International Investigation: Iceland's Kaupthing Bank Alleged to have Manipulated Credit Derivatives Skip to content

International Investigation: Iceland’s Kaupthing Bank Alleged to have Manipulated Credit Derivatives

According to the the Serious Fraud Office (SFO) is investigating Kaupthing, the now bankrupt Icelandic bank. Kaupthing was Iceland’s largest company, but in October 2008 it failed, along with the other two major banks, Landsbanki and Glitnir. The SFO is said to be pursuing a number of allegations of market manipulation involving investment vehicles controlled by some of the bank’s largest clients, including several high profile UK business leaders.

Former Kaupthing chairman of the board, Sigurdur Einarsson. IPA Photo.

In May several Kaupthing officials were put into custody because of market manipulation charges in Iceland. Among them was former chief executive Hreidar Mar Sigurdsson. Sigurdur Einarsson, former chairman of the board of Kaupthing, has refused to come back to Iceland for questioning and an arrest warrant has been given out on him.

It is alleged. according to the article, that in the weeks and months before Iceland’s financial system went into meltdown, certain trades improperly used at least €500m (£413m) of Kaupthing’s funds in an effort to manipulate credit derivatives. Sigurdur Einarsson said in a letter to his friends written shortly after the bank failed that Deutche bank had initiated the buying of the derivatives. In the letter he said: “On a proposal from Deutsche Bank it was decided to put to the test what would happen if the bank itself would start buying these credit default swaps. It was, however, not a simple issue, as the bank cannot buy credit default swaps on itself. Therefore [we] resorted to getting clients we trusted well and had long-standing relations with based on trust and loyalty to engage in these transactions on behalf of the bank … The transactions were made with the interests of the bank as a guiding light and fully in accordance with laws and regulations.”

Kaupthing headquarters. IPA Photo

Bank management hoped this would restore confidence in Kaupthing’s solvency in the months before the bank collapsed in October 2008.

The article says the bank could not act alone. Kaupthing could not offer to insure against its own insolvency because, in such an event, it would not have the funds to pay out on the insurance policy. Instead Icelandic bank bosses arranged for loans to be extended to investment vehicles controlled by trusted Kaupthing clients and these sums were used to write the insurance contracts, known as credit default swaps (CDSs).

Investigators are poring over communications between Deutsche Bank and senior figures at the Icelandic bank, including London-based former executive chairman Sigurdur Einarsson and former chief executive Hreidar Már Sigurdsson.

Both Einarsson and Sigurdsson deny wrongdoing.

Read more:

SFO’s Investigation of Iceland’s Kaupthing Leads to Lux

Wanted Iceland Banker’s Lawsuit Dismissed

Former CEO of Iceland’s Kaupthing Freed from Custody

Icelandic Banker Freed from Custody, Now on Travel Ban

Wanted Icelandic Banker Hires British Star Lawyer

Former Chair of Iceland’s Kaupthing Wanted by Interpol

Supreme Court Confirms Custody of Iceland Bankers

Iceland’s Special Prosecutor Proceeds with Questioning

Former CEO of Iceland’s Kaupthing in Custody

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