Sigrún Davíðsdóttir's Icelog

Magnus Gudmundsson ex-manager of Kaupthing Luxembourg and Banque Havilland was today released from custody but is forbidden to leave Iceland for the time being. Ingolfur Helgason, also an ex-Kaupthing manager, is now in custody since Tuesday. After an unsuccessful appeal to the High Court his week-long custody is now confirmed. Kaupthing’s ex-CEO Hreidar Mar Sigurdsson is still in custody. The fourth ex-Kauthing manager, Steingrimur Karason, living in Luxembourg, has also been questioned and is now forbidden to leave Iceland.

No news of ex-executive chairman Sigurdur Einarsson’s whereabouts. He had originally been asked to come for a hearing today but the date was then moved forward. When his former colleagues were put into custody he is said to have been unwilling to come since he couldn’t get any guarantees as to what would happen to him. Interpol has now issued an international arrest warranty for him.

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Although the Office of the Special Prosecutor had asked for the court rulings on the custodial sentences of two ex-Kaupthing managers not to be published the charges have been seeping into the Icelandic media through the day. The most extensive leak throws light on the charges against Magnus Gudmundsson ex-manager of Kaupthing Luxembourg and manager of Banque Havilland until his arrest last week. Most likely, it’s the defense team of those arrested who are responsible for the leaks that are clearly against the interest of the OSP.

The OSP is investigating five separate issues of what they call ‘extensive, calculated and unparalleled fraud.’ Gudmundsson appears to be at the centre but it’s highly likely that these issues involve at least Hreidar Mar Sigurdsson Kaupthing’s ex-CEO as well as Sigurdur Einarsson ex-executive chairman.

1 Gudmundsson is being investigated for involvement in dealings with the sole purpose of increasing the bank’s share value. This market manipulation is thought to have been going on from June 2005 until the demise of Kaupthing in October 2008.

It’s known that the Icelandic Financial Authorities, FME, has been investigating what is thought to be an extensive market manipulation in all the banks, not only Kaupthing.

The report of the Althingi Investigative Committee, published on April 12, also throws light on this issue. According to the report the bank bought 29% of the bank’s shares, issued on June 30 2008. The bank’s own trade in its shares amount to 60-75% of all trade on the Icelandic Stock Exchange from June to October 2008.

The OSP seems to suspect that managers and certain key employees responsible for the bank’s proprietary trading carried out these trades in a calculated way in order to influence the share price. It then became a major problem for the bank what to do with all the shares it bought. Gudmundsson seems to have played a key role in ‘parking’ the shares.

This throws light on the extensive loans that Kaupthing issued to key employees and many of its major shareholders and clients with the bank’s shares as collateral. It was almost a rule that the bank’s clients bought shares in addition to what other business they had with the bank, i.e. extra money was thrown into the loans for the purpose of buying Kaupthing shares. A foreign employer of the bank recently explained to me that he had been very surprised when he realized, some years ago, how the bank mildly insisted that any big client/borrower also bought shares in the bank – shares that the client wouldn’t need to pay for but that the bank financed with loans.

2 Issues related to alleged market manipulation and breach of fiduciary duty on behalf of Gudmundsson in relation to several companies. One of them is Holt Investment Ltd, a company related to Skuli Thorvaldsson, an Icelandic businessman living in Luxembourg and a major client of Kaupthing but otherwise not very visible. Thorvaldsson was the biggest borrower in Kaupthing Luxembourg. Another company is Desulo Trading Ltd, registered in Cyprus in October 2007. Desulo’s manager is an Icelandic businessman, Egill Agustsson. From mid 2008 until the collapse of Kaupthing Desulo Trading Ltd borrowed ISK13,4bn to buy shares in Kaupthing. Companies related to Kevin Stanford seem to be part of these suspicious trades. Loan agreements and other documents related to Kaupthing’s dealings with these companies are found to be in breach of the bank’s own rules, made without proper documentation and with insufficient collaterals. It’s alleged that it was clear to the managers that these loans were contrary to the interests of the bank as a listed company.

Most likely, the dealings with these companies are only the tip of the iceberg – it’s clear that this extensive ‘parking’ explains many otherwise inexplicable loans to key employees and trusted clients. The OSP mentions deals going back to 2005 – I’ve heard that signs of market manipulation can be traced as far back as to 2004.

3 It’s clear from earlier reports that Kaupthing, advised by Deutsche Bank, tried to influence its CDS spreads. The investigation focuses on two companies, Chesterfield United Inc. and Partridge Management Group, that Kaupthing fed a loan of €260m through four other companies, Trenvis Ltd., Holly Beach S.A., Charbon Capital Ltd and Harlow Equities S.A. in order to trade in the bank’s CDS and influence the spread. The companies were connected to the bank’s major shareholders/clients Olafur Olafsson and Skuli Thorvaldsson. Loans from Deutsche Bank formed a part of this package. When DB made margin calls Kaupthing lent money to these companies to meet the calls. Kaupthing did in the end lose €510m on these transactions and DB refuses any responsibility.

During its last hours, on Oct. 6 2008, Kaupthing got a loan from the Icelandic Central Bank of €500m. Though Kaupthing already seems to have been doomed there was still a belief among Icelandic regulators that Kaupthing might survive though Landsbanki and Glitnir would fail. It now seems that some of this loan was used to lend these companies used to give entirely wrong information about the bank’s standing. – The investigation aims at clarifying who was responsible and whether it was i.a. a question of a breach of fiduciary duty.

4 Two companies, Marple Holdings S.A., owned by Skuli Thorvaldsson and Lindsor Holdings Corporation, owned by Kaupthing’s key employees, bought Kaupthing bonds, issued in 2008 when Kaupthing, as many other banks, ran into financing difficulties. The aim seems to have been to remove any risk of a falling bond price from the beneficial owners of these companies to the bank itself. Documents related to these companies seem to have been falsified so as to indicate that the deals had been done earlier than was the case.

5 In September 2008 Kaupthing announced that the Qatari investor Sheik Sheikh Mohammed Bin Khalifa Al-Thani was buying 5% of the bank. The OSP is investigating if a Kaupthing loan to companies related to the Sheikh and Olafur Olafsson were intended finance the deal so that the Sheikh was actually not putting any money into the deal, done only to make the bank look stronger than it was. (Olafsson owns a food company, Alfesca, that had announced in summer of 2008 that the Sheikh was buying shares in the company. That deal was never finalized but it’s unclear if Kaupthing was also here the lender of a loan that was never going to be repaid.)

In short: the issues investigated relate to deals between Kaupthing and major shareholders/big clients that favoured the key employees and affiliated clients but dumped any losses onto the bank. The investigation focuses on breach of fiduciary duty, counterfeiting and market manipulation and involves billions of kronur.

Kaupthing operated in Luxembourg for eight years and in London since 2005. It operated in all the Scandinavian countries and in the US. In the UK the FSA was warned: the board of Singer & Friedlander, the bank that Kaupthing bought in 2005, repeatedly made it clear to the FSA that it didn’t think the mangers of Kaupthing were ‘fit and proper’ – and yet, nothing was done and in none of these countries the regulators saw anything questionable. Yet, the meteoric growth of the band and ‘incestuous’ relationships with major shareholders should have been an indication, as well as persistent rumours. The good thing is that Serious Fraud Office is now conducting its own investigation of Kaupthing.

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Tonight, the High Court confirmed the Reykjavik County Court’s custodial sentence of 12 days over ex-CEO of Kaupthing Hreidar Mar Sigurdsson and 7 days over Magnus Gudmundsson ex-manager of Kaupthing Luxembourg and manager of Banque Havilland until last week.

Over the weekend other former employees of Kaupthing have been called in to give evidence. Two other ex-managers, now both living in Luxembourg, are expected to be called to give evidence later this week. The two are most likely belonging to a group of six ex-Kaupthing managers who run a company in Luxembourg, Sigurdsson being one of the six. The company, Consolium, is registered in Iceland but doesn’t seem to be registered in Luxembourg though the Kaupthing ex-managers have been operating out of Luxembourg for about a year.

According to Icelandic media ex-executive chairman of Kaupthing Sigurdur Einarsson has been called by the Office of the Special Prosecutor to give evidence but has been unwilling to come to Iceland for this purpose. Einarsson, who has been living in London since earlier this decade, is said to have been awaiting the results of Sigurdsson and Gudmundsson’s appeal. Special Prosecutor Olafur Hauksson hasn’t confirmed news in Icelandic media that Einarsson has been un-cooperative and that he’s adamant to secure that he won’t follow Sigurdsson and Gudmundsson into custody.

Quite exceptionally, the OSP has asked the High Court, contrary to custom, not to publish its ruling on the Court’s website. Consequently, details about the investigation that would have become public remain unknown to the general public. It’s known though that two judges, Olafur Borkur Thorvaldsson and Hjordis Hakonardottir ruled in favour of confirming the County Court ruling whereas Jon Steinar Gunnlaugsson was against – seen in Iceland as highly indicative of where these judges could possibly stand in later cases related to the banks.

Now that the OSP has conducted the case successfully so far, getting the custody through the two Courts it’s clear that the case has been well prepared so far. Like elsewhere, custody and isolation is seen as grave measures by Icelandic courts. The fact that the custodial sentences have been confirmed indicate the gravity of the charges that will eventually rise from the investigation.

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The Reykjavik County Court has confirmed two weeks’ custody over Kaupthing’s ex-CEO Hreidar Mar Sigurdsson and the ex-manager of Kaupthing Luxembourg Magnus Gudmundsson, now manager of Banque Havilland. The owners of Banque Havilland, David and Jonathan Rowland through their investment company Blackfish Capital, are meeting in Luxembourg. They haven’t yet decided on what action, if any, will be taken against Gudmundsson.

Sigurdsson’s term in custody is 12 days, Gudmundson’s 7 days. Both have appealed the custody ruling. They will be kept in isolation, either in Reykjavik or in a prison ca. 45 km from Reykjavik.

It appears that the two, who both live in Luxembourg, were called in by the Office of the Special Prosecutor. This wasn’t the first time and neither of them expected to be detained. Sigurdsson met up yesterday morning. After lunch he was told he would be detained and that a custody was being sought.

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Magnus Gudmundsson, earlier the head of Kaupthing Luxembourg, now the manager of Banque Havilland owned by David and Jonathan Rowland, has also been imprisoned after the Office of the Special Prosecutor in Iceland asked for a custody of two weeks over him. The charges that can be expected to be brought against Gudmundsson and Hreidar Mar Sigurdsson could possibly bring an imprisonment of at most eight years if the two will be convicted. The offices of KPMG and PWC in Reykjavik have also been searched in connection with the investigation.

PS It now seems that Gudmundsson was brought in for questioning but isn’t being held over night like Sigurdsson. What happens later is still unclear. A custody might be demanded Frid.

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Ex-CEO of Kaupthing Hreidar Mar Sigurdsson has been imprisoned after the Office of the Special Prosecutor in Iceland requested a two weeks’ custody for Sigurdsson at the Reykjavik District Court. The Court will rule tomorrow on whether the request will be granted. Sigurdsson is being investigated for various financial malpractice, i.a. market manipulation. It’s most likely that Sigurdsson is only first in line – other managers, board members and major shareholders might well hear from the OSP.

The news has created quite a stir in Iceland. It’s been known that the OSP has been investigating Kaupthing. The fear has been that the cases might prove too big and complicated but no doubt the advice given by the Norwegian French ex magistrate Eva Joly has helped the staff at the OSP to find fruitful directions in the investigation. But it’s not only in Iceland that Kaupthing is being investigated.

The Serious Fraud Office in London also has the collapsed bank under investigation and there is a close collaboration between the countries. Earlier this year, the OSP requested house searches in Luxembourg where 40 policemen conducted searches for three days, mainly concentrating on the now Banque Havilland, earlier Kaupthing Luxembourg, bought by the UK financiers Jonathan and David Rowland. The Rowlands are thought to be unconnected to the alleged fraud.

Now that the OSP has demanded custody for the ex-CEO the question is who will be next. The recent report by the Althingi Investigative Committee threw light on the complicated affairs between Kaupthing’s management and its main shareholders, Agust and Lydur Gudmundsson, Olafur Olafsson and foreigners such as Kevin Stanford and Robert Tchenguiz – wealthy men who became even more wealthy as favoured clients and shareholders of Kaupthing. The Report seems to indicate highly questionable dealings and clear signs of market manipulation.

The interesting angle of the Kaupthing story is how the bank grew exorbitantly in close collaboration with its core shareholders generating huge sums from proprietary trading, fees and joint ventures with the relatively small group of big clients. The bank also serviced clients like the Candy brothers, the London-based property developers and the Russian oligarch Alisher Usmanov, the metal magnate and owner of Arsenal.

The question that many Icelanders will be asking today is if the meteoric rise of Kaupthing and its main shareholders and clients was all too good to be true. When rapid growth and bad loans go hand in hand in a bank it’s often taken as a possible sign of fraudulent behaviour. I’ve pointed out earlier that it’s difficult to find any parallel to the Icelandic banks except Italian Mafia banks. The outcome of the Kaupthing investigation and other ongoing investigations remain to be seen – it will take a while until Icelanders know for sure if their entire banking system was taken over by a group of bankers and businessmen using fraudulent means to enrich themselves.

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Upset that the British government was still too keen on protecting the financial sector, Germany’s Chancellor Angela Merkel said in exasperation that she wanted to remind everyone that something did indeed happen in the financial markets. It made ‘no sense,’ she said, ‘to keep behaving as if nothing had happened.’

Her words describe all too well to the situation in Iceland. The three resurrected banks – New Landsbanki previously Landsbanki, Arion bank previously Kaupthing, Islandsbanki previously Glitnir (but Islandsbanki before that) – have now amassed a sizeable collection of assets and are, in some cases, reselling these assets. In the Icelandic media the banks have been criticised for lack of transparency, especially Landsbanki. There seems good reason to be worried that old habits die hard – but how were the old habits?

A banker working at one of the collapsed Icelandic banks told me recently that it had been quite remarkable to see how the banks’ ‘chosen’ customers – the big customers that in many cases also happened to be the banks’ largest shareholders – were content to pocket the profits but expected the bank to compensate for any losses they might suffer. Documents stemming from the now bankrupt companies Baugur, where Jon Asgeir Johannesson was a major shareholder and Fons, Baugur’s regular co-investor owned by Palmi Haraldsson and Johannes Kristinsson, throw some light on the old habits. Claims lodged against Fons amount to ISK40bn, almost £207m. Claims against Baugur Iceland amount to ISK319bn, £1,65bn.

At the end of 2005 Fons borrowed ISK800m from Glitnir. Three months later 300m were paid off in accordance with the loan agreement. The remaining 500m, supposed to be paid off by the end of 2006, are now part of Glitnir’s claims against Fons. – There are many other examples where the banks’ main borrowers, often their main shareholders as well, apparently did not expect to pay back their loans (even though refinancing was never an issue). The Fons loan from 2005 seems to be a case in point and shows that the banks’ leniency towards their big customers started well before the panic of 2008.

In December 2007 as the credit crunch was seriously starting to hit the leveraged Icelandic companies, Fons borrowed ISK10bn from Glitnir against shares in FL Group, the faltering investment company closely connected to Baugur and Fons. A few days later Glitnir lent Fons another ISK2,5bn. The collateral was a ISK3,7bn loan agreement whereby Fons financed sale of assets to Baugur, i.e. Fons both sold and financed the sale. Nothing was paid off this 2,5bn, most likely because Baugur didn’t pay off its loan from Fons.

Although Fons didn’t pay off any of these loans Glitnir still lent Fons ISK6bn in July 2008 to finance the sale of shares in Aurum Holding, one of Baugur-Fons retail investments, from one Fons-company to another, i.e. like the left hand buying from the right hand. In an illiquid market the evaluation of the shares raises questions. Of the 6bn 1,5bn were set against Fons trading account at Glitnir and 2,5bn were supposedly used to pay off an older loan (though there are conflicting information as to which loan was paid off). Two billion kronur were put into Fons’ account at Glitnir where 1bn was used to pay off 1bn on a loan at Kaupthing, Luxembourg and 1bn was put into Jon Asgeir Johannesson’s private account at Glitnir.

The administrator of Fons has now sued Johannesson to claim back this billion kronur, claiming that the money was paid without the necessary paperwork to underpin the payment. This claim will be settled in court later this year.

This flow of money from Glitnir into and between companies related to the bank’s principal shareholders is a saga of obscure deals and loans that were never repaid. Other similarly questionable deals, related to Baugur and Fons, involve the Danish air company Sterling and the two Icelandic companies Skeljungur, a petrol company, and Securitas, a security company. – The two other Icelandic banks, Landsbanki and Kaupthing, are also big creditors in Fons and Baugur.

Another bankrupt company with an interesting story is ‘Solin skin’, meaning ‘The sun shines’, owned by Baugur, Fons, Glitnir and the UK businessman Kevin Stanford, a frequent co-investor in Baugur’s ventures, a client at Kaupthing and now being investigated by the Serious Fraud Office. The only asset of ‘Solin skin’ was a futures contract on shares in Marks & Spencer. The contract was renewed close to twenty times and incurred spectacular losses. The claims on this tiny company that no one outside of Baugur’s inner circle knew of until its bankruptcy amount to ISK15bn, £77m. – As a comparison the cost of running Althingi, the Icelandic parliament, this year will be ISK2,7bn. The losses of this, in Baugur-Fons’ grand-scheme-of-things, tiny company would be enough to run Althingi for over five years.

The administrator of ‘Solin skin’ has compared the company to a gamble on the house. It seems unlikely that a normal bank would have allowed the company to renew the contract time and again, steadily adding to the losses with no assets to cover them.

In 2007 Jon Asgeir Johannesson bought two flats in New York in one of the most hyped condos in the city, at 50 Gramercy Park. Landsbanki financed the acquisition. The bank’s resolution committee is unwilling to inform what is happening with the flat or if Johannesson has had access to it after he couldn’t fulfil the loan agreement. Attempts to sell the flat, last on the market now in January at $15m, have apparently been unsuccessful. The news of a possible court case against Johannesson for renting out one of the flats with an Ikea kitchen and not a designer kitchen expected in this condo drew some smiles – might it be that after many questionable deals Johannesson would in the end falter on a designer flaw and not a financial deal?

The year 2007 was a year of conspicuous private spending by many of the Icelandic high-flyers, giving rise to a new phrase in Icelandic, ‘it’s so 2007’, meaning ‘outrageously extravagant.’ Banque Havilland, that took over Kaupthing Luxembourg, has already repossessed the yacht bought that year by Johannesson and his wife, and sold it to a Russian buyer. In December 2009 GE Capital repossessed Johannesson’s private jet. Strikingly bold actions compared to Landsbanki’s veil of secrecy hiding the ownership of the New York flat where Johannesson and his wife are still registered as inhabitants.

What causes concern in Iceland is that many of those responsible for lending money ad infinitum to heavily indebted companies and individuals are still working for the three resurrected Icelandic banks (though it doesn’t make the Icelandic banks unique in the international banking sector). – In ‘Liar’s Poker’ Michael Lewis describes banks that were always willing to sacrifice the interest of their clients for their own. Interestingly, the Icelandic banks always set the interest of a few chosen clients/shareholders above their own. So far, no court case has tested the responsibility of the managers and the boards of these banks in deals like those mentioned above.

The report coming out on April 12 will no doubt clarify the operations of the banks. After the report it might be more difficult to continue ‘as if nothing had happened.’

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“I am going to tell you a story about greed, excessive risk-taking, fraud that we believe was both serious and massive, and the complete economic collapse that befell a remote land.” This is how Gunnar Andersen the director of FME (the Icelandic Financial Services Authority recently described the new Icelandic saga of the collapse of the three Icelandic banks, Glitnir, Kaupthing and Landsbanki, in Oct. 2008. Authorities in Iceland and the UK Serious Fraud Office are now investigating this saga. Just this week, the Luxembourg police, together with Icelandic investigators, altogether almost 50 people, carried out an extensive house search at several premises in Luxembourg, centred on the former Kaupthing Luxembourg, now Banque Havilland (bought in summer 2008 by the English Rowland family through its investment company, Blackfish Capital).

I’m just back in London after three weeks in Iceland, my 6th trip to Iceland since Oct. 2008. As usual, I tried to meet as many people as possible – journalists, academics, civil servants, politicians, bankers or former bankers, investors, clients of the banks and, when possible, some of those closely connected to the collapsed banks through ownership (though most of them are getting less willing to talk, even off-the-record since many of them now face prosecution or know they soon will). The more people I talk to and the more I look into the operations of the banks and their closest circle the better idea I get of what Andersen might mean with ‘both serious and massive’ fraud.

Before the banks collapsed foreigners often asked me if I thought the Icelandic banks were sound institutions. My standard answer was that though the ability of Icelandic regulators might be doubted the banks were no dingy back street shops but operated in the full glare of the authorities in many properly, or so we thought, regulated countries. The three banks and their Icelandic satellite investment companies such as Baugur, Milestone, FL Group, Fons and Samson, now all bankrupt, and Exista, surviving at the mercy of its creditors, made headlines in the international media for years, the tone usually either admiring or tinged with suspicion. As early as 2006 I heard that both the Danish Central Bank and the Danish FSA kept a close eye on the Icelandic banks and businesses buying up Danish assets. Though persistent rumours of foul play tailed them wherever they went the rumours never instigated an investigation – until recently.

I travelled to Iceland for the publication of the long-awaited report by the Parliament’s Investigative Commission, www.rannsoknarnefnd.is, nicknamed in English the ‘Truth Commission’ (in Icelandic it’s just called the Investigative Commission). The report was due at the beginning of Feb. but is now expected at the end of this month. Its chairman has already declared to the Icelandic media that rarely has any commission presented such an ugly story to its nation.

With the foreboding of ‘both serious and massive’ fraud it’s clear that there isn’t much happy tiding in the report. However, the good news is the fact that this report was done and is about to be finished. As far as I can judge, without having seen anything from the report, it will be a thorough job of 2000 pages, part of which is written by a sub-commission focusing on ethical aspects. This will be the only extensive report as to yet in any country on the effect of the banking crisis – most appropriately in the country most dramatically hit so far.

What could the ‘serious and massive’ fraud consist of? I don’t think the Ikaruses in the Icelandic banks and businesses invented anything new but they might have taken things to higher levels than bankers in any major banks would dare. Extensive market manipulation in all the banks, driven by the highest echelons in the banks in conjunction with their major owners and related parties, is already being investigated. Opaque ownership has for years characterised Icelandic companies and might have been used to stay under takeover trigger. Assets were most likely siphoned off through companies related to the banks. There is evidence to suggest that when the banks started to offer mortgages they strategically traded mortgage-related bonds in order to push up interest rates in the market. – There is no lack of possibilities here.

These are only few of the schemes that might have been used and are most likely being investigated. Except for the last one they are all tricks often found in companies facing bankruptcy. The feeling in Iceland is that the 2000 pages will takes us far into this murky story; it won’t be a joyous read for bankers, politicians and regulators. Although I’m going to resist the claim that the report will be an example for others to follow it will for sure tell an interesting story of political vanity, a deep and extensive failure of public control – and fraud.

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