Sigrún Davíðsdóttir's Icelog

Some points on the SFO investigation into Kaupthing

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The nature of investigations by Serious Fraud Office is that the matters investigated remain a secret until charges are brought. With Kaupthing it’s clear that Kaupthing Edge, the Kaupthing deposits in the UK, triggered the investigation. The money was, to a large extent, sent to Iceland where it was lent out on favourable terms to a chosen group of clients and used to finance a staggering amount of Kaupthing’s own shares. It could of course be argued that the clients were so enthusiastic about Kaupthing that they wanted to have a share, literally, in its success. However, it looks more like an organised share parking on behalf of the bank, often on terms almost too good to be true. The Icelandic Office of the Special Prosecutor is i.a. investigating Kaupthing for alleged market manipulation.

There are strict rules in the UK regarding loans from a subsidiary to a parent company. According to the Special Investigation Committee’s report, the FSA made frantic attempts towards the end for Kaupthing Singer & Friedlander to claim money back from Iceland. The managers of KSF had meetings with the FSA, promised the earth but delivered no money back (which is one of the reasons why the FSA closed Kaupthing down in the UK, as explained by Alistair Darling in a recent interview.)

The loans used were liquidity swaps. Just before the collapse of Kaupthing the swaps amounted to £1bn but it turned out the swaps weren’t all that liquid: KSF could in reality only, at most, get £300-400m, according to KSF director Armann Thorvaldsson’s report to the SIC.*

The SFO might want to know what happened to the deposits gathered in the UK. But since it arrested the bank’s biggest client Robert Tchenguiz, and his brother Vincent also a client but a lot less visible one, it must have its eyes on something else. In an earlier Icelog I pointed out that the SFO allegedly was interested in a loan to Oscatello, belonging to Robert, where Vincent has assets at stake as a collateral.

The SFO angle isn’t yet clear but since it’s turned towards the brothers, two employees of Robert’s company R20 as well as Kaupthing managers such as Thorvaldsson and chairman Sigurdur Einarsson, it might be that SFO views the brothers as ‘shadow directors,’ i.e. apparently unconnected to Kaupthing but making decisions that the board then acted on. Aaron Brown, one of the two R20 employees arrested, is at the heart of Robert’s operations and had close connections with Kaupthing. Gudmundur Thor Gunnarsson, arrested in Iceland and an earlier Kaupthing employee liaised closely with R20 and its owner.

Vincent was never much seen around Kaupthing but Robert was. I have heard from more than one source that Robert was in and out of Kaupthing all the time, as if he owned the bank. In Independent on Sunday, an entrepreneur in Cannes, asked on Thursday about Robert Tchenguiz state of affairs following the SFO raids quoted Shakespeare’s Hamlet which explains Robert’s situation perfectly: “As Polonius warned, neither a borrower nor a lender be, and it looks like Robert was both, to himself.”

In a Kaupthing credit risk report from 31.08.08 the loans to Robert Tchenguiz had blown the legal limit of 25% of the bank’s equity – his loans amounted to ISK235bn, now ca 1.2bn, or 26,2% of the bank’s equity. This didn’t dampen Kaupthing’s will to lend him yet more. At the board’s credit committee meeting 24.9.08 the committee agreed a loan of £5m to the Tchenguiz Discretionary Trust. This loan wasn’t a part of the Oscatello structure but had collaterals in Montzando Ltd and Santora Investment Ltd holding shares in Phase Eight and House of Fraser where another big borrower in Kaupthing, Baugur, was the majority shareholder. An interesting connection since Kaupthing’s favoured clients were inclined to be attracted by the same companies.

TDT was requesting these 5m to settle a margin call from KSF – in other words, KSF was lending TDT to meet KSF’s own margin call. This may seem weird but in the Wonderland of Icelandic banks this was common when the banks’ major shareholders and favoured clients were fighting margin calls.

Next day, the board seems to have gone through the bank’s largest exposure, the overview was leaked on Wikileaks in summer of 2009. According to that overview, Robert Tchenguiz wasn’t mentioned but two companies related to him were mentioned, holding loans of €250m, only a fifth of the debt mentioned in the credit report a few weeks earlier.

On the Kaupthing loan overview from Sept. 2008 the bank’s exposure to Vincent Tchenguiz is €208m, against two companies, Pennyrock Ltd and Elsina Ltd. The credit rating for both these companies is –BBB. These companies are connected to his real estate and ground rent emporium, the biggest of its kind in the UK.

Today, companies connected to Peverel, the holding company for Vincent Tchenguiz ground rent emporium, have gone into administration, as Bank of America Meryll Lynch demanded a loan of £125m repaid. Vincent Tchenguiz blames the bank’s demand on the SFO raid.

Be that as it may but BoA Merryl Lynch might also have taken a look at the collateral structure and wondered about its worth. In some of the Icelandic company structures there were real assets at the bottom of the structure. On top of these companies there were layers of other companies, also with loans but with only a slight downturn of value the equity of these companies could easily evaporate and the collaterals turn out to be worth not very much.

Following the SFO raids and arrests last week there has been a flurry of articles in the UK media on the Tchenguiz brothers and Kaupthing. The FT put the news on its Thursday front page. However, this weekend there was an article where the Tchenguiz brothers were allowed to vent their anger without the slightest attempt by the paper to indicate that this was a knee jerk reaction. As Eva Joly has so often pointed out in the Icelandic media the spin machines go into overdrive at the moment the authorities question the millionaires. They always claim that an action against them is a conspiracy to hit their business interests. Then there are legal threats. All of these standard reactions were paraded in the FT article. How disappointing that this otherwise so outstanding newspaper should let itself be used in such a transparent PR exercise.

The Tchenguiz brothers claim that they were mislead by Kaupthing but they aren’t suing its directors. In the Sunday Times the fashion tycoon Kevin Stanford claimed that the bank had lent him money to buy its shares, misleading him as to the bank’s dire problems. He alleges that the UK deposits were swapped for troubled loans held by Kaupthing Iceland, propping up the share price. This is abundantly clear from the SIC report and will not surprise any Icelander. However, Stanford doesn’t mention that according to the SIC report he himself was involved in deals, financed by Kaupthing, to influence Kaupthing’s credit default swaps. Further, Stanford claims that the bank used the deposits to lend so that some of the senior Kaupthing executives could sell of their own share holdings. – If this is correct it’s of great interest since the executives have always maintained they didn’t sell their shares. It is however clear, that the top executives can afford to hire the most expensive lawyers both in Iceland and the UK for their defense.

Whether and if something is criminal at the heart of Kaupthing’s operation, justifying the SFO raids last week, will only come to light when and if charges are brought. But it’s clear that the Tchenguiz brothers haven’t only constructed one of the most complicated offshore structures known in this country but they have also distributed debt high and low in these structures. According to Simon Appel partner at Peverel’s administrator Zolfo Cooper “…the business itself was profitable at an operating level, the level of debt in the holdings companies was unsustainable.”

In 2008, when no one was lending and Kaupthing showered its chosen clients and major shareholders with money from its only source, UK depositors (and to a lesser degree depositors in other countries), it seemed like a salvation to have Kaupthing as a generous lender. But it was a doubtful blessing since the temptation was to borrow more instead of selling assets. The Icelandic banks’ goodwill to lend far beyond rhyme and reason has killed many of the companies of the Icelandic banks’ main clients. Vincent Tchenguiz wasn’t one of Kaupthing’s largest clients but the fate of Peverel indicates the same pattern of addiction to debt.

*An attentive reader pointed out to me that if the FSA can prove that KSF transferred money to Iceland in breach of UK law there could be a basis for a course of action to recover that money. The question is against whom the recovery would be pointed.


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Written by Sigrún Davídsdóttir

March 14th, 2011 at 11:36 pm

Posted in Iceland

6 Responses to 'Some points on the SFO investigation into Kaupthing'

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  1. […] Davíðsdóttir bloggar á ensku um Kaupþing og Tchenguiz-bræðurna. Í greininni gagnrýnir hún Financial Times harðlega fyrir […]

  2. Pereval = Peverel


    19 Mar 11 at 10:05 am

  3. ‘Peverel’ – point taken, have now corrected it, thanks!

  4. […] the SFO, which so far hasn’t brought any charges. The burning question is: what is the SFO investigating? The very laconic answer from the SFO is that it’s investigating if value was extracted from […]

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    Some points on the SFO investigation into Kaupthing at Sigrún Davíðsdóttir's Icelog


    Some points on the SFO investigation into Kaupthing at Sigrún Davíðsdóttir's Icelog

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