Sigrún Davíðsdóttir's Icelog

The SFO’s troubled investigation into the Tchenguiz brothers and their relationship to Kaupthing has been getting some attention in the UK press recently. Last Sunday, Simon Bowers at the Guardian wrote an excellent and well-informed article on SFO’s trouble. Yesterday, the FT took up the same topic, explaining in detail what it was that the SFO had messed up. An earlier Icelog deals with some aspects of the Tchenguizes relationship to Kaupthing.

In a nutshell, the FT says that the material, which misled the SFO – or that they didn’t use correctly – came from the accountancy firm Grant Thornton, called in as administrator when some of Robert Tchenguiz companies failed after Kaupthing’s collapse in October 2008. People from the firm, involved in work related to Kaupthing, saw something they felt uncomfortable with and brought it to the attention of the SFO.

In Iceland, it’s been alleged that the SFO troubles with the Tchenguiz investigation stem from information from the Office of the Special Prosecutor in Iceland and as a result of this, the SFO has lost all faith in the OSP. This Icelandic version of things might have come into being due to badly informed sources – or it is an attempt to undermine and throw doubt on OSP’s own investigations. Food for thought, in any case, since nothing in the UK press seems to have indicated OSP as the source of SFO’s problems.

In the FT article it’s pointed out that the SFO mislead the judges in the process of getting permit to conduct house searches at premises connected to Vincent and Robert Tchenguiz, investigated because of dubious loans from Kaupthing. The misleading part relates to Vincent: SFO had claimed that Kaupthing didn’t know that the collaterals pledged were already pledged to others and unenforceable, in other words worthless to Kaupthing. According to the SFO, Kaupthing didn’t know because Vincent didn’t tell Kaupthing or informed Kaupthing wrongly on the status of the assets. Or in FT’s words:

“The 147-page SFO statement seen by the Financial Times set out wide-ranging and separate allegations of financial fraud against each brother. Vincent faced a three-prong allegation that he had duped Kaupthing into issuing him and Robert loans of £80m and £100m in March 2008, six months before it went bust.

In using his portfolio of 250,000 residential property freeholds – the largest business of its kind in the UK – to secure both loans, it was alleged, Vincent had pledged the same collateral for each. He was also accused of having “widely and materially overstated” the worth of the freeholds by accounting for them using a 150-year rather than a 50-year basis, which the SFO contended was standard accounting practice. Lastly, he was said to have failed to disclose to Kaupthing the existence of “substantial” other lenders with senior ranking claims over the collateral.”

It’s necessary to keep in mind that Kaupthing (as well as Glitnir and Landsbanki) did, time and again, issue loans to their favoured clients with insufficient or no collaterals. That was the rule, rather than the exception when lending to favoured clients with whom the bank frequently also co-invested.

It’s more than unfortunate if the SFO has spoiled its own case by tackling it from the wrong end. It may be hard to understand that Kaupthing knew of the inadequacy of the collaterals because it beggars belief that a bank would lend on these terms – but then, that’s no excuse because an investigation is about doing things properly and not let beliefs and suppositions get in the way.

However, the question that the FT doesn’t ask, quite amazingly, is: if Kaupthing knew the collaterals were pretty much useless and worthless to Kaupthing, why did it ever accept these collaterals and issue the loan to Vincent?* Though the SFO misunderstood or mishandled some relevant material to begin with it might still be asking the right questions – the central questions regarding the nature of the relationship Kaupthing had with its clients.

* This is also an issue for Kaupthing’s auditors to contemplate – were they aware of the loan covenants in this loan and other similar loans? – The FT has seen an SFO statement presented to the courts against the Tchenguiz brothers. The statement is not in the public domain but I would be very interested in reading it, in case anyone has a copy. 

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