Sigrún Davíðsdóttir's Icelog

Recent Supreme Court ruling re market manipulation

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Last week, the Icelandic Supreme Court ruled on a market manipulation case. The ruling regards six trades in January and February 2008, ISK5m each time. With their action, the two affected the bond price of Exista at the end of these six days. The pattern was that the two men would put in an offer right at the end of the day, causing the bonds to go up in price.

It was the Icelandic Stock Exchange that draw Kaupthing’s attention to these trades. Following the bank’s own investigation, FME, Icelandic Financial Services Authority, asked for further information in March 2008. Thordarson and Agnarsson were suspended and the bank said it was taking the investigation very seriously.

It has then taken all this time for the case to reach the Supreme Court. The judge reprimanded the prosecutor for the very long time it had taken to get the case through court. The Supreme Court reduced the sentences but they are still severe: six months in prison.

The question hanging in the air is why these two men should take it up on their own accord to trade so as to affect the price. Exista was Kaupthing’s largest shareholder, owning about 40% in the bank. Because of the heavy lending from Kaupthing to Exista and related parties Exista’s well being was paramount to Kaupthing’s financial health. It would make sense for the bank to be interested in keeping up Exista’s share price. But the interest of the two traders isn’t at all clear. The question is if there was a limit that the bank wanted to stick to and the traders knew of or were told to aim for. However, nothing in that direction transpired during the hearings.

There are some interesting aspects to this ruling. It regards market manipulation, allegedly widely practiced in all the banks. This case was, compared to what might come, a fairly small matter, only regarding six trades – and yet it carries a prison sentence of six months, non probational, plus fines. The Supreme Court did shorten the prison sentence from eight months to six but even with a 20% reduction it’s still a noticeable verdict.

This case, arising before the collapse of the banks in October 2008, was run by the police, not the Office of the Special Prosecutor. The OSP can, under certain circumstances, secure reduced sentence to people who cooperate with the OSP. It would be interesting to know if this fairly serious verdict for a relatively minor offense, compared to other cases that might be under investigation, will make some of those with a good insight into the operations of the three collapsed banks more willing to inform the OSP.

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Written by Sigrún Davídsdóttir

March 28th, 2011 at 11:03 pm

Posted in Iceland

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