The Special Prosecutor and the difficult task of bringing bankers to justice
‘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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i would be interested tio see if any of the judges participated in the sweetheart deals of loans for shares, secured on shares deals that were available.
andy
1 Jul 11 at 10:17 am
What andy said. It would appear the learned justice considers fraud a legal impossibility.
Knute Rife
1 Jul 11 at 2:39 pm
I’m surprised that anybody is surprised by this ruling.
The world is full of such rulings today, and they all come from the same source: Money.
wardropper
3 Jul 11 at 2:36 am
No news of any sweet heart deals etc close to Justice Isberg but he does have a very tolerant view on what it means to do business. As if business excludes fraud. But Justice Hardardottir’s ruling shows a a different reasoning. Remains to be seen how it goes in Supreme Court, if it’s appealed as I guess it will happen.
Sigrún Davíðsdóttir
3 Jul 11 at 5:58 pm
I have written elsewhere about the Icelandic tendency to be concerned with the letter of the law rather than its purpose and intent. It stems from a national obsession with the written word. (Which may well stem from the Icelandic tendency to treat the spoken word as having no importance – I’ve noticed that Icelanders can quite happily lie to each other with little or no repurcussions. Doing that with foreigners however has led to problems.) In Iceland – if it ain’t explicitly written down then it ain’t gonna happen. Even before the judgement discussed above I have noted in other blogs that Icelandic courts do not see it as their job to interpret the law – they merely apply it letter-for-letter. (This contrasts strongly with the English-US system of common law in which the courts actually _make_ law through their judgements. Most of English law is NOT statute law but common law. Icelanders find that very hard to understand.)
Another good example of this “letter of the law” approach is kennitala-hopping in which assets are stripped from one kennitala and passed to another. The debts are left behind. Since the two kennitala’s are treated as two legal entities the stripping action means that creditors cannot claim back their money from a sale of the assets – since they are now owned by a separate legal entity. (This type of defence would be overturned immediately in the UK and US.) Some of the Baugur defence has this sort of flavour – in fact by treating the money as a merry-go-round people such as Jon Asgeir can claim they are _owed_money!!
And finally the Icelandic response to the ESA is based exactly on this form of sophistry. They argue that their deposit scheme worked because … the British and Dutch paid the money!
These Icelandic habits are well known. Here are two quotes from the Jannari report on Icelandic banks:
“The banking community and the business community at large had a tendency to consider the letter
rather than the spirit of the law as setting the boundaries for their actions. Here they were helped
by a fair number of diligent legal advisors and international financial consultants. Complicated legal
structures and webs of holding companies were established to circumvent many of the restrictions in
banking and company law.”
“The banking culture in Iceland
seems to have been rather immature in that the banks did not give much consideration to the
underlying purpose of the regulations and sought ways to circumvent them as much as they could if
it served their (or their owners’ and customers’) perceived interests. The legalistic tradition and the
lack of power also hindered the FME from imposing its view on banks.”
The reason the Icelandic banks could act in that way was because they knew the Icelandic courts would take a similar line.
I have been privy to some of the attempts to track money handled by Icelandic enities. If the money is passed through two or three legally constituted bodies then it is almost impossible in Iceland to claim the money back. Thus if $100 million is loaned from company A to company B, and then company B loans $100 million to company C, the classic Iceland defence would be “Ahhh! But those two transactions involved two different sets of money, thus if company A tries to claim the money back from company B, then company B just says “We lost it – tough luck – you get nothing” Again in any advanced Western country this sort of third-world defence would be simply laughed out of court.
But my big point is this: Iceland doesn’t seem to have learnt that this literal approach to the law, property rights, and contract is counter productive. If you look at the terms of any agreements with Iceland since Oct 2008 then the country is losing massive amounts of money by the harshness of those terms. Nobody in any position of power trusts any Icelandic body or individual and that will continue. There needs to be a degree of openness and honesty in Icelandic affairs.
Mike (UK Nordic analyst)
5 Jul 11 at 8:35 pm
Icelandic cultuer is like a super tanker….you will not get a cultural change like that quickly, unless there is a step change eg joining the EU, which would begin the process of circumventing the local business / legal / political elite….which is why they do not like it
andy
6 Jul 11 at 4:20 pm
To Mike (UK Nordic analyst)5 Jul 11 at 8:35 pm.
I am so glad that people outside of Iceland in the fiancial industries are beginning to understand what sort of place Iceland actually is. Your analysis is spot on.
Julian
9 Jul 11 at 12:56 pm
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9 Jul 11 at 4:44 pm
Mike, thanks for your points. As your earlier points: very interesting. The literal approach is a problem. There is, however, the possibility in Icelandic law to put a circle around companies and define them as linked if the same interests are at stake. ‘Going behind the veil’ is the English expression.
Thus, it should indeed be possible to take a more direct approach to the kind of transactions you describe. I hope that will be done.
Sigrún Davíðsdóttir
20 Jul 11 at 12:00 pm
I think literalism is a red herring. The Icelandic legal system is not sui generis, and both the common and civil law systems provide for the negation of forms in the face of fraud. The judge chose to read fraud out of the system to preserve forms, which is nonsense.
Knute Rife
20 Jul 11 at 4:38 pm
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