Bankers On Trial, Again

The Reykjavík District Court began hearing oral testimony on Monday in the largest case relating to the events leading up to the crash of 2008. Nine former managers of Kaupthing bank are on trial for market manipulation in the 11 months leading up to the bank’s collapse, along with the rest of the Icelandic financial system in the fall of 2008. Over fifty witnesses are scheduled to appear before the judge, a process expected to take seventeen days, followed by five days of oral arguments.

Among the nine on trial are the three top managers of the bank who were recently sentenced, along with Ólafur Ólafsson, the largest individual shareholder in the bank, to between four and five and a half years in prison for market manipulation in the Al-Thani case, which is allegedly the most brazen instance of a systematic and massive scheme to manipulate markets and deceive investors by engineering artificial demand for the shares of Kaupthing.

Kaupthing broker overslept, causing the market to take a dive

According to the charge, the bank itself was the largest buyer of its own shares on the open market. During eleven months, from November 1, 2007 to October 8, 2008, its purchases amounted to 42.3% of the total turnover of Kaupthing shares in the Icelandic Stock Exchange. Kaupthing was particularly active in the opening and closing auctions on the Exchange, thus setting the tone for each trading day. Kaupthing systematically mopped up all sell-offers for its shares, ensuring that supply was never able to put a pressure on its share prices.

Kaupthing’s CEO, Hreiðar Már Sigurðsson, its chairman, Sigurður Einarsson, its head of proprietary trading, Einar Pálmi Sigmundsson, and CEO of the company’s domestic division, Ingólfur Helgason, are charged for ordering these trades and carrying them out with the help of two brokers, working for the bank’s proprietary trading, Birnir Snær Björnsson and Pétur Kristinn Guðmarsson.

According to the charges, the top brass received daily updates on these transactions and oversaw them personally. The prosecutor alleges two brokers were instrumental for the scheme, pointing out that one day, when Pétur overslept and thus failed to run through the daily mopping up of sales orders, the stock price of Kaupthing took a dive, falling by 4% in the morning trading.

These actions led to the bank accumulating a massive inventory of its own shares, which it had to unload regularly. The Al-Thani case involved one of these sales, in which Ólafur Ólafsson arranged for two shell companies, which were supposedly set up and financed by the Qatari royal, to purchase 37.1 million shares in Kaupthing.

Fraudulent loans used to finance fraudulent sales

The current case, however, covers four other similar sales involving 68,25 million shares. The total value of these sales, which involved a major part of the outstanding stock of the bank’s shares, has been estimated at between 500 million and 1.2 billion dollars.

The charge alleges that these purchases were engineered by the bank’s top managers, and fully financed with loans from the bank. The bank failed to secure adequate collateral for the loans, other than the shares themselves. This left the entire downside with the bank (and ultimately its creditors and the taxpayers, once it went bust) while the favored customers who participated in the trades could hope to keep the upside, had the bank survived and its share price recovered.

Hreiðar Már, Sigurður, Ingólfur and Magnús Guðmundsson, the CEO of Kaupthing Luxembourg, are all charged with having engineered these sales, which created a false sense of demand for the bank‘s shares. In addition, Björk Þórarinsdóttir, a former member of the loan committee of Kaupthing and Bjarki H. Diego, managing director of the bank‘s loan division, are charged with making fraudulent loans, by failing to secure reasonable collateral for the loans.

Still, it was one the coolest banks in the world

During the first day of oral testimony, Pétur Kristinn Gunnarsson, a broker, argued he was only following orders and that he had no reason to question his superiors, adding that they were considered to be “superstars” by people in the financial sector.

Pétur  said futhermore that he “still believe[s] Kaupthing was among the coolest banks in the world,” and that had the world financial system not crashed in the fall of 2008 he would today be working for the bank, in much the same manner as he had been in 2007 and 2008.

Which is probably the crux of the matter.

There is little reason to assume that anyone, let alone financial superstars like the managers of Kaupthing, would have been charged with anything had Kaupthing not collapsed. And there is every reason to think it would still be considered one of the coolest banks in the world had it managed to weather the storm.