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SFO drops its investigation of Kaupthing – the OSP Kaupthing case in Iceland

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The final nail in the Kaupthing coffin at the SFO: the investigation has been closed, due to “lack of evidence.” However, the SFO states in its press release today that the cooperation with the Icelandic Special Prosecutor will continue.

This has been a long and sorry saga after the fateful SFO house searches in March last year. Although several ex-managers of Kaupthing were investigated the main media focus here in the UK was on the Tchenguiz brothers, Vincent and Robert. The investigation into Vincent’s case was dropped this summer, with a full apology from the SFO.

Now, the whole investigation is dropped but no apology. This means that, amongst others, Robert Tchenguiz and ex-chairman of the Kaupthing board are no longer being investigated.

In Iceland, things are going better for the investigators. The Office of the Special Prosecutor has, ia, charged Kaupthing’s second largest shareholder Olafur Olafsson and the Kaupthing managers Sigurdur Einarsson, Hreidar Mar Sigurdsson and Magnus Gudmundsson in connection to loans to Sheikh Mohammad al Thani – loans that were used to buy a 5.1% share in Kaupthing in September 2001. It’s alleged that since Kaupthing financed the deal but let it be known that the Sheikh had much faith in the bank, it was an alleged case of market manipulation and also alleged breach of fiduciary duty as, according to the charges, the managers did not secure a repayment of the loan. The Sheikh has not repaid the loan and is being sued by the Kaupthing Winding-up board for non-repayment.

The interesting difference between the Icelandic OSP charges and the SFO approach is that the OSP charges relate to alleged misconduct of those in charge of the bank, aided by the shareholder. The failed SFO investigation was aimed at alleged suspect customer relationship. It’s much harder to prove that a client who got a good deal was breaking the law than to prove misconduct in issuing loans.

The al Thani case is now starting its journey through the Icelandic court system. In a report (in Icelandic) that Sigurdsson has lodged with the court he refutes all wrong-doing. He states that yes, there might potentially have been a criminal action relating to the al Thani loan – but the possible criminal action related to deeds done by two other employees – Eggert Hilmarsson and Halldor Bjarkar Ludviksson – whereas everything he himself did was complete in accordance with rules and regulation. – The interesting angle here is that Sigurdsson is pointing finger at two colleagues who have cooperated with the Icelandic investigation.

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Written by Sigrún Davídsdóttir

October 15th, 2012 at 6:34 pm

Posted in Iceland

Further SFO retreat re Robert Tchenguiz

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The news is out over the weekend that the Serious Fraud Office has withdrawn bail conditions regarding Robert Tchenguiz, Kaupthing’s largest borrower who at the collapse of the bank owed the bank over €2bn. The FT (subscription needed) quotes a lawyer who thinks this might mean that no further action will follow. However, it’s difficult to make sense of the SFO actions if, after losing judicial review to Robert and declaring a continued investigation against Robert, the SFO would now be retreating on that. My understanding is that bail is deemed to be of no practical use. That  view is taken up in the Guardian coverage of this latest move in the SFO Tchenguiz saga.

In Iceland the Office of the Special Prosecutor is prosecuting Kaupthing managers regarding the Qatari investment of 5.1% in Kaupthing in September 2008 (which has an interesting parallel in the Qatari investment in Barclays in 2008; another story for another day). It is also understood that the OSP could well sue Kaupthing managers for other actions.

The main difference between what the SFO is doing and the OSP is that OSP has, so far, only charged bank managers, not the big borrowers.

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Written by Sigrún Davídsdóttir

September 16th, 2012 at 9:36 pm

Posted in Iceland

The Tchenguiz brothers win their legal challenge against the SFO

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The High Court (Sir John Thomas, President of the Queen’s Bench Division, and Mr Justice Silber) has today declared that search warrants issued to the Serious Fraud Office were unlawful as they were obtained by misrepresentation and non-disclosure of the judge. – This is the beginning of the Summary of the judgment July 31 regarding the judicial review sought by Vincent and Robert Tchenguiz.

The story is that when the SFO presented their reasons in March last year for requesting a permission for house searches at the home and offices of the Tchenguiz brothers the SFO mispresented their material very badly. Ergo, the ruling is a heavy criticism of the SFO. I would also read the ruling as a criticism of judge Paul Worsley, who heard the SFO in March last year, although the two judges tread very lightly on that issue. But how could the SFO be so sloppy/bad/imprecice in its presentation? The issues the two judges differ on with the SFO are dealt with in para 122-124, quoted in extenso below. The judges add some sweetener to their bitter pill to the SFO: at the end of the judgment they  go to some length in excusing/explaining SFO’s mistake by emphasising the SFO’s lack of human and financial resources.

Regarding Robert and his company R20 Lth, the Court concluded (comments in[] are mine; the “para” refers to paragraphs in the ruling):

We regret to conclude that the Information did not properly present the transactions where criminality was suspected in the context of the financial markets in which they were undertaken. The background was straightforward, but it was never explained. The case that was made on the specific transactions was not in the respects we have identified accurately set out; it failed in the respects we have identified fairly to draw to the attention of the judge the points that weighed against the granting of the warrants.” (para 170)

The failure to set out the background, lack of clarity in the presentation in the Information and in the oral evidence, the errors made and the failure to put the matters that weighed against the granting of the warrant have been set out by us in detail. At the hearing before the judge, the oral evidence given at the hearing was both unfair and inaccurate. The tone of that evidence was unjustified. We have no doubt that, if what was in the Information [submitted by the SFO to the judge in March 2011, when the permission for the searches was sought] had been presented in such a way that the background was properly explained, the errors were corrected and the matters that weighed against the grant of the warrant had been drawn to the judge’s attention, it would have made a real difference and he would not have granted the warrants. This is very far from the case where the failures only might have made a difference; they plainly did, as the warrants would not have been granted.” (para 175)

“… it is apparent from what we have set out after a detailed examination of the materials over three days in court and a study thereafter of the evidence presented to us that a case of reasonable suspicion might have been advanced and presented by the SFO to the judge, at least in relation to the making of the Oscatello loan facility and associated arrangements (see paragraph 124 above) and the Money Market loans (see paragraph 136). This would have been a task that did not require corrections or additions by way of disclosure, but it would have required starting again and putting the presentation in a coherent, fair and analytical manner. Whether there was or is such a case of reasonable suspicion, if a case had been made in that way, would then have been for the judge to determine.

Although we consider such a case might have been made, we cannot accept the submission that it would be just to refuse to quash the decision of the judge. What we would be doing would be permitting the SFO in effect to justify what it had done by adopting a proper and analytical approach in this court and doing what it had manifestly failed to do when it went to Judge Worsley.” (paras 176‐ 177)

This is yet another victory for Vincent against the SFO – the SFO has already dropped all investigations into his affairs with Kaupthing – and completes his vindication in his dealings with the SFO. In a press release yesterday, Vincent said: “I will be seeking damages from the SFO – and from any other parties who contributed to the Court being misled. My claims will reflect the substantial personal and business costs and losses that have directly resulted from the actions of these parties.” The comment leaves an open question as to who else, beside the SFO Vincent will sue. The fact that Grant Thornton, an international advisory firm, played a large part in this whole saga might indicate who Vincent has in mind – but it remains to be seen.

Though Robert, as well as his brother, won his legal challenge against the SFO he has less to celebrate. The SFO has reiterated that its investigation into his relationship with Kaupthing is still ongoing. However, Robert has stated the following: “I now intend to pursue my claim in respect of damages I have suffered as a result of the SFO’s (Serious Fraud Office’s) illegal actions.” He also intends to bring proceedings against the SFO in respect to his arrest.

The ruling itself offers some insight into the mistakes the SFO made in handling this investigation, as well as the issues being investigated.

First some facts regarding Kaupthing: “On 8/9 October 2008, Kaupthing collapsed. According to the Information presented by the SFO it had €8bn in debts, 25% of which was owed by companies within the TDT [Tchenguiz Discretionary Trust; related to Robert Tchenguiz] and 12% by Exista Hf [owned by the Icelandic brothers Agust and Lydur Gudmundsson, with Robert as a board member the last few years], its largest shareholder.” – Robert Tchenguiz owed Kaupthing £1.6bn when the bank collapsed. The fact that Kaupthing’s largest shareholders were also its largest borrowers follows a familiar pattern from the other two Icelandic banks, Landsbanki and Glitnir.

As to the allegations made by the SFO related to Robert and the TDT:

105. As we have set out, five specific transactions were relied on  as showing suspected criminality.  Listed in chronological order, they were:

i)              The Oscatello loan facility and the increases in lending under it

ii)              Money Market loans [in total, Kaupthing made 36 money market loans to Oscatello, in total £345m; £143 million was repaid, but £156m was outstanding at the time of the collapse of Kaupthing. Explained in para 132 and following.]

iii)              Pumpster [regarding Kaupthing loans to a company owned by TDT; the SFO alleges these loans concealed bad debt to Kaupthing at a time when Oscatello was insolvent. Explained para 138 and onwards.]

iv)              Thorson [a TDT company; Kaupthing transferred almost £62m to Thorson’s account with Kaupthing Luxembourg 3 October 2008; para 151.]

v)              Project Longboat and the PIK notes [transactions 13 November 208 related to Oscatello; para 157]

Here are some highlights from the judgment. The following refers to the allegation, see v) above, but as seen here these allegations were also a matter between the Kaupthing resolution committee and TDT:

After the collapse of Kaupthing, TDT companies entered into a series of transactions on 13 November 2008 through which the security previously pledged to Kaupthing for loans to Oscatello [structure owned by TDT with Kaupthing as a co-investor] were replaced by “Payment in Kind Notes”.  Immediately after the transaction had been effected, the lawyers acting for TDT notified the Resolution Committee of Kaupthing that the transactions had taken place.  The clear intention and effect of these transactions were to remove the assets, including interests in Somerfield Ltd, used as security for the loans by Kaupthing, to companies outside the Oscatello structure to prevent the liquidators of Kaupthing taking control of those assets and selling them in the then market conditions. [This is how the SFO presented these transfers.]

30. On 5 December 2008, the Resolution Committee began proceedings in the British Virgin Islands in respect of these transactions against Investec and the Oscatello companies.  The pleadings signed by Mr Steinfeld QC alleged fraud. Grant Thornton prepared a report on this transaction on 14 January 2009.  An interim application for the appointment of receivers was made to the courts of the BVI which was vigorously contested on grounds set out in an affidavit sworn by an officer of Investec.  The proceedings were subsequently settled for £137m in June 2010; we were told by Lord Macdonald QC who appeared for RT and  R20 [company belonging to Robert’s business sphere] that this payment represented the proceeds of the sale of the interests in Somerfield Ltd.  All allegations of fraud were withdrawn as part of the settlement.

On how the SFO presented its case to Judge Worsley in March last year:

After short submissions from the in-house advocate the judge authorised the issue of the warrants.  Nothing was asked or said as to whether the judge had been told matters that weighed against issuing the warrants. 

51. The judge gave no reasons for his decision. [This is ia what I take to be a criticism of the Judge.]  This is a matter of complaint which we consider as the second issue at paragraphs 202 and following.

The SFO has dropped its investigation not only into Vincent Tchenguiz but also into Kaupthing Singer & Friedlander manager Armann Thorvaldsson and another key Kaupthing employee Gudni Adalsteinsson. Former chairman Sigurdur Einarsson and CEO Hreidar Mar Sigurdsson are still under investigation. The following is an interesting indication of matters being investigated:

There was no allegation against RT or VT that they had tampered with or destroyed documents, though such an allegation was made in the Information against others.

The SFO greatly emphasised that Kaupthing kept on lending to Oscatello all through 2008 even if it seemed “under water,” as stated in an email from Gudni Adalsteinsson. However, the two judges felt this was a one-sided presentation – this is the core of their grave criticism of SFO’s presentation. The two judges take a different stance on the loans and that’s what they are pointing out here:

122. It was obvious that a forced liquidation of Oscatello at the time of the 19 December 2007 arrangements could, because of the nature of the security held by Kaupthing, in all probability have seriously damaged Kaupthing.  It is not uncommon that a bank exposed to a company with a balance sheet of the type exhibited by Oscatello might have therefore a commercial rationale for lending more money in those circumstances, even if the company was  insolvent; the bank would hope that the market would improve and that the loss that would result from a decision to terminate the lending and consequent insolvency would be averted.

123. In our judgment, the failure to set out these facts and to explain these matters in the Information and oral evidence, was a grave and material omission which resulted in the judge not being given a fair presentation of the key issue in the case – was this a case where Kaupthing made  a wrong commercial decision in December 2007 by continuing to lend to the TDT companies in the hope that their exposure would be reduced by an improvement in the market or was this dishonest and collusive lending?

124. The failure to explain that issue in these relatively simple terms is entirely consistent with the overall presentation  to the judge which did not  set the issues out in an analytical manner.  It is with deep regret that we have reached this conclusion on what was done. Properly understood and explained, the materials which we have had an opportunity of examining during a three-day hearing before us and thereafter, might have provided grounds for reasonable suspicion on the basis of the matters to which we have referred at paragraph 118 and the matter to which we refer in paragraph 126.

It would then have been for the judge to be personally satisfied that it did.  However that was not the way in which the matter was put before the judge.  He was given an account that was not only wholly inadequate, but unfair.

This is how the judges view the case – the judicial review was not about the merits of the investigation but about procedures in obtaining permission for house searches etc. Below, the judges spell this out quite clearly:

176. However, it is apparent from what we have set out after a detailed examination of the materials over three days in court and a study thereafter of the evidence presented to us that a case of reasonable suspicion might have been advanced and presented by the SFO to the judge, at least in relation to the making of the Oscatello loan facility and associated arrangements (see paragraph 124 above) and the Money Market loans (see paragraph 136). This would  have been a task that did  not require corrections or additions by way of disclosure, but it would have required starting again and putting the presentation in a coherent, fair and analytical manner.  Whether there was or is such a case of reasonable suspicion, if a case had been made in that way, would then have been for the judge to determine.

177. Although we consider such a case might  have been made, we cannot accept the submission that it would be just to refuse to quash the decision of the judge.  What we would be doing would be permitting the SFO in effect to justify what it had done by adopting a proper and analytical approach  in this court and doing what it had manifestly failed to do when it went to Judge Worsley.

178. In any event, as Lord Macdonald correctly submitted as we have set out at paragraph 76, the merits of the investigation and continuing the investigation are not an issue in these proceedings. It is very important that proceedings of this kind are confined to the issues that strictly arise and are not utilised as a means of indirectly seeking the court’s view on an investigation.  The question whether matters should be investigated is under our constitution the responsibility of the investigating and prosecuting authorities; the role of the courts is strictly limited.  There would be highly undesirable consequences if it were otherwise.

As the SFO has stated, its investigation regarding Kaupthing continues.

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Written by Sigrún Davídsdóttir

August 2nd, 2012 at 12:13 pm

Posted in Iceland

SFO and the Tchenguiz brothers: Vincent’s case dropped – updated

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For those who hope that the authorities know what they are doing when it comes to investigating financial fraud it’s been an excruciating experience to follow the SFO investigation into the Tchenguiz brothers’ relationship with Kaupthing. Regarding Vincent, all went wrong at the SFO that could go wrong. The SFO must be reviewing it all in detail, ia how documents already with the SFO, showing that Vincent wasn’t fooling Kaupthing with his collaterals, came to be ignored by the SFO – Kaupthing did indeed know the bank couldn’t enforce the collateral to achieve the full value of the collateral on a short term basis.

It’s crystal clear that the SFO went about all this completely in the wrong way, in Vincent’s case. After much confusion the SFO is now satisfied there is nothing there to investigate. What remains is Robert’s relationship with Kaupthing, still under investigation. His loans went from just over a billion euros to €2.2bn in one year – the fatal year when no banks were lending, ie from end of 2007 until the collapse of the bank in Oct. 2008.

As to the Kaupthing managers, the question is why the bank was willing to lend Robert Tchenguiz, as so many of its main clients, against no or poor collaterals and, time and again, to expose the bank to excessive risk whereas the favoured clients were completely, or mostly, sheltered from any risk. Some would say that such lending is a breach of a manager’s duty, on behalf of a bank’s shareholders, to take into account the interest of the bank – and not just the interest of a few favoured clients, who in some cases also were among the bank’s shareholders.

These stories are all laid bare in the Icelandic SIC report, cases involving this type of lending are being pursued by the Office of the Special Prosecutor in Iceland (now with one case ended and two bankers sent to prison for 4 1/2) years. Not only Kaupthing but also Landsbanki operated in this way – both banks operated in the UK: these are not Icelandic stories, except that the banks were Icelandic – these are international stories.

And yet and yet, other countries such as the UK – not to mention Luxembourg where the core of the shadiest Icelandic operations were carried out – seem to be utterly complacent. That said, not much is being done to investigate lending by the three bust Irish banks and the Spanish cajas – but that’s another story for another day.

*See an earlier Icelog on the Tchenguiz judicial review, SFO, Kaupthing and Tchenguiz and here, for further logs on this topic.

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Written by Sigrún Davídsdóttir

June 19th, 2012 at 10:46 am

Posted in Iceland

SFO and the Tcenguiz judicial review: day 1

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Today, the defence teams of Vincent and Robert Tchenguiz spoke in Court, in order to demonstrate that the Serious Fraud Office had been wholly wrong in its actions against the two brothers. At the end of the day, Justice Sir John Thomas summed up the difference between the cases of the two brothers: Vincent Tchenguiz claims there never was a case against him; Robert Tchenguiz claims that the SFO’s portrayal of him as someone who wouldn’t respond honestly to an order to hand over documents, necessitating an arrest and house searches, was utterly wrong and unfounded.

According to the skeleton of the Vincent Tchenguiz defence team he seeks a mandatory order quashing the search warrant; a declaration that the entries into his premises, searches and seizures were unlawful; a mandatory order to remove all those at the SFO who were involved in the action or dealt with material from it; and lastly but not least: an assessment of dammages and indemnity costs.

According to the skeleton of Robert Tchenguiz defence team Robert claims that his arrest was unlawful, bail was not necessary or proportionate, search warrants were unlawfully applied for and issued and there was failure to give any or adequate reasons, which renders the warrants unlawful. His defence points out that the Director of the SFO has now conceded that search warrants were unlawfully applied for and issued.

The brothers had made it known to certain media that much interesting stuff would be aired in court today. That was hardly the case. The weirdest news have been leaks in the media prior to the trial: first, in the Daily Telegraph, that the SFO had offered Robert to close the case against a £50m donation to a charity. The other, in FT today, that the SFO had contemplated to use undercover agents at Annabel’s, the nightclub frequented by the brothers. Both stories indicate that SFO was desperate and clueless. In order to understand these rather unflattering stories, it’s interesting to reflect on whom these leaks benefit, the media they appear in and the former reporting of these papers on the brothers.

That said, the SFO has things to answer for on mistakes made. In Court today, a note was filed on behalf of the Director of the SFO, referring to Vincent’s claim and certain mistakes made. In the note the SFO’s ongoing investigation of Robert is mentioned “and the nature of the relationship between RT and various senior executives at Kaupthing.”

For those familiar with this relationship it raises many questions. Hopefully, the SFO will be able to continue its investigation and find the answers to these questions. Whether Vincent just got unfortunately involved in this relationship, because he put up a collateral for his brother in Robert’s hour or need, or if there is a further untold story about Vincent and Kaupthing remains to be seen. The fact that the SFO chose to investigate them both, and not just Robert, indicates a certain suspicion, founded or not.

Robert wasn’t seen in court today. Vincent sat with Lisa, his sister, and some employees, and listened intently all day. The case continues tomorrow.

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Written by Sigrún Davídsdóttir

May 22nd, 2012 at 5:37 pm

Posted in Iceland

SFO and the Tchenguiz brothers

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In an FT front page article today, the story is of an SFO lawyer who in a report warned the SFO not to pursue a case against the Tchenguiz brothers. One of the reasons: “It was an Icelandic bank, with many of the suspects in the case being Icelandic nationals, allegedly committing fraud against Icelandic institutions, taxpayers and authorities,” according to a person who has seen the report.

Correct, Kaupthing was an Icelandic bank – but it had a subsidiary here in the UK, these loans were made here and in Luxembourg, not in Iceland. This happened on the SFO’s turf, with clients based here and most of the money spent here. Surely, a clear case for the SFO to investigate. Otherwise, there wouldn’t be anyone to investigate these matters. Otherwise, the UK is a free-for-all foreign financiers to get involved with UK citizens with good offers.

Most of the cases pursued by the SFO are against some previously unknown crooks who have managed to swindle lots of money. It’s not every day that the SFO lawyers meet someone like Lord Goldsmith in court and high-flyers like the Tchenguiz brothers. This might test SFO’s confidence but it hardly tests the legitimacy of pursuing a case involving a UK subsidiary of a foreign company.

At the heart of the case are loans that not everyone could get and the relationship Kaupthing had with its favoured clients and – in the case of Robert Tchenguiz who sat on the board of Exista – the largest shareholder of the bank.

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Written by Sigrún Davídsdóttir

May 22nd, 2012 at 8:30 am

Posted in Iceland

A reputation buy-back for £50m from the SFO?

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According to The Daily Telegraph, Kaupthing-clients Robert and Vincent Tchenguiz were at some point negotiating with the Serious Fraud Office if they could get out of the SFO investigating claw by paying £50m to charity. Unsurprisingly, the SFO isn’t commenting nor are the Tchenguiz brothers.

According to the Telegraph: “On the eve of Robert and his brother Vincent Tchenguiz’s legal challenge against their 2011 arrests and searches of their properties, details of secret negotiations between the brothers and the SFO have emerged. It is alleged the SFO offered to announce it had dropped its investigation if Robert donated £50m to charity. The negotiations broke down after the two sides could not agree on details including the whether payments would remain confidential.”

It’s not unlikely that the brothers would gladly pay their way out of the investigation. As to the secrecy, it’s likely that it would be in their interest to keep any such deal secret. If the creditors think the brothers have 50m handy to pay the SFO the creditors might have a thing or two to say.

But is it likely that the SFO was really willing to discuss this? Maybe I’m just being naïve but it beggars belief they really did accept to discuss it. True, the SFO is in deep trouble with the house searches and arresting of Vincent Tchenguiz. However, they are pressing ahead and seem interested in pursuing the case, in spite of the brothers’ judicial review coming up this Tuesday.

Another angle to this story: has the SFO ever accepted to call off an investigation against a humongous donation to charity? A quick search on the SFO website doesn’t indicate they ever did. Which isn’t to say it’s never happened but hardly in such a prominent case as the Tchenguiz case. And hardly for such a sum.

There are also some funny angles to this supposition. Why should the brothers pay if they are innocent? And why should the SFO accept such an offer if they think they have a case against the brothers? And if they don’t have a case the brothers will come out of it squeaky clean – though their defense will cost a bit. They truly have a formidable defense team, the best money can buy. For Vincent there is former Attorney-General – and as such the head of the SFO at the time – Lord Goldsmith, QC. For Robert, a former Director of Public Prosecution Lord Macdonald of River Glaven, QC.

For those interested in Kaupthing and its favoured clients, the coming week will be a very interesting one.

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Written by Sigrún Davídsdóttir

May 20th, 2012 at 9:50 am

Posted in Iceland

Tchenguiz, Kaupthing and the SFO

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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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Written by Sigrún Davídsdóttir

May 3rd, 2012 at 12:02 am

Posted in Iceland

SFO wrestles with the Tchenguiz case

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Serious Fraud Office seems to have committed a major blunder in the handling of documents when Vincent Tchenguiz, together with his brother Robert, was arrested in March last year, together with Sigurdur Einarsson, ex-chairman of Kaupthing’s board and six others. The arrest was connected to an SFO investigation into the relationship between the Tchenguiz brothers and Kaupthing. According to the FT, a High Court judge has scolded the SFO for “sheer incompetence:” the SFO admits is has “no clear record” of the information it used to obtain search warrant. True, it seems pretty gross that the SFO can’t document the information used to obtain the search warrant – but this dispute doesn’t touch the substance of the charges, only the way SFO documented their case for making the arrests. And it seems only to relate to the warrant on Vincent Tchenguiz, not the others.

It is clear from the SIC report that Robert Tchenguiz was both Kaupthing’s largest borrower, with his loans of €2bn, and had stakes in the bank’s largest shareholder, Exista. He was on the board of Exista, whose founders and owners were Lydur and Agust Gudmundsson. This relationship – being a major shareholder and the largest borrower or among the largest borrowers – is the normal one in the most abnormal loans issued by the Icelandic banks: loans that ia broke the banks’ rules on legal limits exposure, had no or worthless collaterals, weren’t subjected to margin calls or paid by issuing new loans etc.

Vincent’s relationship to Kaupthing was far less extensive. He had a loan of €208m, which he seems to have taken/been offered as he put up an extra collateral for his brother. In court documents related to Vincent’s legal wrangle with Kaupthing over this collateral – a whole saga in itself, ended late last year with an agreement between Kaupthing and Tchenguiz’ entities – it’s clear that Vincent was of the understanding that Kaupthing wouldn’t claim the collateral.

Further, Vincent Tchenguiz also claims that Kaupthing knew the collateral couldn’t be claimed because of cross-default triggered if the assets changed hands. The value of an unenforceable collateral raises some intriguing questions, ia for the bank’s auditors since such a loan seems to be worth not much. Now, this is only Vincent’s side of the story. The Kaupthing managers haven’t told their story of this loan – nor of any of the loans, so abnormally favourable to the clients and abnormally unfavourable for the bank.

It seems pretty clear that the Kaupthing loans – as is true for the loans of Landsbanki and Glitnir to favoured clients – are far from normal. The question is why the banks decided these loans were a good idea for the bank. The Tchenguiz brothers have claimed that Kaupthing duped them into investing in the bank, that they didn’t know the bank was running a scheme, which could be seen as a market manipulation.

All these favoured clients, including the Tchenguiz brothers, are experienced businessmen. Same with Kevin Stanford, mentioned on an earlier Icelog: experienced business men must have known that the loans they were offered weren’t quite the run-of-the-mill loans any bank would offer. They would also know that borrowing from a bank doesn’t necessarily mean that the bank, as a side offer, peddles a loan to buy some of the bank’s shares. It’s normally not necessary to be a shareholder in order to borrow from a bank. Claiming to be a victim of Kaupthing managers’ duplicity makes these victims seem more than ordinarily naive.

Some of the favoured clients of the Icelandic banks have claimed that the offers were too good to refuse. The SFO seems to be investigating what the real relationship was between Kaupthing and the Tchenguiz brothers. If the SFO suspicions are valid it is unfortunate that they could possibly hinge on technical issues. Remains to be seen.

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Written by Sigrún Davídsdóttir

April 5th, 2012 at 4:29 am

Posted in Iceland

SFO and OSP: further searches in Luxembourg

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According to a press release from the SFO there have been house searches in Luxembourg today, on request from both the Serious Fraud Office and the Office of the Special Prosecutor in Iceland. The operation has involved 70 investigator, from the Luxembourg Police, SFO and the OSP.

The searches per se are interesting – and also the fact that this is a joint operation, involving the three countries. It remains to be seen if the Luxembourg authorities will now be opening up an investigation of its own. However, this doesn’t mean that the investigations in Iceland and the UK are being merged. It’s still separate investigations but forces are combined when practical.

It seems that the SFO is conducting house searches at Consolium, where some ex-Kaupthing managers run a consultancy. On the Consolium team there are the following: Hreidar Mar Sigurdsson, Ingolfur Helgason, Steingrimur Karason, Gudmundur Thor Gunnarsson (arrested in Iceland in connection to the SFO searches recently) and Kristinn Eiriksson.  The OSP is focusing further on Skuli Thorvaldsson and searched Banque Havilland.

In february last year the OSP did house searches in Luxembourg in an operation that was, at the time, one of the largest of its kind in Luxembourg. Some 19 parties did at the time protest the handing over of the documents and it took the OSP the best part of a year to get the documents, after the 19 took their case to an appeal court. However, since then the rules in Luxembourg have been changed and it’s no longer possible to appeal. It means that this time the process to get the documents could take no more than a few months, not a year like last time.

Update: here is how the Guardian reported on the searches.

Further update: the searches were at two homes and three work places. The homes were those of Hreidar Mar Sigurdsson ex-CEO of Kaupthing and Magnus Gudmundsson manager of Kaupthing Luxembourg. The three work places were Havilland, Consolium and the third place, so far unidentified.

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Written by Sigrún Davídsdóttir

March 29th, 2011 at 12:12 pm

Posted in Iceland