One frequently encounters foreigners who believe that Iceland offers a unique model of how to deal with a financial crash. A popular internet meme that purports to explain how Icelanders dealt with the crash features a photo of President Ólafur Ragnar Grímsson overlaid with this: “The Government Bailed out the People and Imprisoned the Banksters—The Opposite of What America and the Rest of Europe Did.”

Until last month most Icelanders would have argued there was only a fraction more truth to the claim that Icelanders “imprisoned the banksters” than there is to the fairytale that we all believe in elves (the first part of the statement, that the government had “bailed out the people,” has been one of the most hotly contested questions of Icelandic politics in the past years).

Finally some banksters jailed!

Now, Iceland has truly started jailing its banksters. On February 12, the Supreme Court of Iceland decided the fate of defendants in the so-called “Al-Thani case,” the first major case against the managers of the former banks to reach the court.

The verdict was that the top brass at Kaupthing—Iceland’s largest bank on the eve of 2008’s financial collapse—with the assistance of one of its principal shareholders, did, in fact, undertake particularly brazen efforts to manipulate the bank’s share price.

Consequently, the bank’s chief executive Hreiðar Már Sigurðsson, its chairman Sigurður Einarsson, and Kaupthing Luxembourg CEO Magnús Guðmundsson will soon begin serving their four to five-and-a-half-year prison sentences for market manipulation, “a crime against both the general public and the financial markets,” as the Supreme Court put it. Kaupthing’s second largest shareholder Ólafur Ólafsson—one of Iceland’s most prominent investors in the lead up to the crash—has already started serving a four-and-a-half-year sentence for his involvement, at white collar criminal prison Kvíabryggja.

These are, to date, the longest prison sentences for financial crimes in Icelandic history. They are quite long compared to other non-violent crimes, with the average sentence in serious drugs trafficking cases at five years and eight months.

Surprise and Schadenfreud

The ruling was met with a certain level of surprise from a large portion of the population. Many Icelanders half expected that Kaupthing’s bosses would walk free. The embattled Special Prosecutor’s Office, which was created in 2008 to investigate suspicions of wrongdoing in the lead-up to the crash, seemed to move at the pace of a tortoise. In the six and a half years that have passed since the crash, the Special Prosecutor has reviewed hundreds of cases, but only a handful had been sent to court. All the while, lawyers with ties to those under investigation have maintained a continuous barrage of criticism directed at the office, and the current government has already slashed its budget.

Small wonder, then, that many had started believing the Icelandic justice system was no more a match for financial fraud than those in the US and Europe. The schadenfreude that characterized the public reaction to the verdicts is therefore understandable.

Six years is not a long time

While the public’s frustration over how slowly justice seems to move is understandable, it is not entirely reasonable. Cases like the one against the Kaupthing Four are extremely difficult to prosecute, and it usually takes a long time to uncover the facts. Consider, for example, the time that passed between Enron’s collapse in December of 2001, and the sentencing of its disgraced CEO Jeffrey Skilling in October of 2006.

The alleged crimes are usually extremely complex, and the accused can usually afford the best legal representation money can buy. Anti-corruption crusader Eva Joly, who in 2009 and 2010 advised the Special Prosecutor on financial crimes, argued that for the case to go through the whole system, up to the Supreme Court, in “only six years” was “quite quick, contrary to what people believe,” adding that cases like this could easily take up to nine years to investigate and prosecute.

Five guilty verdicts, one acquittal

Despite public perception, the Special Prosecutor’s track record is, in fact, quite good: only one of the six cases he has brought to the Supreme Court has resulted in acquittal.

The SP’s first case to go to the Supreme Court concerned the insider trading of one Baldur Guðlaugsson, who was, in 2012, found guilty and sentenced to two years in prison. Baldur’s verdict raised a few eyebrows, not least because he had been among Iceland’s most powerful people, the Permanent Secretary of the Prime Minister’s Office, an Independence Party insider and former chairman of the government’s privatization commission. Other successes followed.

The Special Prosecutor’s record at the Reykjavík District court has been somewhat less impeccable. Last year, a number of important cases were heard by the court, several of which resulted acquittals for former bank CEOs and prominent Corporate Vikings.

Scores of new cases are still to be heard

Of course, every District Court ruling has been appealed to the Supreme Court. Furthermore, the Special Prosecutor is reportedly ready to send a large docket of cases to District Court. In April, the court will hear an extensive case against nine top-level managers of Kaupthing, alleging that the bank engaged in systematic and extensive market manipulation.

The SP is currently determining whether fourteen other cases will be brought to trial, while another twenty-four are still under investigation, with many nearing completion.

An important precedent

This makes the Supreme Court’s ruling in the Al-Thani case all the more important for two reasons.

For one, the court was particularly harsh in doling out punishment, stating that the four bankers’ crimes were aimed at “the entire public and the financial markets at large”—and that they were “thoroughly organized, committed with determination and extraordinary indifference to their con­sequences.”

Secondly, every single one of the defendants’ dismissal claims was dismissed out of hand. The court furthermore admonished the bankers’ lawyers for attempting to train witnesses and giving them access to evidence.

Essentially, the legal system found that no matter how many shell companies the bankers created to funnel money back and forth, the criminal intent was both blatant and obvious.

Thus, the ruling sends a very clear message to the District Court, as well as the defence lawyers working on these cases. It sets a critical precedent, signalling that the Supreme Court will take cases like this very seriously. According to independent news website Kjarninn, defence lawyers who have worked on cases connected to the crash were “in shock” following the verdict, as it indicated that the Supreme Court would approach these types of trials with far less leniency than they had hoped.

THE AL THANI CASE: BACKSTORY

A deal that never made any sense

In September of 2008, as the global financial system teetered on the brink of collapse and concerns about the solidity of Icelandic banks grew, Kaupthing announced that Sheikh Mohamed bin Khalifa Al-Thani, a senior member of the Qatari royal family, had purchased a five percent stake in the bank, making him Kaupthing’s third largest shareholder after Exista and Ólafur Ólafsson, who held roughly 25 and 10 percent, respectively. Many proclaimed this announcement a solid vote of confidence for the bank.

However, after Kaupthing’s eventual collapse, it became clear that the transaction had been financed entirely by the bank itself. Kaupthing had approved two separate thirteen billion ISK loans to two companies, located in Tortola and owned by Ólafur Ólafsson and Al-Thani. Those funds were then routed through other shell companies before finding their way back to the bank in the form of payment for the five percent stake.

A systematic campaign of market manipulation

Internal Kaupthing emails that surfaced in the Al-Thani case refer to the need to “put the jack to work, just create demand.” Such attempts to jack up share prices were not at all uncommon, as the 2009 Special Investigation Commission found. In fact, the Al-Thani deal was just the most brazen example of Kaupthing’s systematic attempts to manipulate markets. The SIC’s report demonstrated that the bank had for a long time methodically engineered the purchases of large chunks of its own stock—effectively cleaning up all sale offers in the Icelandic Stock Exchange—with the aim of maintaining its value. These blocks of stock were then sold on to key employees and financiers with ties to Kaupthing, who paid for the shares with loans from the bank.

The Special Investigation Commission found that all of the Icelandic banks had practised such market manipulation. Maintaining share prices was important to prop up confidence in the banks. It was also critical to their survival, since their shares served as collateral for countless highly leveraged holding companies and investment vehicles that formed the Icelandic economic miracle.

In essence, the verdict confirms that Kaupthing was little more than a giant market-manipulation machine.

A knight in shining armour

By announcing that a foreign investor had purchased a large stake in Kaupthing, in the midst of a financial crisis, the bank hoped to dispel fears that it might be on the brink of collapse. As a publicity stunt, it was a great success, at least judging by the Icelandic media’s reception.  Journalists reported that a “shining white knight” had come to Kaupthing’s rescue, and seemed quite impressed with the fact that such a prominent foreigner was giving the bank his seal of approval. News stories about the deal frequently referred to Al-Thani as “his royal highness,” stressing that he was not just any old foreigner: Al-Thani was a royal foreigner.

The fact that any foreigner was all of a sudden making major investments in Iceland was of course newsworthy enough. Despite grand plans of making Iceland a “global financial centre,” local authorities and financial wizards had consistently failed to lure significant foreign capital to the island—indeed, in 2006 foreign analysts wrote off the Icelandic banks as hopelessly overvalued.

“A very private man”

A few commentators expressed doubts about Al-Thani’s investment. Where had this Qatari prince come from? Despite being touted as a respected global investor by Ólafur Ólafsson and Kaupthing’s PR department, Al-Thani did not seem to have made much of an appearance in the global financial media.

Curiously, the only other mentions of Al-Thani as global investor were also in connection to Iceland. In June of 2008, mere months before the Kaupthing announcement, it was announced that Al-Thani had purchased a 12.6% stake in Alfesca, a marketing company for fish products. Kaupthing and Ólafur Ólafsson, through his investment company Kjalar, were the two largest shareholders of Alfesca, which was also a major customer of Kaupthing.

At the time, I was a business reporter for newspaper Fréttablaðið. While attempting to cover the story of this Qatari White Knight, we had serious trouble finding information on his backstory, or even anything concerning his other global investments.

I therefore called up Ólafur Ólafsson and asked him about Al-Thani’s background: Who was this man, and what other significant business dealings had he engaged in?

Ólafur refused to provide any details, explaining that Al-Thani was a very private man who had kept a low profile as an investor, since he did not care for media attention. Which seemed strange, considering the fact that he had just made a major investment that was obviously designed to create media attention. There was something missing from the story.

The truth.

Victims  of a political witch hunt?

While most feel that the guilty verdict in the Al-Thani case proves that the Icelandic justice system can handle even the most powerful bankers, others have cried foul. In that group you’ll find convicts Ólafur Ólafsson and Sigurður Einarsson, who have both complained that they are victims of a political witch hunt. Independence Party MP Brynjar Níelsson, a prominent defence lawyer before being elected to parliament, similarly criticized the Special Prosecutor and Reykjavík District Court (which found the Kaupthing Four guilty while giving a shorter prison sentence), essentially for having “given in to public anger,” out of fear that if defendants weren’t found guilty “and given harsh sentences, waves of loud anger would rise.”

According to this line of defence, bankers like the Kaupthing Four are only found guilty to placate the public. Ólafur has even appealed his sentence to the European Court of Human Rights. His argument is that since Icelandic laws regarding market manipulation are based on European legislation, and since guilty verdicts (like the one he received) are unknown in Europe, he could not possible be guilty.

Sentenced for something others get away with

Ólafur and Sigurður are understandably frustrated that they are being punished for activities that were probably quite common in their heyday. Kaupthing is unlikely to have been the only global financial institution to attempt to shore up stock prices in the lead-up to the crash. Moreover, is almost unheard of globally that banks’ top executives and powerful financiers like Ólafur are sentenced to jail, no matter how questionable and immoral their activities.

It is unclear whether their activities were more brazen, or not as well executed, as the shenanigans of other European or American bankers that have not had to face charges (let alone prison). But, it is clear that they were caught, while other financiers have walked scot-free.

Perhaps it has something to do with the fact that the bankruptcy of Kaupthing was the fourth largest corporate bankruptcy in the history of global finance.

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A Crash Of Historical Proportions

Kaupthing’s bankruptcy was one of the largest in financial history. Compared to the largest bankruptcies in US history, it ranks in fifth place, well ahead of Enron. If we take the crash of the three largest Icelandic banks as a single event, only the bankruptcies of Lehman Brothers and Washington Mutual were larger.

Comparison of the bankruptcy of the Icelandic banks and the largest corporate bankruptcies in US history.

(Source: Financial Services Authority of Iceland)

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Verdicts

The post-collapse edition

Since 2009, Iceland’s Special Prosecutor has been investigating criminal activity in the year’s leading up to the financial crisis. Here, we’ve tried to compile a list of every single one of those cases in which a verdict has been reached.

SUPREME COURT RULINGS:

February 2012

Baldur Guðlaugsson, former Permanent Secretary of the Prime Minister’s Office.

Verdict: Two years in prison

Charge: Insider trading

June 2012

Ragnar Z. Guðjónsson, former CEO of Byr, an S&L

Verdict: Four and a half years in prison

Jón Þorsteinn Jónsson, former Byr chairman

Verdict: Four and a half years in prison

Charge: arranging fraudulent loans from Byr to a holding company, Exeter-holdings, in October 2008, which then used the funds to buy shares in Byr at inflated prices from Jón Þorsteinn and several Byr key employees.

October 2013

Styrmir Þór Bragason, former CEO of MP bank

Verdict: One year in prison

Charge: money laundering and participation in the arrangement of fraudulent loans from Byr in the Exeter case (see above).

December 2013

Friðfinnur Ragnar Sigurðsson, former director of interbank markets at Glitnir

Verdict: Nine months in prison

Charge: Insider trading

March 2014

Lýður Guðmundsson, former chairman of investment company Exista, one Kaupthing’s largest shareholders

Verdict: Eight months in prison

Bjarnfreður Ólafsson, former Kaupthing board member

Verdict: Six months in prison

Charge: Lýður was charged with giving misleading information to the Company Registry when he arranged to purchase a large offering of Exista shares in December 2008. The end goal of the transaction was to secure that Lýður and his brother, Ágúst, would maintain control of Bakkavör. Exista owned a large stake in Bakkavör, which Lýður and Ágúst had grown into the UK’s largest producer of chilled ready-made foods with the help of Kaupthing financing.

February 2014

Lárus Welding, former CEO of Glitnir

Verdict: Acquitted

Guðmundur Hjaltason, former head of corporate finance at Glitnir

Verdict: Acquitted

Charge: arranging a fraudulent loan to investment company Milestone.

February 2015

Hreiðar Már Sigurðsson, CEO of Kaupthing

Verdict: 5.5 years in prison

Sigurður Einarsson, chairman of Kaupthing

Verdict: 4 years in prison

Magnús Guðmundsson, CEO of Kaupthing Luxembourg:

Verdict: 4.5 years in prison

Ólafur Ólafsson, prominent investor, one of the largest shareholders of Kaupthing

Verdict: 4.5 years in prison

Charge: Market manipulation

REYKJAVÍK DISTRICT COURT RULINGS APPEALED TO THE SUPREME COURT

June 2014

Birkir Kristinsson, former head of private banking at Glitnir

Verdict: Five years in prison

Jóhannes Baldursson, managing director of capital markets at Glitnir

Verdict: Five years in prison

Magnús Arnar Arngrímsson, the managing director of corporate finance at Glitnir

Verdict: Five years in prison

Elmar Svavarsson, stockbroker at Glitnir

Verdict: Four years in prison

Charge: market manipulation and fraudulent loans to holding companies which speculated in the bank’s shares.

June 2014

Sigurjón Árnason, former CEO of Landsbankinn

Verdict: Acquitted

Elín Sigfúsdóttir, former managing director of corporate finance

Verdict: Acquitted

Steinþór Gunnarsson, former director of brokerage at Landsbankinn

Verdict: Nine months in prison

Charge: market manipulation.

June 2014

Jón Ásgeir Jóhannesson, prominent Corporate Viking, largest shareholder of Glitnir

Verdict: Acquitted

Lárus Welding, former CEO of Glitnir

Verdict: Acquitted

Magnús Arnar Arngrímsson, the managing director of corporate finance at Glitnir

Verdict: Acquitted

Bjarni Jóhanesson, former account manager at Gitnir

Verdict: Acquitted

Charge: Jóhannesson, the largest shareholder of the bank, pressured the bank’s management to extend a fraudulent loan to one of his many holding companies to buy a second holding company from one of his business partners, at grossly exaggerated prices.

October 2014

Sigurjón Árnason, former CEO of Landsbankinn

Verdict: Acquitted

Elín Sigfúsdóttir, former managing director of corporate finance

Verdict: Acquitted

Charge: arranging fraudulent loans to shell companies in Panama, which purchased shares in Landsbankinn.

November 2014

Sigurjón Árnason, former CEO of Landsbankinn

Verdict: One year in prison

Ívar Guðjónsson, former director of proprietary trading at Landsbankinn

Verdict: Nine months

Júlíus S. Heiðarsson, broker in proprietary trading at Landsbankinn

Verdict: Nine months

Sindri Sveinsson, broker in proprietary trading at Landsbankinn

Verdict: Acquitted

Charge: market manipulation

December 2014

Karl and Steingrímur Wernersson, brothers, prominent Corporate Vikings and owners of Investment company Milestone

Verdict: Acquitted

Guðmundur Ólafsson, former managing director of Milestone

Verdict: Acquitted

Three accountants at KPMG

Verdict: Acquitted

Charge: Karl and Steingrímur Wernersson were charged with having arranged Milestone to fraudulently pay five billion ISK to their sister in the lead up to the crash.

Ferbruary 2015

Hannes Smárason, former CEO of investment company FL Group

Verdict: Acquitted

Charges: Embezzling three billion ISK from FL Group in 2007.