Sigrún Davíðsdóttir's Icelog

The ongoing case against nine Kaupthing managers and staff gives an intriguing insight into the bank’s extensive buying and selling of own shares, which the Office of the Special Prosecutor claims involves market manipulation and breach of fiduciary duty. Witness statements by foreign employees have been especially informative.

In a witness statement today Jan Petter Sissener former head of Kaupthing Norway said he had not had faith in Kaupthing’s annual accounts for 2007. Irked by the bank’s reporting on buying and selling of own shares he asked a law firm in London to look at the bank’s activities from the point of view of international business ethics.

The firm concluded the bank’s behavior was entirely unacceptable. Sissener said that following heated conversation with Kaupthing’s CEO Hreiðar Már Sigurðsson, one of the nine charged now, and the bank’s chief legal officer Helgi Sigurðsson these trades had been stopped for a while but then later resumed again. Sissener left Kaupthing in February 2008 because of these differences of opinion regarding Kaupthing’s reporting on proprietary trading in own shares, which the bank funded to a large extent as shown extensively in the SIC report in 2010.

Another foreign employee, Nick Holton, an international compliance officer with Kaupthing, resigned at the end of July 2008, following a disagreement with senior management. Holton wanted to make some changes but failed to secure support. He said he had had serious doubts about what was going on and wondered at the time whether it was due to negligence or lack of organization. In addition, he worried about his own reputation after working for Kaupthing. He said he had pointed out to the chief legal officer that trading in own shares was illegal in many countries. Holton said it had come as a surprise when he realized that Kaupthing owned 4% of own shares but he did not know at the time that Kaupthing had funded big purchases of its shares for clients nor was he aware of losses stemming from these transactions.

Niels de Connick-Smith, a Danish business man, who sat on the board of Kaupthing, said that as far as he knew Kaupthing’s purchase of own shares had not been discussed on the board.

Senior Kaupthing managers now charged – Sigurður Einarsson, Hreiðar Már Sigurðsson and Magnús Guðmundsson, all of them already in prison following a judgment in the al Thani case – have all been questioned. They deny all charges. The same goes for Ingólfur Helgason, formerly the CEO of Kaupthing Iceland.

The five employees, charged in this case, who carried out the trades said they did so on orders, mostly from Ingólfur Helgason. Helgason denies having operated on his own but would have taken orders, mostly from Sigurðsson. Einarsson claims that being the chairman of the board meant he had no direct involvement in transactions of this type and consequently they would have been outside of his horizon.

Parking shares

The prosecutor has played informative recordings from phone tappings. In one of them the bank’s chief legal officer is talking about transactions in 2008 where the bank lent over ISK10bn, to an offshore company, Desulo Trading owned by an Icelandic business man, Egill Ágústsson. Desulo Trading then bought Kaupthing shares; over a few months it bought 2% of the bank. According to the legal officer the bank was “literally parking the shares” in what he called quite “clearly fictive trades.”

The owner of Desulo Trading has said in an earlier witness statement that he was not told of these transactions and was quite shocked when he saw the substantial loans issued to his company. One Kaupthing Luxembourg employee said the company was, in the end, quite obviously “just like a dustbin” in the bank. Apart from loans to Desulo Trading two other companies are involved in this case, also belonging to big Kaupthing clients, Holt Investment owned by Luxembourg investor Skúli Þorvaldsson and Mata Investments, owned by Gísli V. Einarsson and his family.

Þorvaldsson is charged in another case regarding embezzlement from Kaupthing, together with Sigurðsson, Guðmundsson and Guðný Arna Sveinsdóttir Kaupthing’s chief financial officer, seen to have been very close to the Kaupthing management.

In total, Kaupthing sold almost 18% of the bank’s share in seven large transactions shortly before it collapsed, in all cases funding the share purchase with Kaupthing loans. The largest transaction was when a Qatari sheikh bought 5,1% for which the three above mentioned managers and Ólafur Ólafsson, the bank’s second largest shareholder, are now serving 3 to 5 1/2 years in prison in the so-called al Thani case.

I have earlier stated that I wonder if anything like this was going on in other banks up to the crisis. Here, some Irish banks come to mind re loans to ten shareholders in Anglo Irish. An Irish Court found two bankers guilty but they were not sent to prison because the judge found regulators had failed to warn the bankers of the illegal activity. Icelandic senior bankers have been less lucky.

*This report is based on Rúv reporting on the ongoing case, found here, in Icelandic.

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