Sigrún Davíðsdóttir's Icelog

Today, the Icelandic Supreme Court annulled the Reykjavík District Court acquittal in the Aurum case. This means that the District Court has to start all over again on the case. Those charged are Jón Ásgeir Jóhannesson and Lárus Welding who became Glitnir’s CEO when Jóhannesson and a group of investors bought over 30% in the bank in spring 2007. Two other Glitnir employees are also charged.

At the centre of the case is a loan from Glitnir to a shelf company, FS38 to buy a share in the retailer Goldsmith, owned by Aurum Holding, from Fons, owned by Pálmi Haraldsson, a business associate of Jóhannesson. Haraldsson was i.a. a co-investor in Glitnir with Jóhannesson, where the duo were close up and intimate with the management. So much so that Welding at some point, in an email to Jóhannesson, complained that he was being treated like a branch manager and not the CEO.

The particulars of this whole loan arrangement was that after various evaluations of Goldsmith, Glitnir lent ISK6bn to FS38; it so happened that of the 6bn ISK1bn landed on Haraldsson’s account with Glitnir and an equal amount landed on Jóhannesson’s personal account.

The FS38 loan saga was already familiar from the SIC report, published in April 2010, one of many SIC’s loan sagas related to the major shareholders of the three banks. The four were charged by the Office of the Special Prosecutor. When the case came up in the District Court it was presided over by two District Court Judges the third one being a Court-appointed external expert, Sverrir Ólafsson.

In June last year the Court acquitted all four charged in the Aurum case. Soon after, it transpired that Ólafsson was the brother of Ólafur Ólafsson, at the time already sentenced by the District Court in the so-called al Thani case. Ólafur is now serving a sentence of 4 1/2 years after the Supreme Court sentenced him last January (thereby adding a year to Ólafsson’s sentence in the District Court). Foreigners always think that in Iceland everyone knows everybody, which definitely was not the case with the Ólafsson brothers – special prosecutor Ólafur Þ. Hauksson denied he had known about the relationship (and yes, Ólafsson is a very common name in Iceland and the two brothers are not at all similar) nor had the Icelandic media picked this up.

Following the revelation, Sverrir Ólafsson said in an interview with Rúv that it was inconceivable Hauksson and the OSP had not been aware of whose brother he was. According to Sverrir the fuss was only to undermine the judgement. In this interview Ólafsson used harsh words about Hauksson, seen by many as somewhat unsuited for a judge, even a lay one.

Following the District Court ruling in the Aurum case the state prosecutor (a different authority from the OSP) demanded that the judgement should be annulled because of doubt of the impartiality of one of the judges. Today, this is exactly what the Supreme Court did, which means that now the case must start anew, probably adding at least another year and probably more to the story of this case.

In addition to this the Glitnir Winding up Board has sued Jóhannesson and others for damages caused by the FS38 loan. In connection to that case, and at the demand of Glitnir, Jóhannesson’s assets were subjected to an international freezing order by a London Court in May 2010 (see here, here and here). The Glitnir case is resting until a final judgement in the criminal case; as far as is known the freezing order is still standing. However, Jóhannesson is again an active investor, i.a. in the UK but investing on behalf of his wife.

Recently, there have been articles in Icelandic on the website Vísir and in the newspaper (distributed for free) Fréttablaðið owned by 365 Media, under the ownership of Ingibjörg Pálmadóttir, wife of Jóhannesson. These articles have been insinuating lies on behalf of the Special Prosecutor regarding Ólafsson, i.e. stating that Hauksson and others at the OSP did indeed know whose brother Sverrir Ólafsson was. Earlier, the paper had also sought to sow doubt of the al Thani judgement; the sentence in one of its articles, saying that when the Courts fail the media must take over, was much noted. No doubt, Jóhannesson and his allies will fight their case ferociously, not only in the Courts but also in the media in the Jóhannesson’s sphere of influence.

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Jón Ásgeir Jóhannesson, Glitnir ex-CEO Lárus Welding and two other Glitnir employees have all been acquitted this morning in the Reykjavík District Court in the Aurum Case. The Prosecutor will no doubt appeal, sending the case to the Supreme Court.

It remains to be seen what the outcome will be but in the Exeter case, another financial fraud bank-related case, the Reykjavík District Court acquitted but the Supreme Court sentenced to 4 1/2 year prison term.

The verdict is not yet out on the Court website. Will read it later on.

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The oral hearings in the Aurum case are now over and a verdict can be expected in the coming weeks. Those charged are Jón Ásgeir Jóhannesson, for  exerting undue influence on Glitnir CEO Lárus Welding, also charged, in addition to two Glitnir employees, Magnús Arnar Arngrímsson and Bjarni Jóhannesson who managed Glitnir’s business relations with Jóhannesson and his companies. The three Glitnir employees are charged for breach of fiduciary duty.

An intriguing sub-story, surfacing during the hearings, is that during the hearings Jóhannesson told the court that he had been able to obtain information on Fons, the company of his long-time business partner Pálmi Haraldsson. Jóhannesson told the court how he had requested and obtained this information. The interesting thing is that Jóhannesson had no formal relation with Fons and yet the bank handed over to him financial information on Fons. And it was quite interesting the Jóhannesson told this to the court as if this was the most natural thing in the world.

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One of the most spectacular lending stories from the collapsed Icelandic banks, from Glitnir, comes up in the Reykjavik District Court as oral hearings in the Aurum case start Monday January 7. This is essentially a story how Glitnir’s two main shareholders – Jon Asgeir Johannesson and his long-time business partner Palmi Haraldsson – got a loan of ISK6bn, ca €35.5m, from the bank and ended up getting rid of the loan by selling, for 1 krona, the company where the debt was placed (yes, this sounds crazy but this was Icelandic banking for favoured clients pre-collapse).

Those charged are Johannesson, for  exerting undue influence on Glitnir CEO Larus Welding and Bjarni Johannesson who managed Glitnir’s business relations with Johannesson and his companies. A third Glitnir employee, Magnus Arnar Arngrimsson is also being charged. The charges relate to the three Glitnir employee regard breach of fiduciary duty.

From these ISK6bn it is alleged that Johannsson and Haraldsson each personally got ISK1bn whereas the whole amount was lost to the bank. The loan saga is recounted in an earlier Icelog. Here is further to the charges brought now by the Office of the Special Prosecutor and here is an earlier log on Aurum, also connected to an international freezing order, which the Glitnir ResCom secured against Johannesson in the summer of 2010. Earlier, the Glitnir ResCom brought a case against Johanesson and Glitnir managers for losses caused by the Aurum lending.

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Baugur, the investment company of Jon Asgeir Johannesson, his family and few others, started its life as a listed company that Johannesson later took off market. In 2002, while still a listed company Baugur was investigated for financial irregularities. Eventually, charges were brought against the company. As the case came to court, most of the charges, but not all, were thrown. Johannesson was finally sentenced to a three months conditional imprisonment in the summer of 2008. The sentence meant he had to leave the boards of several companies where he sat.

The demise of the Baugur case – Johannsson was sentenced but many of the claims were thrown out – is fresh in the memory of those now investigating not only Johannesson’s businesses but also other cases related to the collapsed banks. There are some intriguing parallels between the Baugur case and a recent case.

Glitnir, one of the three banks that collapsed in October 2008, is now bringing a case against Johannesson, his long-standing business partner Palmi Haraldsson, the Glitnir CEO Larus Welding, brought in when Haraldsson and Johannesson became major shareholders in Glitnir in spring of 2007 and three employees of Glitnir. The Glitnir case regards the sale of Aurum shares from one Haraldsson company to another Haraldsson company, a case Icelog has reported on earlier as a modern amorality tale.

The first Baugur charge to be thrown out by the Reykjavik County Court judge Arngrimur Isberg regarded a sale of shares in a company called Voruveltan by another company, Fjarfar, to Baugur, then a public company. According to the prosecutor Johannesson was guilty of fraud and breach of fiduciary duty for his part in this sale.

The judge saw it differently. To him, the charges merely described a business transaction. He did though acknowledge that the listed company Baugur had quite possibly lost ISK325m and Johannesson and his associates had profited by ISK200m but their cost, ia brought on as they tried to hide ownership and business relations, had been considerable. Consequently, it wasn’t a crime to trick Baugur and make ISK200m on the side.

The Aurum case rises from a Glitnir loan of ISK6bn related to sale of the Aurum shares. There is a significant difference between the Aurum case and the Baugur case: in the former case Glitnir is suing for damages, the latter was a criminal case brought on by the prosecutor (not the Office of the Special Prosecutor, which is a new office, set up to investigate cases related to the collapsed banks).

The Aurum sale was a classic deal in the Icelandic pre-collapse business environment: a sale between related entities. Glitnir’s employees valued the Aurum shares, at most, at ISK1.5bn. Johannesson and Haraldsson wanted a loan of ISK6bn where the Aurum shares should be worth at least ISK4bn.

Their evaluation was based on ‘Head of Terms’ from the Damas International, a big Dubai jewellery chain that in the summer of 2008, just at the time that the Aurum sale was being organised, had shown an interest in Aurum. It was a Kaupthing contact in the Middle East who brought Aurum and Damas together.

Johannesson and Haraldsson discredited Glitnir’s evaluation and convinced the bank to accept the Damas evaluation. Damas, by the way, never bought Aurum. Last year, three brothers who are Damas main shareholders and managers, were banned by the Dubai Financial Services Authority from the board of Damas International for 10 years and imposed penalty for having illegally withdrawn $165m from Damas, a public company.

The Aurum sale went through as Johannesson and Haraldsson wanted. Of the ISK6bn 4bn was used to pay off older loans, one billion went to Haraldsson’s Kaupthing Luxembourg account and a billion went into Johannesson’s private account with Glitnir. A loss of ISK6bn landed with Glitnir late 2008 because of a buy back clause obliging Glitnir to buy the 6bn indebted SPV for the royal sum of 1 krona.

In a report in the Aurum case, Johannesson’s lawyer Gestur Jonsson claims that Johannesson neither sat on the board of Glitnir nor was in any position to influence Glitnir. This echoes the defence in the Baugur case, where Jonsson was also acting on behalf of Johannesson. In an email published in the Glitnir charges Welding complains that the bank’s main shareholders treated him like a branch manager.

With the SIC report it became abundantly clear that Johannesson was diligent sending emails to Welding and other Glitnir managers and in general to managers in the three banks where he was among the biggest clients. Actually such a big client with all of them that the power was reversed: the banks had no power over him; he had all the power over the banks because on their books he was too big to fail. Consequently, he had to be saved, at all cost, with loans upon loans from late 2007 until the bitter end of the three banks. In addition, he and his business associates were closely involved with Byr, one of the small Icelandic savings banks.

The Aurum case has indirectly come up in a UK court. In relation to the Aurum case in Iceland, Glitnir asked for an international freezing order in a UK Court, confirmed last summer by Justice David Steel. Regarding the Aurum case, Justice Steel concluded that ‘even if Mr Johannesson has some prospect of answering the (Aurum) claim in Iceland, nonetheless the prospect of establishing that he had no control over the bank and/or that the loan was a bone fide commercial transaction looks somewhat forlorn.’

From the Voruvelta deal Johannesson profited at least ISK200m, a small sum compared to what was to come. Johannesson and Haraldsson got each a billion from the Aurum sale. From a third deal, the so-called Stytta deal, another remarkable 2008 loan story, Fons netted ISK2bn.

All this isn’t just an old story. The deals made with the bank’s favoured clients during 2008 secured them well beyond the collapse of the banks. And they are still profiting from these deals. In a recent interview, professor William Black said:  ‘If cheaters prosper, cheaters will dominate. It is like Gresham’s law: Bad money drives out the good. Well, bad behavior drives out good behavior, without good enforcement.’

This is what Iceland is wrestling with: to make sure that it’s not the unnatural, counter-market law of the cheaters that still rule the market.

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“I’m just doing it for you guys,” Birkir Kristinsson was caught on tape saying to one of his fellow bankers at Glitnir. Kristinsson, the brother of Magnús Kristinsson – owner of fishing industries in the Vestman islands and a big borrower in the Icelandic banks – has been sentenced to five years in prison together with three Glitnir colleague two of whom also got the same prison sentence. The fourth was sentenced to four years in prison. Kristinsson has appealed and so will the three others most likely do.

This case is not one of the big ones involving major investors or bank managers and the numbers are not as high as in some of the other cases, most noticeably the al Thani case. It was however an important judgement because there are other similar cases snarling their way through courts.

Three Glitnir employees – Elmar Svavarsson, Jóhannes Baldursson and Magnús Arnar Arngrímsson (also accused in the Aurum case, acquitted in the Reykjavík District Court; case appealed to Supreme Court) – were indicted for loans to a fourth Glitnir employee, Birkir Kristinsson.

The loans, totaling ISK3.6bn, €23m, were issued between December 2007 and July 2008 to a company owned by Kristinsson, used to buy shares in Glitnir, thereby effectively creating a misleading share price. In addition, the three employees ignored the bank’s rules on lending. Later, the three made sure Glitnir i.a. bought back own shares at double the market price to insulate Kristinsson’s company from losses. Kristinsson was indicted for participating in the scheme.

Svavarsson and Baldursson, as well as Kristinsson were sentenced to five years in prison and Arngrímsson to four years. They were sentenced for market manipulation and breach of fiduciary duty. The four bankers are, with the exception of Birkir Kristinsson, not household names in Iceland. However, this is yet another banking-collapse case from the Office of the Special Prosecutor. Since there are other similar cases this verdict is indicative but none of these cases is over until ruled on by the Supreme Court.

The verdict, from June 22, is here, in Icelandic.

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Acquittals in major cases brought by the Office of the Special Prosecutor have made headlines in Iceland and elsewhere. In addition, it has now surfaced that an expert, called in to be a lay judge in the Aurum case is the brother of Ólafur Ólafsson, one of the four indicted in the al Thani case.  Jón Ásgeir Jóhannesson, at the time Glitnir’s largest shareholder, was indicted in the Aurum case, together with Glitnir’s ex-CEO Lárus Welding and two Glitnir employees. Both were acquitted.

Jóhannesson has however earlier been found guilty in two cases but in both cases the prison sentence was suspended. In February last year, he was sentenced in a tax fraud case to 12 months in prison, suspended, and fined for ISK62m, €400.000. In June 2008 Jóhannesson was sentenced, as part of the long running Baugur case, to three months in prison, also suspended. Following both sentences Jóhannesson is prevented from sitting on boards of companies for some years.

In a nutshell, the Aurum case concerns Glitnir staff indicted for breach of fiduciary duty, i.e. for lending money without necessary collaterals and guarantees. Indeed Glitnir lost the ISK6bn, €40m, that the bank lent in this saga. Jón Ásgeir Jóhannesson, who profited from the loan by getting €6,5m, of the loan (because Fons, the company that got the loan and couldn’t repay it, apparently owed Jóhannesson this sum of money) was charged for aiding in the alleged illegal activities. Numerous emails brought up during the oral hearings showed his direct involvement and severe pressure on finalizing the loan, which he profited from.

Ólafur Ólafsson was indicted on similar grounds in the al Thani case last December. Reykjavík County Court found him guilty and he was sentenced to 3 1/2 years in prison. That case has been appealed to the Supreme Court. In Iceland no one goes to prison until the Supreme Court has ruled in an appealed case.

In addition to two District Court judges Sverrir Ólafsson professor at Reykjavik University was called to be an expert judge in the Aurum case. Over the weekend, Icelandic media pointed out that Ólafsson is the brother of Ólafur Ólafsson. It is still unclear if this will have consequences. (Foreigners sometimes think that everyone must know everyone in Iceland – well, not quite and Ólafsson is a common last name).

Judge Guðjón Marteinsson and Stefán Ólafsson acquitted the four. The third judge, Arngrímur Ísberg, was in minority: in his opinion all four were guilty and should have been sentenced to prison. Theoretically, if a lay judge had sided with Ísberg the outcome would have been different.

From the course taken by the Reykjavík District Court in the al Thani case, where the four indicted were sentenced to 3-5 1/2 years, it is difficult to understand the reasoning of the two judges who chose to acquit in the Aurum case. The al Thani case has been appealed and a Supreme Court decision is expected in autumn or early winter. If the Supreme Court comes to a different conclusion it would not be the first time that an acquittal in a banking-related case is turned around in the Supreme Court.

The other case ruled on last week – called the Ímon case after one of the companies involved – is part of a market manipulation case brought against Landsbanki managers. Here the loan saga is similar to the al Thani case: Landsbanki lent funds to limited liability companies with little or no collaterals, here in order to fund the buying of shares in Landsbanki only days before the bank collapsed. These deals were nothing less than the largest share purchases in Landsbanki that year – these companies were each buying around 2% of Landsbanki shares. Sigurjón Árnason and Sigríður Elín Sigfússdóttir were acquitted but a lower level employee, Steinþór Gunnarsson was sentenced to nine months in prison, of which six are suspended.

So far, all the OSP cases have been appealed and that will most likely be the route with these two recent decisions.

Apart from legalities it is clear that if banking as practiced in the above mentioned cases were applied as a general rule the bank in question would be out of business fairly soon. And who wants to be a shareholder in a bank where funds are leant out in such a way that if something goes wrong the bank can’t recover the funds?

*The verdict in the Aurum case is here and the Landsbanki verdict here (both in Icelandic). 

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Instead of starting the oral hearings in the al Thani case – where the Office of the Special Prosecutor in Iceland has charged three former Kaupthing managers and the bank’s second largest shareholder – as planned Thursday morning, April 11, the hearings were postponed until further notice. This happened after the defense lawyers of Sigurdur Einarsson and Olafur Olafsson took the unprecedented step not to heed the judge who refused to accept their resignation of the case. In court, prosecutor Bjorn Thorvaldsson pleaded that the two lawyers would receive penalties for willfully causing delays to the case. The judge will consider any such step after the case had finally been heard.

The defendants have now appointed new lawyers who need to read up on the case. The two lawyers who resigned – Gestur Jonsson and Ragnar Hall – are two of the most experienced lawyers in Iceland. Jonsson was i.a. lawyer for Baugur’s main shareholder Jon Asgeir Johannesson in the so-called Baugur case and is also Johannesson’s defense lawyer in a case brought against Johannesson by the Office of the Special Prosecutor, the so-called Aurum case.

The defense in the Aurum case shows a similar trend to the al Thani case. – The oral hearings were due to start in January, got postponed until early April when it was again postponed, this time because documents that the defense team wanted to present were not ready. After the events in the al Thani case Special Prosecutor Olafur Hauksson expressed his worries that similar things might start to happen in other cases brought by the OSP.

The two lawyers replacing Jonsson and Hall – Olafur Eiriksson and Thorolfur Jonsson– are not at all big names in the Icelandic legal profession. The are both from Logos, the largest Icelandic law firm.

The two lawyers who resigned claim they felt forced to resign because of the way their clients have been treated. Still, they have neither filed any complaints nor taken any action. Earlier, they had made several attempts to have the case thrown out or postponed, taking their cases all the way to the Supreme Court, which has rejected their attempts. In its last ruling re the case the Supreme Court reprimanded the two lawyers, saying their case was without merit.

The strong feeling in Iceland is that the two lawyers resigned in order to gain the postponements they could not obtain via the courts. It is well known in big white-collare cases that highly paid lawyers often try all possible tricks to thwart and delay going to court. Both lawyers strongly deny any such tactics.

The judge will meet with the new defense lawyers on April 22, after which it might be clear when the oral hearings will start. Given the complexity of the case, it is quite likely that the next chapter in the case will not commence until autumn.

*Here are earlier blogs where the al Thani case is mentioned – and here is the story behind the charges in the al Thani case. 

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The Icelandic Supreme Court has sentenced Jon Asgeir Johannesson to one year  prison, suspending the sentence for two years for tax evasion. In addition, Johannesson is ordered to pay ISK62m, €371.445. The case is a part of a case that has been running since Baugur’s offices were raided in 2002. In the summer of 2008 he was sentenced to 3 month prison, also suspended, for fraud, in a case that also sprung from the raids in 2002. In its sentencing the Supreme Court reprimanded the Reykjavik County Court for giving Johannesson too much scope to delay the case. The sentence was more lenient, according to the judgement, because the criminal behaviour stems from tax returns in the years 1999-2003. The charges were not brought until 2008.

But this is not the only case that brings Johannesson to court these days. The Office of the Special Prosecutor has charged Johannesson and Glitnir managers for causing Glitnir fraudulent losses, as recounted earlier on Icelog. In another case the Glitnir Winding-up Board is suing Johannesson and eight others – Glitnir managers and board members – for a fraudulent lending of ISK15bn to companies related to Johannesson. In both these cases Johannesson is effectively being charged and sued as a shadow director – as someone who was not legally a director but who acted like one who by putting pressure on managers and board caused these huge losses, stemming from loans issued to companies related to Johannesson and his close business partners.

The Glitnir case is related to a case the WuB tried to bring to a New York court but failed. This case is now being fought in Iceland but the New York exercise did probably help the WuB gather valuable information, which will benefits its case in Reykjavik. Johannesson’s defender claimed in court today that his client had no powers to manipulate the Glitnir management. Johannesson emphasises his innocence in both cases.

Johannesson has lately made some investments in the UK, on behalf of his independently wealthy wife. His investment in Muddy Boots, a very successful fine food start-up, made headlines recently. News of his investment indicated he would be on the board of Muddy Boots. It is unclear if this sentencing will affect these plans but with this sentencing he can’t sit on boards of Icelandic companies in the near future. After the sentencing in 2008 he was forced to step down from the board of some UK companies where he had been a board member.

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The Office of the Special Prosecutor in Iceland has charged Jon Asgeir Johannesson former CEO of Baugur and a major UK retail investor for his role in a Glitnir loan of ISK6bn (now £40m) in summer 2008. Johannesson is charged for exerting undue influence on Glitnir CEO Larus Welding and Bjarni Johannesson who was in charge of connection to Johannesson’s companies. A third Glitnir employee, Magnus Arnar Arngrimsson is also being charged. The charges related to the three Glitnir employee regard breach of fiduciary duty.

This case, called the Aurum case because the collaterals for the loan were shares in Aurum, formerly Goldsmith, the UK jewelry chain. This was essentially a series of transactions, which in the end brought ISK1bn in cash onto Johannesson’s account with Glitnir and the same amount to his business partner Palmi Haraldsson, who is not charged. According to the charges, the purpose of the loan was to find a way to settle Johannesson’s overdraft with Glitnir, in addition to cash and to enable Haraldsson to get money as well. The OSP is asking for the maximum sentence, a six year prison. Johannesson denies all wrong-doing. In the charges it is stated that both Johannesson and Welding live in the UK.

The tendency here, according to the OSP, is the same as in so many other questionable loans to the major shareholders: the loans were very favorable to the borrower and equally unfavorable to the lender.

The Aurum case has long been known to the Icelandic public, ia from the SIC report and from loan agreements, which had landed in the public domain. Earlier Icelogs on this case can be found here. A link to the charges, in Icelandic, is here. Oral hearing is scheduled to start January 7.

In addition to this case, the OSP has brought charges against Kaupthing managers in the so-called al Thani case. So far, Landsbanki managers or major shareholders of Landsbanki have not been charged.

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