Sigrún Davíðsdóttir's Icelog

Tonight, the Office of the Special Prosecutor declared that Halldor Kristjansson, the other Landsbanki ex-CEO, following a court order, is not allowed to leave Iceland until January 25. Kristjansson, who now lives in Canada and returned to Iceland early Sunday morning, has been questioned all day. His lawyer says that Kristjansson has no intention to leave until the questioning is over. He is not appealing the court order.

Sigurjon Arnason, the other CEO of Landsbanki, and Ivar Gudjonsson manager of the bank’s proprietary trading are in custody, respectively until January 27 and January 21. Arnason was always seen as the hands-on driven CEO with Kristjansson being the bank’s statemanlike face to some extent. The two couldn’t be more different. Kristjansson was a lawyer, a former permanent secretary in the ministry of trade and industry and a polished civil servant. He left the civil service in 1998 to become the CEO of Landsbanki, at the beginning of the privatisation process. He remained with the bank after Bjorgolfur Gudmundsson and his son Bjorgolfur Thor bought the bank in 2002. Arnason is an engineer, a nerdy type who mastered excel, numbers and calculation like few others and was famed for his taste for sweets, as his round figure shows. Together with a team from Bunadarbanki, he was hired by Landsbanki in spring 2003 and made a CEO next to Kristjansson.

According to the OSP ca 30 people have been questioned over the last week regarding Landsbanki. The main focus seems to be on market manipulation, reaching back as far as 2003, when Bjorgolfur Gudmundsson and his son Bjorgolfur Thor bought over 40% of shares in the bank.

In early December, a report by forensic accountants on Landsbanki annual accounts 2007, done at the behest of the OSP, was leaked to the Icelandic media. One of the findings of the report was a gross misstatement of the bank’s capital. If this were correct, the bank’s capital would have been below legal limits already in November 2007, almost a year before the bank collapsed. In a press release following the leak, the bank’s auditors, PriceWaterhouse Coopers, said they stood by their accounts but underlined that the board of Landsbanki did bear the final responsibility of the bank’s operations.

According to the report the information on loans to related parties is misleading. The two examples below are related to the bank’s major shareholders:

Samson was the holding company where Gudmundsson and his son had their Landsbanki shares. Samson went bankrupt following the collapse of Landsbanki. Although not a listed company Samson issued bonds held by several Icelandic pension funds that consequently lost money on Samson.

So far, neither father nor son has been called to be questioned. Gudmundsson’s lawyer, Thorunn Gudmundsdottir, i.a. earlier on the board of Straumur investment bank, where father and son were the largest shareholders, has stated that the OSP has asked her about Gudmundsson’s whereabouts and that he is now in London. Gudmundsson, who earlier owned West Ham, went bankrupt already in summer 2009.

After the collapse of Enron and WorldCom the boards weren’t sued whereas CEOs and other managers were charged and ended up in prison. Boards can easily claim that they were kept in the dark by managers. The boards of the Icelandic banks were to some extent closely connected to the major shareholders. Gudmundsson was the chairman of the board of Landsbanki and did, together with his son, own around 45% of the bank through Samson. People closely connected to Novator, Bjorgolfsson’s investment fund, also sat on the Landsbanki board.

If Landsbanki was involved in market manipulation all the way back to 2003, as the OSP seems to be investigating, and if the bank’s annual reports didn’t give a fair representation of the state of the bank’s operations it will have to be clarified what the role of the board was and who stood to gain most from these alleged misconducts.

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Two of Landbanki managers are now in custody at Litla Hraun, an old prison ca 45 km from Reykjavik, close to the little fishing villages at Stokkseyri and Eyrabakki. The bank’s ex-CEO Sigurjon Arnason will remain in custody for eleven days, until Jan. 27. Ivar Gudjonsson ex-manager of proprietary trading will be in custody for a week, until Jan. 21.

The bank’s other CEO Halldor Kristjansson who now lives in Canada is expected to arrive in Iceland on Sunday. Thorunn Gudmundsdottir lawyer for Bjorgolfur Gudmundsson has confirmed that the Office of the Special Prosecutor has asked her for information on Gudmundsson’s whereabouts. According to her, Gudmundsson is on vacation in London, expected to stay there for the coming two weeks but would return to Iceland if asked to. His son, Bjorgolfur Thor, ex-chairman of their other bank, Straumur, and owner of the investment fund Novator lives in London.

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At the beginning of the year, Cayman islanders were dismayed to discover that their PM, McKeeva Bush, returned from a holiday with family and friends on a private jet. The premier felt it was of no one’s business on whose private Gulfstream jet he travelled but the Cayman media found out that a certain Luxembourg company, Pillar Securitisation sarl, owns the jet.

Icelog readers will know that Pillar Securitisation is the ‘bad bank’ of the collapsed Kaupthing Luxembourg. Its administrator is Banque Havilland that took over the Kaupthing operation in Luxembourg. The jet was built in 2000, first registered in the USA as N602PL, then in the Cayman Island as VP-CLA belonging to International Jet Club that rents out and runs private jets. Now it’s registered in the Isle of Man as M-ABCT.

There are two things of interest here: the close connection between Havilland and the Cayman Island, a notorious tax haven and secrecy jurisdiction and then implicitly between Havilland’s owners, the Rowland family, and the Cayman PM – and the fact that Pillar owns and runs a jet.

Private jets are often chartered out but in this case the Gulfstream registration excludes that possibility since it doesn’t allow it to be chartered. Consequently, the PM seems to have been travelling on the Gulfstream by invitation only. And he, or someone he knows, must be pretty close to Pillar and its owners.

It’s also intriguing that Pillar owns a jet. I would have thought that an administrator is bound by the interests of the creditors to maximise the value of the assets instead of spending money on jetting dignitaries around the world. But perhaps Pillar is set up in some special way so as to make a jet ownership acceptable. I sent a query earlier this week to Havilland for an explanation but got no answer.

Last year, Havilland’s owner David Rowland was set to become the treasurer of the UK Conservative party. Daily Mail got all itchy over this and dug out a lot of intriguing and compromising stories about Rowland who then suddenly realised that he was far too busy and really didn’t have the time for this unpaid but influential post. He has been one of the biggest donors to the Conservative party over the last years.

It will be interesting to see if the Conservatives, now in government, will do any more than Labour in throwing light on the murky offshore world, which to a great degree belongs to the remnants of the British Empire. The interesting ties between Pillar and the Cayman rulers yet again raises the question if there is a connection between the political inertia regarding the offshore havens and political donations from those who thrive on offshore businesses.

*I have earlier blogged on Havilland and the Rowlands: Havilland dismisses its CEO Gudmundsson; Havilland and the Kaupthing investigation; on Rowland and other Tory connection; what the Daily Mail had to say about Rowland and more on Rowland; the Icelandic investment bank Straumur has sued Jonathan Rowland regarding share buying; Havilland tries to hinder that the OSP get information from Luxembourg.

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After a day of house searches by the Office of the Special Prosecutor and questioning of seven ex-managers two of those questioned today will remain in custody. The two are the bank’s CEO Sigurjon Arnason and Steinthor Gunnarsson managers of securities.* Just before midnight it was still unclear what exactly their position. The Reykjavik County Court was tonight being asked to rule on custody but it’s unclear if there will be a verdict right away or within 24 hours, the maximum time it can take.

The other CEO of Landsbanki, Halldor Kristjansson, now lives in Canada. He seems to have been called in for questioning but it’s now known when he will return to Iceland. Elin Sigfussdottir who was a manager of corporate affairs at Landsbanki and became a CEO after the collapse of the bank has also been questioned today.

According to the OSP this investigation is one of the major investigations now being run at the OSP. It seemed for a long time that Landsbanki wasn’t being as heavily investigated as Kaupthing and Glitnir but that’s evidently no longer the case.

*Correction: in the end it wasn’t Gunnarsson, who together with Arnason, was put in front of a judge for custody but Ivar Gudjonsson manager of prop trading at Landsbanki. This morning the Reykjavik County Court hasn’t yet ruled on custody but Arnason and Gudjonsson can, as far as I understand, be held for 24 hours without a judge ruling on custody.

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Today, the Office of the Special Prosecutor conducted house searches at several premises in Iceland, related to an investigation into Landsbanki. Seven people, among them the bank’s ex-CEO Sigurjon Arnason, are being questioned but it’s unclear if anyone will be held in custody.

According to Icelandic media today, the searches are related to four topics:

1. Alleged market manipulation related to shares in Landsbanki.

2. Loans to four companies Hunslow S.A., Bruce Assets Limited, Pro-Invest Partners Corp and Sigurdur Bollason ehf. to buy shares in Landsbanki.

3. Landsbanki Luxembourg’s sale of loans to Landsbanki only a few days before the bank collapsed in Oct. 2008.

4. The buying of shares by eight offshore companies that supposedly were set up to hold shares related to employees’ options.

Sigurdur Bollason is an Icelandic businessman, often connected to Baugur companies and a friend and associate of Magnus Armann, another Baugur associate. According to my sources Bollason, who imported UK high street fashion to Iceland over a decade ago, met Kevin Stanford, through business with Karen Millen, then Stanford’s wife. That’s how Stanford became connected to Icelandic banks and businesses, first with Baugur, where he was often a co-investor, and later with Kaupthing where he was involved in the financial high-wire acts that Kaupthing engaged in.

Hunslow S.A. was registered in Panama in Feb. 2008. In November 2009 two Novator companies (Novator is the investment fund of Bjorgolfur Thor Bjorgolfsson who was a major shareholder in Landsbanki and Straumur investment bank together with his father) were registered in Panama with the same law firm as Hunslow. The same five directors are on the board of the two Novator companies and Hunslow but there are probably hundreds of companies registered at this one law firm. I have no information on Bruce and Pro-Invest.

The loans moved from Landsbanki Luxembourg to Landsbanki Iceland on Oct. 3 2008 amounted to €784m. By far the largest loan had been assigned to Bjorgolfsson, €225m. (The complete list of the loans is here, from the SIC report, ‘Tafla 20’) but the four companies mentioned above are also on the list.

I find it interesting that the OSP is investigating the offshore companies that Landsbanki set up to own shares in itself. The first of these companies was set up in Guernsey in 2000, before the privatisation of Landsbanki in 2002 but later seven more were set up in the BVI and in Panama. To begin with, the bank financed these companies but later one was financed by Kaupthing and six by Straumur, from 2006 when Bjorgolfsson and his father were major owners in Straumur. Bjorgolfsson was Straumur’s chairman.

In total, these companies owned 13,2% of the shares in Landsbanki. Normally, similar structures holding shares for staff option usually don’t own more than 1-2%. The SIC report maps these companies but the weird thing is that although they were apparently set up to hold shares for options they don’t seem to have been used for that purpose. The ownership in each company was held below 5%.

With the bank owning 13,2% via these companies (above the 10% legal limit of own shares) and father and son owning around 45,8% of the bank the majority was assured. Another interesting aspect of these companies is that Straumur lent them against no collaterals. This isn’t the only example of the very close relationship between the two banks where father and son were the major shareholders. Neither of the two are being questioned today.

*Last October I reported on these offshore companies for Ruv. Bjorgolfsson was very upset, according to his spokeswoman, about my reporting and did eventually file a complaint to the Icelandic Press Complaints Commission. The PCC has dismissed the complaint. Here is a story about his spokeswoman when she wasn’t happy about Iceland Weather Report reporting on Bjorgolfsson.

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The Icesave agreement* is by no means save, in the sense that it’s still unclear how the Icesave bill will fare in Althingi when MPs return January 17. The latest I heard was a rumour that the government (a coalition led by social democrats with the Left Greens) had made a pact with the Independence Party (conservative): the IP would support the new Icesave deal but in exchange the government would make no radical changes on the fishery quota system.

This is an unsubstantiated rumour from political circles and I’ve no idea whether there is a grain of truth here but it shows that there’s no lack of speculation. Since the Icelandic president refused to sign the last bill a year ago his reaction is a variable in the Icesave outcome and many are speculating as to what he will do. President Ragnarsson hasn’t yet said what he will decide re Icesave but some Icelanders interpreted his New Year address on TV January 1st as a message on Icesave: that he would again refuse to sign the new bill and instead call for an Icesave referendum again.

In a log on Vox today, professor of economy at Reykjavik University Fridrik Mar Baldursson contemplates the new agreement and the third round of solving the issue. Baldurson concludes:

We have come out of the laboratory and into the real world with all its complexities. This is not a one-shot ultimatum game, but a repeated real-life game with high stakes, and the rules are made up as we go along.

*An earlier log on the latest Icesave agreement can be found here.

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Like Kaupthing’s management the Landsbanki managers had their largest clients and shareholders in mind to the bank’s bitter end. But they seem to have gone to greater lengths when it came to documentation.

Three Landsbanki managers, Halldor Kristjansson, Sigurjon Arnason and Elin Sigfussdottir, met on October 6 2008, when the bank had already been taken over by the FME (the Icelandic financial services authority), for an ‘informal meeting’, according the minutes. Investigation that my colleagues at RUV (the Icelandic State Broadcaster) and I did shows that actually this meeting probably never took place. The minutes was most likely only meant to serve as a documentation for loans that had already been handed out but without the proper process.

According to the minutes the loans are by no means comparable to the sums handed out by Kaupthing (partly wishful because Kaupthing hardly had the money to follow up on the loans). All in all, the Landsbanki managers were documenting loans of ISK117bn (€763m). About ISK70bn (€457m) were loans to companies connected to the bank’s major shareholders, Bjorgolfur Gudmundsson and his son Bjorgolfur Thor.

One loan, of ISK27bn (€176m), was to Samson, owned by father and son, related to guarantees regarding the XL Leisure guarantee that still hung on Eimskip, where Gudmundsson was a major shareholder, after XL went dramatically bankrupt in September 2008.* Other loans were related to Grettir companies, owned by Gudmundsson: one Grettir company got a loan so that another Grettir company could reduce its loans to Landsbanki – a common way of shifting loans around in all the banks since the banks had lent way too much to major shareholders and favoured clients and were trying to hide exposures that exceeded the legal limits to large exposures.

Another loan, documented at this non-meeting, was ISK5,1bn (€33,5m) to a company called Imon, owned by a close associate of Baugur, Magnus Armann. Imon’s role was to buy Landsbanki shares the week before the collapse. The scheme was that Landsbanki, which could no longer buy more of its own shares, then lent Imon funds to buy the shares so the share price wouldn’t be affected by the ongoing sales. The feeling is also that certain people could then sell shares though it’s not clear who possibly profited. Overview of sales in Landsbanki shares these fateful days doesn’t show any major sales, i.e. no big stakes were sold off in single sales. In Iceland Imon has become synonymous with the activities the bank engage in just before the collapse to keep everyone in the dark about the real situation in the banks.

In an earlier log I told the story of Stytta. In the minutes of Landsbanki Oct. 6 meeting there are also loans related to Stytta and shifting of loans so as to hide huge exposures to Palmi Haraldsson, yet another businessman closely associated to Baugur.

The Landsbanki Oct. 6 minutes gives an idea of whom the bank had in mind as the last documents were prepared, in this case after the bank had been taken over. Soon after the collapse of the bank Kristjansson and Arnason resigned but Sigfussdottir was appointed a CEO. This shows that after the bank did indeed collapse someone closely linked to the old bank, its main shareholders and big clients, was running the new bank. The question is how much of the spirit of the old bank lived on in the new bank, the spirit of favouring those already with way too large exposures.

* Bjorgolfur Thor Bjorgolfsson runs a website to clarify his points of view to the Icelandic public but unfortunately this website is only in Icelandic. He maintains that he and his father did not offload the guarantee on to Landsbanki. Others dispute his point of view regarding XL Leisure, the Eimskip guarantee and Samson’s role in the XL Leisure story. The Oct. 6 minutes does mention a loan to Samson related to the XL Leisure guarantee.

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The exposure that Kaupthing created by offering to lend Alisher Usmanov and related parties ISK270bn exceeds the legal limit according to Icelandic legal act on financial institutions from 1996. This exposure was around 58% of the bank’s equity base whereas the legal limit is only 25%.

However, this was nothing out of the (extra)ordinary, neither at Kaupthing nor the other Icelandic banks. As the report of the Althingi Special Investigative Commission shows clearly the banks habitually broke law on limits to large exposures.

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Kaupthing’s ad campaigns underlined the banks innovative thinking as ‘thinking beyond.’ Scrutinising the minutes of the Credit Committee of the Board of Kaupthing hf’s  last meeting, Sept. 24 2008, the loan decisions seem far beyond rhyme and reason, at least from the perspective of the bank’s shareholders minus the major shareholders who were being laced with more loans.

Unsurprisingly, the CC was lending more to companies owned by Lydur and Agust Gudmundsson and Olafur Olafsson, the bank’s biggest shareholders in addition to Robert Thenguiz Discretionary Trust. Skuli Thorvaldsson and Kevin Stanford were getting loans to buy CDSs in Kaupthing in order to influence the bank’s CDS. In spite of their companies’ lousy credit rating they were getting yet more loans. Not loans to do anything new but loans to pay older loans.

The billions of ISK sunk into these companies are however dwarfed by the sums that Kaupthing was offering the Uzbek oligarch Alisher Usmanov, recently in the news as an eager investor in Facebook. Usmanov owned 1.48% in Kaupthing. Since Kaupthing had the policy to lend large clients and employees to invest in Kaupthing shares the first thought here is that Usmanov’s ownership was of that kind.

Through one of his companies, Epion, Kaupthing offered Usmanov two loan facilities, in total €1,1bn, to acquire up to 9,9% of shares in Sampo Group. Intriguingly, Exista was selling its 20% in Sampo at the time through Citigroup and Morgan Stanley. It doesn’t take much imagination to think that this deal was somehow linked with Exista’s sale. Exactly how isn’t clear to me. Perhaps Epion was supposed to buy what the two banks couldn’t sell or Epion was supposed to buy but didn’t get around to it because the bank collapsed before it could pay out the loan. Whatever the plan was Exista did in the end lose €1,4bn euros when it sold its 19,98% in Sampo early October 2008.

Usmanov, through his Gallagher Holdings, was also seeking an approval to build up to $1.2bn of stake, by CFDs, in Norilsk Nickel. At the time, Usmanov had a total exposure of $827.000 in CDF trading positions that did ‘not reflect regulatory exposures,’ according to the minutes. An important client at Kaupthing has told me that he found it difficult to understand Kaupthing’s thinking on this deal since the bank ran a huge risk by building up this position in illiquid shares. Perhaps the Sampo deal was important enough according to Kaupthing to run this risk. According to my sources, Kaupthing was planning to expand in Russia and saw a major advantage in having the well-connected Usmanov on board.

At this CC meeting the Israeli London-based brothers Moses and Mendi Gertner also got a share of Kaupthing’s thinking beyond. Although their company, Crosslet Vale, was on the exception list with regard to credit rating, their loan facility was increased from $120m to $350m. Earlier that year, Crosslet Vale, got a Kaupthing loan to the equivalent of €120m, in Swedish krona, to buy shares in Kaupthing. According to the minutes the brothers have been investing in Congo. – For Kaupthing’s big client a loan to buy shares in the bank was like a piece of chocolate with a cup of coffee.

The complicated deal with Sheik Mohamed al Thani was also presented at this meeting. In collaboration with Deutsche Bank it was structured around credit link notes. One of al Thani’s companies was supposed to get a loan of $50m, which was ‘parts of the profits of the transaction,’ according to the minutes. In other words, al Thani wasn’t supposed to wait for the profit to materialise.

Some of these loans were already known. What is truly revealing – or horrifying – is the ease with which the CC poured billions of krona into either sinking ships or clients that hardly served the broader interests of shareholders outside the narrow circle of the chosen few. Just this single meeting and the loans shovelled out seems a clear cut case of breach of fiduciary duty. Whether the Special Prosecutor thinks the same is still unclear.

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