matter with Landsbanki. Funnily enough, the FSA was more adamant in this matter – certainly not because they were dying to pay but because they wanted clarity – than Icelandic authorities and politians that seemed blissfully unperturbed by the possible consquences of Icesave.

In the aftermath of the collapse, Bjorgolfur Thor Bjorgolfsson who with his father owned 40% of Landsbanki vehemently claimed that the bank had done everything in its power to move Icesave into a subsidiary and solve the burden of Icesave on the Icelandic state. The Report tells a very different story: the bank did everything it could to counter FSA’s attempt in this direction. In this matter, as in many others, Bjorgolfsson’s account isn’t trustworthy.

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Following the charges brought by Glitnir’s wind-up committee at a court in New York and an international freezing order on his assets from a court in London Jon Asgeir Johannesson has resigned from the boards of the two companies where he has represented the Landsbanki resolution committee, the supermarket chain Iceland and House of Fraser. Following Johannesson’s conviction in Iceland in the so-called Baugur case in 2008 he was forced to resign from all boards in his Icelandic companies since a conviction bars anyone from being on a board but the Icelandic conviction didn’t seem to affect his foreign activities. The Glitnir charges recently brought against Johannesson in Iceland didn’t seem to have any effect in this direction but it’s unclear if his decision now was a voluntary one or if he was under pressure to resign.

Following the freezing order Johannesson was obliged by the WuC to hand over a complete list of his assets within 48 hours. However, the WuC has declared that it won’t inform publicly whether Johannesson has met this obligation or not. First when Johannesson was presented with the charges in New York Johannesson indicated that he wouldn’t try to defend himself, the cost would be exorbitant. He has now changed his mind and will use all available legal powers to fight Glitnir’s WuP.

Magnus Gudmundsson, ex-manager of Kaupthing and, until recently, of Banque Havilland, was released from custody on Friday as was expected. Afterward, he issued a statement underlining his innocence, the harrowing effect that the case was having not only on him but his family and that he was co-operating fully with the Office of the Special Prosecutor. He pointed out that he had traveled to Iceland on his own accord for the questioning at the OPS.

The last statement could be seen as a message to ex-executive chairman of Kaupthing Sigurdur Einarsson who has been unwilling to travel to Iceland since he couldn’t get an assurance that he wouldn’t be taken into custody. There are rumours that the families and close friends of those who have been put into custody are very upset with Einarsson since his unwillingness to show up for questioning can very well have made life more difficult for the three who were placed in custody. Hreidar Mar Sigurdsson and Ingolfur Helgason were released from custody today. Sigurdsson isn’t allowed to leave the country until next week.

Asked yesterday on Silfur Egils, a political chat show on Icelandic tv, the French-Norwegian ex-magistrator and now French MEP Eva Joly, advising the OSP, said that Einarsson wouldn’t have anything to fear if he was innocent. The fact that Einarsson has chosen not to show up and is now on Interpol’s wanted list doesn’t change the course of the investigation, according to Joly. She was stoic about complaints that custodial sentences and Interpol arrest warrants were too severe but pointed out that many felt an acute discomfort over the treatment of alleged white-collar criminals. Only few identify with drug sellers and thieves but the whole establishment could usually identify with people who are charges with white-collar crimes. (You can watch the interview here; it’s in English but the programme begins in Icelandic.)

But there are more bad news for ex-Kaupthing high fliers. The bank lent in all ISK32bn (now £16m) to 80 key-employees to buy shares of the bank. Twenty of these 80 got ca 90% of these loans – and 50 of these 80 people are still working at Arion, the New Kaupthing. Hreidar Mar Sigurdsson borrowed ISK5,8bn and Sigurdur Einarsson borrowed ISK7,8bn. At the time, these loans were presented as a salary boost to these employes. In hindsight, this looks more like part of the extensive share ‘parking’, alleged to be part of market manipulation. The only collaterals for these loans were the shares themselves but the borrowers gave personal guarantees as well. A few of the employees had been allowed to place the shares in limited liabilities companies.

Shortly before Kaupthing collapsed the board of the bank decided to release these employees from their personal guarantee, thereby underlining that the employees weren’t meant to make any loss on these loans but only to pocket the dividend. The extent of these loans didn’t become public until well after the collapse. The loans have been a bone of contention for a long time, also with the tax authorities, symbolising so much of what was wrong with banking the Icelandic way.

The Kaupthing wind-up Committee has now decided that the employees shouldn’t be released from their personal guarantee. They now have ten days to either repay the loans or renegotiate the terms. The WuC has also declared that it will try to circumvent the right to put the shares into limited liabilities companies meaning that those with companies will also be hit. This will no doubt put many of the employees under severe financial strain since the loans were in many cases far beyond what the salaries of these people justified.

In the Althingi Investigative Commission’s Report it’s clear, from statements from ex-Kaupthing employees that they saw themselves as held hostages by the bank since they were not meant to sell their shares. This underlines the sense of share ‘parking’ by the bank. In the end, the loans that were supposed to enrich these chosen employees might well end up bankrupting them, showing the bank’s cynicism in serving its own interests rather than the interests of its employees.

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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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