Investigate Supreme Court Bias in Banking Collapse

European Court of Human Rights

The European Court of Human Rights (ECHR) will discuss the shareholdings of two Icelandic supreme court justices – specifically whether their losses in the 2008 banking collapse influenced their rulings on bankers. RÚV reports that Ólafur Ólafsson, one of the main owners of now-defunct Kaupþing bank, has sued justices Markús Sigurbjörnsson and Árni Kolbeinsson who ruled in the infamous Al-Thani case in which Ólafur was convicted of market abuse.

Big losses, heavy convictions

The Al-Thani case was one of the most extensive criminal cases in Iceland. The convictions received by the four defendants are also the most heavy ever given for financial crime. In the case, Ólafur and three other executives of Kaupþing were convicted of market abuse for falsifying transactions to keep stock prices high at the bank.

The defendants previously appealed the case to the ECHR, which concluded that Justice Árni Kolbeinsson was not impartial in his ruling due to his son’s work for Kaupþing. Ólafur’s current complaint concerns the two justices’ shareholdings before the banking collapse, which disappeared when Kaupþing declared bankruptcy in 2008.

The ECHR sent a letter to all parties involved in the case earlier this month. In the letter, the Icelandic state is requested to try and reach an agreement with Ólafur. If an agreement is not reached by December 2, the ECHR will continue its deliberations on the case and begin more substantive proceedings.

Central Bank Was Wrong to Grant Loan During Banking Collapse

Central Bank of Iceland

Central Bank of Iceland Director Már Guðmundsson says that the institution made the wrong decision when it granted a loan to Kaupþing Bank during the banking collapse, RÚV reports. The Central Bank has published a report on the controversial ISK 75 billion ($605m/541m) loan, which it granted to Kaupþing Bank just days before it went bankrupt in the 2008 economic crisis. The report states, however, that no laws were broken in the granting of the loan.

The Central Bank of Iceland granted Kaupþing Bank an ISK 75 billion ($605m/541m) loan on October 9, 2008, just before emergency trading restrictions were put in place by the government. Kaupþing went bankrupt only two days later, leading to a loss for the Central Bank purportedly amounting to ISK 35 billion ($282m/€252m). The decision to grant the loan proved controversial and the reasoning behind it opaque.

No written documentation

The main objective of the recently published report was to clarify the reasoning behind the loan. It has been in the works since 2015 and its release was repeatedly postponed. The report states that information on the loan is lacking, making it difficult to determing the reasoning behind it. Notably, there is no written documentation that Kaupþing requested a loan in the first place. There is also no evidence that the Central Bank’s Board of Directors approved the loan. There is, however, no doubt that the decision was made by the Board in consultation with then-Prime Minister Geir H. Haarde.

Geir was highly criticised for his response to the banking collapse and tried by the High Court in Iceland, which convincted him on one the four charges, namely, not having held cabinet meetings on important matters in the lead-up to the economic collapse. A recorded telephone conversation reveals that Geir did not expect the loan granted to Kaupþing to be repaid.

Hindsight and lessons

Although hindsight reveals that granting Kaupþing a loan was the wrong decision, Már asserted that it was not clear at the time the decision was made. The loan would have been justified had it succeeded in rescuing the bank. “It’s not always appropriate to use the metrics of information of later times when assessing particular decisions. In the financial whirlwind that raged around the world then, banks and central banks were fighting to stay afloat and other authorities came to their aid.”

Már stated that two important lessons can be learned from the situation. The first is that regulations on the granting of emergency loans need to be better clarified. The second is that shares in foreign banks are not suitable collateral for such loans, as it can quickly become worthless in a financial crisis.

Former Kaupþing Bank CEO Convicted of Insider Fraud

Judge's gavel

Hreiðar Már Sigurðsson, the former CEO of Kaupþing Bank, was convicted in Reykjavík District Court today for insider fraud, Kjarninn reports. Namely, he was found guilty of selling his shares in the bank to his own company. This is Hreiðar Már’s third conviction related to financial crimes during his tenure at Kaupþing, for which he has, thus far, earned a cumulative sentence of seven years in prison.

Per the findings of the court, Hreiðar Már bought shares in Kaupþing for ISK 246 million ($2m/€1.8m) on August 6, 2008. That same day, a private limited company in his ownership purchased the shares for ISK 572 million ($4.7m/€4.1m), funded by a loan that the company had received from Kaupþing. The resulting “profit” – a difference of ISK 326 million – was then transferred to Hreiðar Már’s personal bank account later that month. The loan taken by the private limited company was supposed to be paid back in 2011, however, by then, Iceland’s banks – including Kaupþing – had long-since crashed and the company had gone bankrupt.

The indictment against Hreiðar Már made a particular point of emphasising that when this sale took place, stock prices in Iceland were dropping rapidly. Iceland’s banking crisis is typically dated to October 6, 2008, the day that Former Prime Minister Geir H. Haarde notified the nation of the gravity of Iceland’s financial situation in a televised address. Over the next few days, Iceland’s banks crashed one by one.

Hreiður Már was tried in this fraud case alongside Guðný Arna Sveinsdóttir, Kaupþing’s former chief financial officer. Guðný Arna was charged with participating in the commission of the crime, such as instructing lower-level employees on the settlement of securities transactions and loan distribution to Hreiðar Már’s company. However, Guðný Arna was acquitted of all charges in this matter.

Prosecutor Finnur Þór Vilhjálmsson requested that the court levy an additional sentence of 12 to 15 months against Hreiðar Már for this fraud conviction, which he said represented another serious breach of trust and also afforded him significant personal gains. The District Court did not sentence Hreiðar Már to prison time for his crime, however, as he has already been sentenced to seven years in prison, which exceeds the maximum sentence allowances for economic crimes.

Heiðar Már was previously found guilty for major market manipulation and breach of trust in 2016, and embezzlement and breach of trust in 2015.