New information appears to shed light on the downturn of investment fund GAMMA, according to investigative news programme Kveikur. Personal payments to Pétur Hannesson, CEO of Upphaf (owned by GAMMA subsidiary GAMMA: Novus) may have been the impetus for unfavourable deals with contractors, leading to losses that weren’t discovered until after Pétur had left the company, and which were ultimately shouldered by insurance companies and pension funds. In just over one year, GAMMA: Novus’s worth went from ISK 5.2 billion ($37 million/€34.2 million) to just ISK 42 million ($300,000/€277,000).
VHE and Upphaf
The service and manufacturing company VHE – hired to complete the lion’s share of construction projects for the property development company Upphaf – paid a total ISK 58 million ($413,000/€382,000) to Upphaf CEO Pétur Hannesson between 2015 and 2019. The payments were made directly to Pétur and companies in his name. At the same time, Upphaf paid VHE and its subcontractors more than ISK 7 billion ($50 million/€46.1 million) for a project negotiated directly with VHE, without tender.
The Sale of GAMMA
As reported by Kveikur, GAMMA (GAM Management) was established by two former employees of the Kaupþing bank during the summer of 2008, months prior to the financial crisis (GAMMA managed assets for pension funds, insurance companies, financial institutions, companies, and individuals). GAMMA survived the financial crisis, and, in 2011, the company began turning its attention to investments in real estate (the company attracted controversy, being accused of driving up rent and real estate prices).
In 2018, following a decline in GAMMA’s operations – during which time many leading figures left the company – GAMMA’s owners began searching for a potential buyer. Kvika bank showed interested, eventually assuming control of GAMMA’s entire outstanding share capital in late 2018. The initial buying price was set for ISK 3.75 billion ($26.7 million/€24.7 million), but was eventually settled at ISK 2.9 billion ($20.6 million/€19.1 million) when the agreement was finalised.
After Kvika Bank acquired GAMMA, it reevaluated GAMMA: Novus’ assets, concluding that the fund’s sole asset – the aforementioned Upphaf – was worth significantly less than previously thought, or approximately ISK 42 million ($299,000/€277,000). As it was initially valued at ISK 5.2 billion ($37 million/€34.2 million) GAMMA: Novus’ value decreased in value by 99%.
As noted in a public statement on September 30, 2019:
“It has transpired that the position of two alternative investment funds managed by GAMMA, GAMMA: Novus and GAMMA: Anglia, is considerably worse than had previously been estimated. The rate of the funds has been lowered to reflect this.”
A single-sheet publication distributed to equity certificate holders on that same month (September 2019) stated that the “actual development” of the project had been significantly overrated. As Kvika explained to investors, the fund’s devaluation could partly be traced to overvalued real estate. Furthermore, almost two billion had been lost to exorbitant loans, and another two billion disappeared when it was discovered that the worth of GAMMA: Novus’ assets had been overestimated (“assertions regarding how much real estate had been constructed turned out to be false”).
Upon this discovery, Kvika replaced the former managers of the fund, notified the Financial Supervisory Authority, and hired the accounting firm Grant Thornton as an impartial agent to investigate. Among other things, Kvika probed whether payments had been made from Upphaf to companies owned by former CEO Pétur Hannesson.
Upphaf, a property development company owned by GAMMA: Novus
Grant Thornton’s investigation centred on the property development company Upphaf, whose sole ownership was in the hands of GAMMA: Novus (a subsidiary of GAMMA Capital Management). GAMMA: Novus’ equity amounted to ISK 4.8 billion ($34.2 million/€31.6 million) in mid-2018. During the spring of 2019, GAMMA: Novus issued bonds to finance construction projects and raised ISK 2.7 billion ($19.2 million/€17.8 million) at high interest rates (approximately 16%).
An extensive business relationship
As reported by Kveikur yesterday, after Pétur Hannesson had assumed the role of CEO, Upphaf entered into an extensive business relationship with VHE, a heavily leveraged contracting company, struggling with illiquidity, and with little experience in large-scale real estate projects. Contracts awarded to VHE, without competitive bids, were such that Upphaf bore sole responsibility for the projects (and VHE none).
Reporters with Kveikur maintain that they are in possession of documents showing payments amounting to a total of ISK 58 million ($413,000/€382,000) from Pétur Hannesson, and companies in his name, at the same time that he was awarding contracts of upwards of ISK 7 billion ($49.8 million/€46.1 million) to VHE.
Kveikur reporters contacted Pétur Hannesson and Unnar Steinn Hjaltason, VHE senior partner and chairman of the board. Both refused to comment. A few days later, a lawyer representing VHE sent a letter to Kveikur, in which the company admitted to having paid Pétur ISK 58 million ($413,000/€382,000) in consulting fees. While acknowledging that the payments seemed suspicious, VHE maintained that there was a valid explanation; the payments concerned to other real estate projects unrelated to Upphaf, and there was nothing suspect about the two parties’ business relationship.
Investors in the GAMMA: Novus investment fund – Icelandic citizens, insurance companies, and pension funds – suffered heavy losses. The insurance company TM lost ISK 300 million ($2.1 million/€2 million), and insurance companies VÍS and Sjóvá ISK 155 million each ($1.1 million/€1 million). Three retirement funds, among them Birta, lost a total of ISK 800 million ($5.7 million/€5.3 million). In an interview with Kveikur, Ólafur Sigurðsson, CEO of Birta pension fund, stated that the payments to Pétur needed to be investigated. During the programme, it was revealed that the district prosecutor had been given copies of the files in question. On Monday, executives at Kvika Bank have also filed a suit to the District Prosecutor, and the payments will be investigated as embezzlement.
Following Kveikur’s coverage, GAMMA issued a public statement that reads that the current executives of GAMMA had been informed of the programme prior to the broadcast: “The relevant authorities are conducting an investigation into the matter, and GAMMA has informed the office of the District Prosecutor of the pertinent details. GAMMA will also, on behalf of GAMMA: Novus’ owners and its lenders, i.e. its many investors, investigate whether these parties are entitled to compensation.”