Sigrún Davíðsdóttir's Icelog

The loans that Kaupthing offered to a group of key employees and management to buy shares in Kaupthing have turned into a millstone around the neck of some of these employees. Two rulings in Icelandic courts lately have obliged these people to pay.

The case that has gone all the way to the High Court relates to Delia Howser who had been working for Kaupthing from 1997. Compared to some other loans of billions of Icelandic kronas, her loans are very modest. All in all, the number mentioned in court as the grand total of the employee loans on Kaupthing books is ISK55bn.

In 2005, Howser took a loan of ISK18m, to buy shares in Kaupthing. According to the loan agreement the shares were the collateral and in addition the agreement stipulated that her personal guarantee was only 10%. This meant that no matter what, she would never pay more than 10% of the loan, in addition to giving up the shares, in case she defaulted on the loan. In 2007, she borrowed additional ISK3m to buy shares. For some reasons, this agreement didn’t mention any maximum to her personal guarantee.

In court, she claimed she had not been allowed to sell the shares except with permission from the bank. In court ex-CEO Hreidar Mar Sigurdsson confirmed her words. She also said that it had been her understanding that no matter what, she would never lose any money on this loan agreement – the loans were completely risk-free for her. In other words: she was free to pocket the dividend but wasn’t supposed to pay off the loans until they matured, in 2009 and 2010. The ruling went against her – she has to pay, in total, ISK6.5m (now €40.000. In the grand scheme of things, she was lucky that the much higher loan has the 10% limit to her personal guarantee.

With this ruling, it’s now clear that the Kaupthing employees who were favoured with these loans do have to pay them back. Also, the decision of the bank’s board from end of September 2008, just two weeks before the collapse, to free all the employee borrowers of their personal guarantee isn’t accepted by the court.

The other ruling, in the Reykjavík District Court, went against ex-chairman of the Kaupthing board, Sigurdur Einarsson. This ruling refers to following loans: ISK1bn in 2005, maturing in 2010; ISK1.2bn and ISK793.000 in 2006, both maturing in 2011; ISK247.000 in 2007, maturing in 2012; August 2008 ISK248.000, maturing in 2011. Interestingly, all of these loan contracts limited his personal guarantee to 10% and the only collateral were the shares. In court, Einarsson claimed that Kaupthing owed him  £1,2m pounds for unpaid loans, pension and other payments. The court rejected his claims and ruled that Einarsson should pay back 10% of the outstanding loans, in total ISK550m (€3.4m).

The feeling is that the employee loans were allegedly part of an extensive “share-parking” on behalf of Kaupthing’s management. While things went well, the employees pocketed the dividend – but in the end, these loans have turned out to be a major calamity for many of the employees. They can now ponder whether the management had more in mind the employees’ wellbeing or the need to park the shares and, when the shares started falling, the need not to sell so as not to show that the share price was, in all likelihood, even lower than the market price indicated.

Tchenguiz judicial review

Next week, Vincent Tchenguiz judicial review granted into his arrest, house searches and raids is scheduled to come up in court.* This case relates to an investigation into his connections with Kaupthing, conducted on behalf of the Serious Fraud Office, These three days in court will no doubt be highly interesting. His brother Robert has also been granted a judicial review.

Much of the dealings that Vincent and his brother Robert had with Kaupthing went through Luxembourg. SFO has, as well as the Icelandic Office of the Special Prosecutor, done house searches in Luxembourg. From the way Kaupthing was run, it’s quite clear that without documents and sources in Luxembourg the brothers’ connections – as well the relationship between Kaupthing and mother major clients – will neither be fully understood nor explained.

*Earlier Icelog on that case is here. – The ruling in the Howers case is here and Einarsson’s case here; both only in Icelandic – Mr L

Follow me on Twitter for running updates.