‘Business but not breaking the law.’ This is how Justice Arngrimur Isberg described some of the most blatant money-making tricks at the heart of the charges in the Baugur case, brought against Jon Asgeir Johannesson and his companions in 2005. At the time, Isberg threw out charges of fraud and breach of fiduciary duty since in his opinion it was normal business that caused a loss of ISK325m to Baugur whereas Johannesson and his companions made at least ISK200m in a deal where Johannesson had hidden his ownership of a company sold to Baugur.
On Tuesday, Isberg yet again caused a major surprise, now with his ruling* in the Byr case.
As explained in an earlier Icelog the Byr saving society wasn’t among the heavy-weights in the Icelandic financial world. Prosecutor Bjorn Thorvaldsson had demanded a jail sentence of five years for Jon Thorsteinn Jonsson chairman of the board of Byr, a saving society, Byr CEO Ragnar Gudjonsson and the CEO of MP Bank Styrmir Thor Bragason for breach of fiduciary duty. In addition, Bragason was charged with money laundering. The investigation centered on two overdraft loans, in total ISK1bn (now €6m), from Byr, in October and December 2008 to a holding company, Exeter Holding. Exter then bought Byr shares from Jonsson and others related to Byr at a conspicuously favourable rate. Byr investors were being pursued by MP Bank with margin calls since MP Bank had earlier lent a group of Byr employees to buy into Byr.
I was in Iceland during the court hearings. It was interesting to see one Byr- and MP Bank-employee after the other, as well as others related to the case, give witness. Their memory was often so poor that one wonders how they get out of bed in the morning. They didn’t understand emails they had sent or received. And so on.
At the core of the Byr case were loans to buy shares in Byr with only these shares as collateral. Justice Isberg didn’t pose many questions himself to the witnesses but he did, at some point, ask if this type of loan was necessarily a bad thing for a bank. Maybe he thought his question would clarify something but it mainly seemed he was trying to figure out himself what was so harmful about these loans.
Yesterday, Justice Isberg acquitted the three of them. This ruling was done at the County Court. No doubt, the Special Prosecutor will appeal to the Supreme Court.
According to the ruling, Byr clearly broke its own rules on collaterals, loan ratio and loans to related parties. It lent to a company, Exeter, with a negative equity, owned by a heavily indebted individual. All of this characterised loans to the favoured clients of the Icelandic banks. But no, nothing of this amounted to breach of fiduciary duty nor, in the case of Bragason, to money laundering. According to Isberg, the three couldn’t possibly have been defrauding the bank with these loans since they didn’t realize these loans could cause harm to the bank. Isberg sees nothing intentional about these bad loans. According to Justice Isberg the three couldn’t possibly have known the harm these loans did to Byr.
There were indeed three judges on the case. The second, who used to work as a broker, was in accordance with Isberg. The third, Ragnheidur Hardardottir, wanted to sentence the Byr managers but acquit Bragason.
It’s interesting to keep in mind that lending against own shares was one of the characteristics of Icelandic banking and consequently a major topic in the SIC report a year ago. That Justice Isberg didn’t seem to have understood how wrong and how harmful to a financial institution these loans are was nothing less than frightening. It’s intriguing to keep in mind that Eva Joly has often pointed out that in cases regarding financial crimes it’s often a major problem how ignorant judges often are of finance and business.
The Byr ruling was a test case for the Special Prosecutor. So many of the cases that he will bring to court will most likely reflect similar situation: the charged has done things that cause a loss to a listed company. Since these were clever people and there is a certain purpose to the deals the Prosecutor will charge them for a criminal intent. The Byr case shows that there can be judges who absolutely can’t see any criminal intent. Just negligence.
There are many cases in Iceland where a drug dealer has been caught with a bag of ‘goods’ and he just says he didn’t know what it was whereas the judge rules that it had to be clear to him what he was supposed to do with the drugs. In these cases, the judge reads into the circumstances certain intent. In the Byr case, the judge sees the loans, sees the losses they cause, but he can’t see anything intentional though the loans make no sense except understood in the context they were made.
If this will be the case regarding pending charges, it’s clear that it will be very hard for the Special Prosecutor to get rulings in his favour. It will be of utmost interest and importance to see what the Supreme Court makes of the Byr case. Not all is yet lost and it’s still too early to send the Special Prosecutor packing. The Byr case shows that the Special Prosecutor has some formidable hurdles in court. And Icelanders are asking if it really is the case that circa 30 individuals who turned the Icelandic economy on its head will be able to live happily ever after with the proceeds that most Icelanders will be as ill begotten.
*The ruling is here, in Icelandic.
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