Sigrún Davíðsdóttir's Icelog

Baugur and Aurum: fighting the counter-market laws of the cheaters

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Baugur, the investment company of Jon Asgeir Johannesson, his family and few others, started its life as a listed company that Johannesson later took off market. In 2002, while still a listed company Baugur was investigated for financial irregularities. Eventually, charges were brought against the company. As the case came to court, most of the charges, but not all, were thrown. Johannesson was finally sentenced to a three months conditional imprisonment in the summer of 2008. The sentence meant he had to leave the boards of several companies where he sat.

The demise of the Baugur case – Johannsson was sentenced but many of the claims were thrown out – is fresh in the memory of those now investigating not only Johannesson’s businesses but also other cases related to the collapsed banks. There are some intriguing parallels between the Baugur case and a recent case.

Glitnir, one of the three banks that collapsed in October 2008, is now bringing a case against Johannesson, his long-standing business partner Palmi Haraldsson, the Glitnir CEO Larus Welding, brought in when Haraldsson and Johannesson became major shareholders in Glitnir in spring of 2007 and three employees of Glitnir. The Glitnir case regards the sale of Aurum shares from one Haraldsson company to another Haraldsson company, a case Icelog has reported on earlier as a modern amorality tale.

The first Baugur charge to be thrown out by the Reykjavik County Court judge Arngrimur Isberg regarded a sale of shares in a company called Voruveltan by another company, Fjarfar, to Baugur, then a public company. According to the prosecutor Johannesson was guilty of fraud and breach of fiduciary duty for his part in this sale.

The judge saw it differently. To him, the charges merely described a business transaction. He did though acknowledge that the listed company Baugur had quite possibly lost ISK325m and Johannesson and his associates had profited by ISK200m but their cost, ia brought on as they tried to hide ownership and business relations, had been considerable. Consequently, it wasn’t a crime to trick Baugur and make ISK200m on the side.

The Aurum case rises from a Glitnir loan of ISK6bn related to sale of the Aurum shares. There is a significant difference between the Aurum case and the Baugur case: in the former case Glitnir is suing for damages, the latter was a criminal case brought on by the prosecutor (not the Office of the Special Prosecutor, which is a new office, set up to investigate cases related to the collapsed banks).

The Aurum sale was a classic deal in the Icelandic pre-collapse business environment: a sale between related entities. Glitnir’s employees valued the Aurum shares, at most, at ISK1.5bn. Johannesson and Haraldsson wanted a loan of ISK6bn where the Aurum shares should be worth at least ISK4bn.

Their evaluation was based on ‘Head of Terms’ from the Damas International, a big Dubai jewellery chain that in the summer of 2008, just at the time that the Aurum sale was being organised, had shown an interest in Aurum. It was a Kaupthing contact in the Middle East who brought Aurum and Damas together.

Johannesson and Haraldsson discredited Glitnir’s evaluation and convinced the bank to accept the Damas evaluation. Damas, by the way, never bought Aurum. Last year, three brothers who are Damas main shareholders and managers, were banned by the Dubai Financial Services Authority from the board of Damas International for 10 years and imposed penalty for having illegally withdrawn $165m from Damas, a public company.

The Aurum sale went through as Johannesson and Haraldsson wanted. Of the ISK6bn 4bn was used to pay off older loans, one billion went to Haraldsson’s Kaupthing Luxembourg account and a billion went into Johannesson’s private account with Glitnir. A loss of ISK6bn landed with Glitnir late 2008 because of a buy back clause obliging Glitnir to buy the 6bn indebted SPV for the royal sum of 1 krona.

In a report in the Aurum case, Johannesson’s lawyer Gestur Jonsson claims that Johannesson neither sat on the board of Glitnir nor was in any position to influence Glitnir. This echoes the defence in the Baugur case, where Jonsson was also acting on behalf of Johannesson. In an email published in the Glitnir charges Welding complains that the bank’s main shareholders treated him like a branch manager.

With the SIC report it became abundantly clear that Johannesson was diligent sending emails to Welding and other Glitnir managers and in general to managers in the three banks where he was among the biggest clients. Actually such a big client with all of them that the power was reversed: the banks had no power over him; he had all the power over the banks because on their books he was too big to fail. Consequently, he had to be saved, at all cost, with loans upon loans from late 2007 until the bitter end of the three banks. In addition, he and his business associates were closely involved with Byr, one of the small Icelandic savings banks.

The Aurum case has indirectly come up in a UK court. In relation to the Aurum case in Iceland, Glitnir asked for an international freezing order in a UK Court, confirmed last summer by Justice David Steel. Regarding the Aurum case, Justice Steel concluded that ‘even if Mr Johannesson has some prospect of answering the (Aurum) claim in Iceland, nonetheless the prospect of establishing that he had no control over the bank and/or that the loan was a bone fide commercial transaction looks somewhat forlorn.’

From the Voruvelta deal Johannesson profited at least ISK200m, a small sum compared to what was to come. Johannesson and Haraldsson got each a billion from the Aurum sale. From a third deal, the so-called Stytta deal, another remarkable 2008 loan story, Fons netted ISK2bn.

All this isn’t just an old story. The deals made with the bank’s favoured clients during 2008 secured them well beyond the collapse of the banks. And they are still profiting from these deals. In a recent interview, professor William Black said:  ‘If cheaters prosper, cheaters will dominate. It is like Gresham’s law: Bad money drives out the good. Well, bad behavior drives out good behavior, without good enforcement.’

This is what Iceland is wrestling with: to make sure that it’s not the unnatural, counter-market law of the cheaters that still rule the market.

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Written by Sigrún Davídsdóttir

May 20th, 2011 at 1:22 pm

Posted in Iceland

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  1. […] Icelog. Here is further to the charges brought now by the Office of the Special Prosecutor and here is an earlier log on Aurum, also connected to an international freezing order, which the Glitnir […]

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