Sigrún Davíðsdóttir's Icelog

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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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

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Landsbanki promised “the most comprehensive protection possible” according to the bank’s documentation. That has proved to be very far from the truth. – As reported earlier on Icelog, a group of Landsbanki Luxembourg clients claim they are wrongfully being targeted by the bank’s administrator Mme Yvette Hamilius to pay back dubious “equity release” loans – and in some cases investments, which the bank made without the clients’ knowledge and/or acceptance.

The Icelandic resolution committees for the three Icelandic banks have used time and resources to investigate alleged fraud in the Icelandic banks. The same doesn’t seem to be done in Luxembourg. Icelog has heard evidence from Landsbanki Luxembourg clients, which give good ground to suspect that Landsbanki:

1 Bought the bank’s own bonds, on behalf of clients, without clients’ acceptance, shortly before the bank failed (and at a time when it was most likely already insolvent)

2 Money was taken from clients’ accounts without proper consent for trading

3 MiFID rules were neither applied correctly nor were the clients made aware of these rules and their implications for the clients.

As far as is known, the Landsbanki Luxembourg administrator hasn’t done anything to investigate – or have the proper Luxembourg authorities investigate – if this was the case or not. If it is indeed the case that Landsbanki Luxembourg accessed and used clients funds in an inappropriate way it would be most interesting to know who ordered it. Was this a concerted action? And who ordered this allegedly inappropriate use.

In spite of these alleged irregularities, Mme Hamilius seems to treat the clients as if nothing was wrong with the loans and is trying to recover them, going after people’s homes when everything else fails. Most of the clients are elderly and the administrator’s actions and her insufficient communication have put these clients under severe stress and duress by the administrator. An administrator’s business if of course recovery – but an administrator also has the duty to report eventual irregularities and to maintain a reasonable level of communications with those hit by the administrator’s actions.

There are already some legal cases related to Landsbanki clients in France and Spain traversing through court systems there. One couple in Spain have already won their case: their home is now debt free and Landsbanki has to pay them €23.000 in compensation. In spite of this, the Luxembourg administrator carries on as if nothing was happening.

Lately, the Landsbanki Luxembourg clients have organised themselves as “Landsbanki Victims Action Group” to put some pressure on Mme Hamilius. They now seem to be making some headway. After issuing a press release on May 7, where they questioned the buisness morale in Luxembourg the local media reported on the Action Group, its plights and a case in France, involving Mme Hamilius. She was interviewed in Paper Jam, a Luxembourg newspaper. Some of her answers there don’t quite fit the reality, seen from the perspective of the clients. The interview was no doubt a reaction to a media action by the clients’ pressure group, reported on in Luxembourg.

But the absolutely most remarkable part of this saga is that on May 8, Robert Biever Procureur Général d’Etat – nothing less than the Luxembourg State Prosecutor – issued a press release, as an answer to the Action Group. It is jaw-droppingly remarkable that a State Prosecutor sees it as a part of his remit to answer a press release that’s pointed against the administrator of a private company. One might think that a State Prosecutor would be unable to comment on a case, which he has neither investigated nor indeed been involved with in any way.

In this surprising move, the Prosecutor puts forth the following claim (in my rough translation; my underlining):

“Following a criminal proceeding in France against Landsbanki Luxembourg November 24 2011 for fraud by the Parisian Justice Van Ruymbeke and without the liquidator accepting the merits of the claims, she offered the borrowers an extremely favourable settlement whereby the borrowers will only reimburse that part of the loans which they received for their personal use, excluding funds used for investments. A considerable number of debtors have now accepted the settlement and the repayment is now being finalised. However, a small number of borrowers are trying with all means to escape their obligations. These are the same people who sent out a press releases on May 7 2012.”*

Apparently, Biever takes such an extreme interest in the case that this civil servant can, the day after the Action Group’s press release (and on the same day it appeared in the Luxembourg media) answer with authority and full certainty. The Prosecutor’s statements raise some questions. How can the State Prosecutor say this is an “extremely favourable settlement”? What makes it favourable? According to my information, it’s indeed not the case that most have paid. How does the Prosecutor know how many have accepted the administrator’s offer? Where did the Prosecutor get that information? If that information came from the administrator, did the Prosecutor verify the numbers?

Since the high office of the Luxembourg State Prosecutor takes such an interest in this case there is perhaps hope that Biever’s curiosity is now sufficiently aroused for him to take a further look at what really happened in Landsbanki Luxembourg in terms of unsound business practice and improper use of funds. I can’t think of any European country where a State Prosecutor would wade into a case of this kind to make a comment. If his comment is made to come to the rescue of the administrator, the functioning of the Luxembourg justice system is light years from the justice system in its neighbouring countries.

Luxembourg makes a good living by being a financial centre. No doubt, its authorities want to emphasis, just like Mme Hamilius does in her interview, that in the little country investment is safe. International creditors should rest assured that no matter what, they will get their money back. This credo seems so important that the State Prosecutor sees it as his role to back up a bank administrator under pressure.

There is indeed a lot to defend in Luxembourg. Monday night (May 14) the BBC programme, Panorama, will “reveal how major UK-based firms cut secret tax deals with authorities in Luxembourg to avoid paying corporation tax in Britain.”  – Possibly another worthy case for the Luxembourg State Prosecutor.

*“Suite à l’introduction d’une procédure pénale en France contre Landsbanki Luxembourg et à sa mise en examen le 24 novembre 2011 pour escroquerie par le juge d’instruction parisien Van Ruymbeke, le liquidateur sans pour autant reconnaître le bien fondé des poursuites, a proposé aux emprunteurs des transactions extrêmement favorables aux termes desquelles ceux-ci ne remboursent plus que le capital à eux remis pour leur usage personnel, à l’exclusion des fonds destinés aux investissements. Bon nombre de débiteurs ont d’ailleurs déjà accepté cette proposition et les transactions sont en cours de formalisation. Toutefois un nombre infime d’emprunteurs s’oppose à tout remboursement des fonds reçus et essaye de se soustraire à ses obligations par tous moyens. Ce sont ces mêmes personnes qui sont à l’origine du communiqué de presse du 7 mai 2012.”

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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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As could be expected, there has been hefty debate in Iceland following the trial of ex-PM Geir Haarde. Haarde and many others from his party, the Independence Party, say the trial was a game of politics and have accused the High Court judges of having succumbed to political pressure. A former High Court judge says these allegations are preposterous. Four of the five High Court judges who were on the case ruled in favour of sentencing Haarde, with no punishment, for being in breach of the Constitution. One judge was against.

The trial is part of a process that was set in motion after the collapse of the Icelandic banks in October 2008 to clarify what had happened and how. The SIC report pointed at the role of politicians – but in the end, the Icelandic Althing voted on sending only Haarde on trial. Most people thought that former Minister of Finance Arni Matthiesen, former Minister of Banking Bjorgvin Sigurdsson and former Minister of Foreign Affairs and leader of the Social Democrats (in coalition with the Independence Party at the time) should also have been put on trial. Quite surprisingly, some MPs changed that course of events and in the end only Haarde was charged.

The ruling on Monday made news all over the world. This was also debated on al Jazeera’s Inside Story, where I was on the panel. One of the points I made was that although not saying that Iceland is a leading example in handling its crisis, there has at least been some efforts made to explain and clarify. Losing main banks – or saving them as others have done – is not a natural catastrophe like an earthquake or a volcanic eruption but happens slowly slowly due to human actions.

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Ex-PM Geir Haarde used harsh words to criticise the Court that found him guilty of one charge, but without a punishment. Claiming the verdict was “laughable, he compared Iceland to Ukraine and the trial of Julia Tymochenko now that he had been held victim to this process, which has taken two years.

There are various views in Iceland regarding the trial. But whatever the opinion, Althingi has at least attempted to place the political accountability for the crash. Ex-PM Gordon Brown can be grateful that the British Parliament isn’t doing anything as drastic to investigate who is to blame for the 5% of GDP that the UK bank collapse in October 2008 cost the UK. The same counts for the US and many European countries.

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Ex-PM Geir Haarde is acquitted by the Court convened by Althingi to judge his ministerial actions related to his actions during 2007 and 2008 – but the majority, 9 out of 15, rule that he broke law on ministerial duty to hold cabinet meetings on important issues. No punishment is given.

The charges were:

(1 A serious omission to fulfil the duties of a prime minister facing a serious danger)

(2 Omitting to take the initiative to do a comprehensive analysis of the risk faced by the state due to danger of a financial shock)*

3 Omitting to ensure that the work of a governmental consultative group on financial stability led to results

4 Omitting to guarantee that the size of the Icelandic banking system would be reduced

5 For not following up on moving the Landsbanki UK Icesave accounts into a subsidiary

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The ruling in the trial over former Prime Minister Geir Haarde is expected today at 2pm Icelandic time. This court can only be convened to judge ministers and can only be set in operation by the Icelandic Parliament, Althingi. The prosecutor in the case prosecutes on the behalf of Althingi. The judges are fifteen in total. Five of them are High Court judges and two with a judge competence – in this case, one is an academic in law and the other a County Court judge. The remaining eight are nominated by Althing.

This court is called “Landsdómur” in Icelandic and is, as so many things in the Icelandic constitution, based on a Danish example, “Rigsret,” last convened in 1995 in a case against Minister of Justice Erik Ninn-Hansen. In the Danish “Rigsret” there are 15 High Court judges and 15 MPs.

It’s the first time this court is convened Iceland.

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Staff of the Office of the Special Prosecutor is still at work in Luxembourg. According to Ruv, ten Luxembourg citizens have been questioned today. It would be interesting to know exactly what they are being questioned about but as reported earlier on Icelog, the topics relate to cases already known to be under investigation in Iceland.

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The Office of the Special Prosecutor is still conducting searches and collecting documents at the Landsbanki estate, Luxembourg, at 2-4 rue Beck. Searches are over at the two other places searched yesterday, April 17. It’s not clear how long the operation at Landsbanki will continue. When the premises of Kaupthing Luxembourg, at Banque Havilland, were searched last year the operation took about a week. It might be the same this time – most likely quite a pond of Landsbanki documents to fish in.

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