Sigrún Davíðsdóttir's Icelog

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.

Follow me on Twitter for running updates.

It’s now clear who, apart from Banque Havilland, tried to hinder the Office of the Special Prosecutor in Iceland to get access to the documents from Kaupthing Luxembourg, now the Rowland family’s Banque Havilland that bought Kaupthing’s Luxembourg subsidiary. Earlier, when I inquired at the courts in Luxembourg I was told that only those connected to the case could get the verdict. Now, Vidskiptabladid Iceland, has obtained a copy of the verdict.

Unsurprisingly, both Kaupthing’s CEO and chairman of the board, Hreidar Mar Sigurdsson and Sigurdur Einarsson, tried to hinder the OSP to get the documents obtained via house searches a year ago. Another paper, DV, wrote today the the OSP had been very successful in finding documents at the home of Magnus Gudmundsson, who was Kaupthing Luxembourg manager and stayed on at Havilland. Some of the documents were in Gudmundsson’s car. (If you ever drive in an ex-Kaupthing manager’s car look around and try to get a peep into the booth.) Gudmundsson however is not on the OSP ‘opposition team.’

Others in this team are Olafur Olafsson,* the second largest shareholder in Kaupthing and four companies owned by him: Sable Air APS Denmark and three BVI companies, Marine Choice Ltd, Fort Shannon Ltd and Fordace Ltd. In addition there are Skuli Thorvaldsson, Egill Agustsson and his business partner Einar Bjarni Sigurdsson, living in Denmark.

This is quite an intriguing circle of business men. All these people, apart from Einar Bjarni, are names that are already connected to alleged market manipulation and other manipulation by Kaupthing. It’s save to conclude that this is a group of men who formed a close network at the core of deals that the OSP is investigating.

Olafsson was connected to the al-Thani deal: a sheikh from the Qatar ruling family bought 5% in Kaupthing in a highly publicised deal in early September 2008. But instead of the deal showing the sheikh’s believe in Kaupthing it apparently showed that the bank was unable to sell any shares except by offering ‘risk-free’ loans (the risk was all on the bank, making these deals look like a breach of fiduciary duty on behalf of the bank’s management). The sheikh also got a loan of $50m towards future profits. Needless to say there were no future profits only imminent losses. Olafsson got the sheikh another Kaupthing loan to buy shares in Alfesca, where Olafsson is a major shareholder, also a highly publicised deal that then came to nothing. – Olafsson still holds his interests in Alfesca where the chairman is Arni Tomasson chairman of the Glitnir’s ResCom. Olafsson, who earlier lived in London, now lives in Switzerland.

Skuli Thorvaldsson had an interesting relationship with Kaupthing. He has been living in Luxembourg for decades and wasn’t known for being fabulously wealthy. His branch has been property investment. His connection with Kaupthing first became clear when the loan overview from Sept. 08 was leaked on Wikileaks. The SIC made it known that Thorvaldsson was Kaupthing’s biggest debtor in Luxembourg, pretty staggering considering his apparently low key property business. His loans with Kaupthing peaked at €200m just before the collapse of the banks. Thorvaldsson was also involved in Kaupthing plots to lower its CDS: the bank lent Thorvaldsson huge sums through a web of companies enabling Thorvaldsson to buy CDS and affect the bank’s CDS spread. An audacious attempts that Deutsche Bank was involved in – Kaupthing managers claim the idea came from DB but DB claims it, unaware of the aim, only advised these structures. Kevin Stanford and Olafsson were also involved in these CDS acrobatics – and yes, DB’s role is, ahem, interesting.

Agustsson’s business partner is otherwise unknown but Agustsson is connected to companies that were close to Kaupthing and their habit of lending to companies, most noticeably a company called Desulo that has featured in an earlier Icelog on the deals Agustsson and others from the OSP ‘opposition’ were engaged in.

Unsurprisingly, it turns out that those who tried to hinder the OSP to obtain the documents are all, except Banque Havilland, part of Kaupthing’s inner circle, connected to deals and companies that the OSP is investigating.

*4.3.’08: Olafsson has issued a statement saying that he didn’t oppose the handing over of documents to the OSP but that he opposed that documents unrelated to issues being investigated should be handed over.

Follow me on Twitter for running updates.

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.

Follow me on Twitter for running updates.

The Office of the Special Prosecutor in Iceland has only stated in general terms the offences under investigation in the Kaupthing case. It’s thought that the starting point in the investigation were deals connected to a Qatari investor, His Highness Sheikh Mohammed Bin Khalifa Al-Thani. When the bank announced in September 2008 that the investor had bought 5% shares in Kaupthing this was taken as a sign of confidence in the bank. Olafur Olafsson, now living in Lausanne and a major shareholder in the bank knew Al-Thani and was instrumental in bringing the Qatari on board. It later turned out that Kaupthing had lent Al-Thani the money to buy the shares, arranging the buying in such a way that Al-Thani couldn’t lose – a typical characteristic of so many of the dealings in the Icelandic banks: only the banks could lose, not the favoured clients.

Olafur Hauksson from the OSP said last night that information from the report of the Investigative Commission had also been crucial. Magnus Gudmundsson’s name only appears four times in the report, in connection to a share deal that Gudmundsson and Sigurdsson planned together with Armann Thorvaldsson (author of ‘Frozen Assets’, on his life at Kaupthing) ex-CEO of Kaupthing Singer & Friedlander and Kaupthing’s chairman Sigurdur Einarsson.

The report publishes an email where the discussion is on how to arrange Kauthing share ownership for the managers so that their personal risk will be limited. On Dec. 12 2006 Gudmundsson and Thorvaldsson sent an email to Einarsson and Sigurdsson as to how this could be arranged:

“Hi Siggi and Hreidar, Armann and I have discussed this (association of loyal CEOs) and have come to the following conclusion on our shares in the bank: 1. We set up a SPV (each of us) where we place all shares and loans. 2. We get additional loans amounting to 90% LTV or ISK90 to every 100 in the company which means that we can take out some money right away. 3. We get a permission to borrow more if the bank’s shares rise, up to 1000. It means that if the shares go over 1000 we can’t borrow more. 4. The bank wouldn’t make any margin calls on us and would shoulder any theoretical loss should it occur. We would be interested in using some of this money to put into Kaupthing Capital Partners [an investment fund owned by the bank and key managers] Regards Magnus and Armann”

In the report this is taken as an example of a certain attitude among Kaupthing’s managers showing how they gave themselves the possibility of pocketing a personal gain by putting more risk on the bank and its shareholders.

Another speculation relates to sub-prime loans, bought through Kaupthing Singer & Friedlander. When the loans incurred heavy losses they were bundled together in Black Sunshine, a SPV set up. When Black Sunshine surfaced Sigurdsson said that this hadn’t been an attempt to hide losses. The losses had been properly accounted for in the accounts.

These are only speculation from the Icelandic media. A Kaupthing insider tells me that as far as he knows there is nothing new in the cases under investigation. Most likely, the case against Kaupthing is more extensive than these examples indicates. The Icelandic Financial Services Authority, FME, has been conducting an extensive investigation into market manipulation related to all the banks. The FME investigation relating to Kaupthing is probably part of the OSP investigation. It is now highly likely that other top managers from Kaupthing will be drawn into the investigation. It’s also interesting to see if the Serious Fraud Office will make any moves soon though the SFO’s investigations tend to take a very long time.

According to Icelandic news, both Sigurdsson and Gudmundsson spent the night in prison. Whether they will be kept in custody is still unclear. The Reykjavik County Court is expected to rule on their custody now around lunch time. It’s also unclear if the two will fight the investigation with an army of lawyers or if they will choose to cooperate with the OSP.

Follow me on Twitter for running updates.

The pre-fall banking system in Iceland had some intriguing characteristics. One of the more astounding one is how willingly all the three major banks lent a small group of businessmen, tied to the banks through ownership and inter-dealings, beyond all rhyme and reason. This completely reversed the power balance between the banks and their main clients – the clients, not the banks, set the rules of the game. In their game the clients were favoured at the expense and to a great risk for the banks.

Last summer I read a fascinating and scary book, ‘Mafia Pulita’, ‘The Clean Mafia’, by Antonio Laudati (now a prosecutor in Bari where the Mafia is particularly ingrained and vicious) and Elio Veltri, both well known for their fight against organised crime. Through stories of a few Mafiosi they explain how the Mafia infiltrates the ‘clean’ economy (as opposed to the ‘dirty’ or ‘black’ economy of organised crime) – this is the Mafia that buys what it can and only kills when it has to. I interviewed Laudati on a hot August Sunday morning in Naples where we shared the Napolitan pastry ‘sfogliata’ as he told me about corrupt Italian banks that seemed uncannily similar to the Icelandic banks.

In former times, the Mafia would find a bank clerk, often a low level one, to help channel its ill begotten money into the licit economy. Now instead, there have been cases, mostly in small banks in the North of Italy, where the criminals collude with the managers. The criminals get loans that systematically are far above the exposure anyone else gets, putting the bank itself at great risk. These banks also assist the criminals to borrow money from other banks by guaranteeing their loans though the collaterals, mostly shares and property, often financed by loans from the ‘helping’ banks. This effective loan machine generates money for the criminals, their loans are never paid back but serviced with more loans.

I’m not suggesting a Mafia connection or anything Mafia-related regarding the Icelandic banks; not at all. I just find it intriguing that the only banks with business patterns similar to the Icelandic ones turn out to be corrupt Italian banks that have been closed down by the authorities. As in the Italian banks the Icelandic banks loaned money to few chosen individuals beyond all sensible limits. These clients weren’t much bothered with margin calls nor the collaterals sold when loan covenants were breeched; old loans were serviced with new ones and it does indeed seem likely that in some cases the banks did not expect the loans to be repaid.

Icelanders are now following with anger and resentment how the new banks –Islandsbanki and Arion Bank owned by credit holders respectively in Kaupthing and Glitnir respectively, Landsbanki by the Icelandic state – are refinancing companies owned by some of the major before-the-fall players. Here are the latest examples:

There isn’t much left of Baugur, Jon Asgeir Johannesson’s retail empire spanning UK high streets and other places. Both Baugur Iceland and Baugur UK collapsed under its debt. Administrators have contested various last-minute dealings. Landsbanki was evidently the biggest lender but the two other banks were fairly generous too. The most valuable Icelandic assets are now in Hagar, a holding company that runs a myriad of shops in Iceland, most importantly two supermarket chains, Bonus and Hagkaup (interestingly, Hagkaup was founded by the father of Jon Asgeir’s wife – first Jon Asgeir bought Hagkaup, later he married into the Hagkaup family, though long after its founder’s day). Arion Bank had taken over Hagar, apparently against a debt of ISK70bn (£350m).

After continuous headlines of Hagar’s fate – last summer Johannesson i.a. wowed to bring in foreign investors in 2-3 years time – Arion Bank has now decided to float Hagar later this year. Johannes, Jon Asgeir’s father (who in 1989 founded Bonus with his son, the first step towards the Baugur empire), is the chairman of Hagar. Arion will grant him the right to buy 10% of the company, in addition to the management getting 5% – in Iceland, the takeover trigger is 30%. Before the fall the bank would no doubt have lent preferred buyers against Hagar shares but Arion claims that’s not on offer now. Many Icelanders would have liked to see Hagar broken up so as to correct the ca 60% market share that Hagar has in the food market. Arion maintain that it’s obliged to focus on its profit not correcting competition.

Olafur Olafsson’s foreign profile has been much lower than Jon Asgeir’s though he has been living abroad for years, recently swapping Knightsbridge for Lausanne. Olafsson, who spans the gamut of the pre- and post-privatisation period, rose on the tail of the Progressive Party and the co-operative movement and built his empire on the shipping company Samskip. He later became one of the biggest shareholders in Kaupthing and was the main shareholder of Alfesca that sprung from one of the two main fishing companies, operating since after the war. It seems to have been through Olafsson’s networking that the Quatari businessman al-Thani invested in both Kaupthing (Sept. 2008) and Alfesca (summer 2008). The Alfesca investment never materialised; the Kaupthing one is being investigated as an alleged market manipulation. Olafsson and Samskip’s management have now negotiated a financial reorganisation with Arion and Fortis Bank – it is understood that the owners will bring in new capital.

Icelandic Group is the other major Icelandic fishing company that in 2005 was bought by Magnus Thorsteinsson and Björgolfur Gudmundsson. These two, together with Gudmundsson’s son Bjorgolfur Thor Bjorgolfsson, bought 40% as Landsbanki was privatised in 2002. At the time it was understood that the money came from the sale of the Bravo Brewery in St Petersburg to Heineken for $400m (their St Petersburg enterprise gave rise to myriads of stories about Iceland’s ‘Russian connections’ and ‘Russian money’ culminating when Russian authorities seemed to contemplate bailing Iceland out in Oct. 2008 – one of the many untold stories of the fall). It’s now clear that if there was any profit from the Bravo sale it only partly, if at all, financed the Landsbanki deal – the three simply got a loan from Bunadarbanki just like those who bought Bunadarbanki (later merging with Kaupthing), Olafsson being one of them, got a loan from Landsbanki.

Thorsteinsson and Gudmundsson are both bankrupt in Iceland. As most companies touched by the two (and all the other ‘viking’ investors) Icelandic sank under its debt in October 2008 when Landsbanki’s new CEO, put in place just after the bank’s demise, revived it. Icelandic’s present management has been running the company since 2007. In spite of losses since 2005, Landsbanki, now on its second CEO since the fall, still keeps the company afloat, claiming that the company will be able to clear out its debt in due course. Since Icelandic hasn’t published an annual report since 2007 it’s difficult to judge its position.

The latest stories of Hagar, Samskip and Icelandic – all important companies within the major Icelandic business conglomerates during the boom – show that certain relations seem to reach if not beyond the grave then at least beyond bankruptcies. Those who had the greatest hold on the old banks are still flying but some of these financial cliffhangers might still crash as the administrators edge in. In Iceland, the feeling is that it’s happening only very slowly – people find it difficult to understand that billions in debt in companies fallen by the road side do not affect the general standing of those whose financial acrobatics brought down the banks and the krona. Returning to former times when the political parties meted out favours through the banks is not an option – and yet there is a great pressure on the Government to do whatever it takes to prevent what is seen as cementing the unfairness in the unhealthy banking system before the fall.

Follow me on Twitter for running updates.