Three and a Half Years Have Been Wasted

The UK Serious Fraud Office's probe into Vincent Tchenguiz's connections with Kaupthing Bank was called off this past June. In an extensive interview with Þórður Snær Júlíusson, he discusses the case, his dealings with Icelandic banks and his opinion of Kaupthing's winding-up and resolution committees.

Vincent Tchenguiz is a name with which Icelanders have become familiar, although many do not realise why that is. Vincent is not to be confused with his brother Robert, who was the largest individual debtor to the Kaupthing banking group at the time of the bank's collapse, as well as investing heavily in Icelandic businesses. Companies led by Vincent were also clients of Kaupthing, but his only interaction with the parent bank, and his only actual financial activity in Iceland, was a 100 million GBP loan provided to him in March 2008, a loan that turned out to have great consequences for Vincent Tchenguiz.

It was a little past 6 A.M. on the 9th of March 2011 when Vincent awoke to find several police officers in his bedroom. They told him that he was to be brought in for questioning and waited while he showered and dressed before escorting him to a London police station. Meanwhile, press photographers, having gotten wind of the arrests, gathered outside his offices, where policemen were conducting a search of the premises. At the police station, Vincent was told that his connections to the Icelandic bank Kaupthing were the reason for the Serious Fraud Office's investigation of him.

On 18 June 2012, over a year after Vincent's arrest, the SFO announced that the office had dropped its investigation. By then, he had received an apology for the proceedings and a judge had opined that the SFO had shown utter negligence in their handling of the case. Vincent believes that the probe, which had a multifold effect on his business empire, was connected to his dealings with the Icelandic parties handling the bankruptcy estate of Kaupthing.

Hedge Funds Rather Than Banks

"My first contact with Kaupthing in Iceland was in March 2008, when the bank granted me a loan, the so-called Pennyrock loan of 100 million GBP," says Vincent Tchenguiz. The loan, which totals ca. 20 billion ISK at the current exchange rate, was described in the report of Althingi's Special Investigation Commission as having been "secured against a second mortgage on lease payments for real estates in his possession. The first mortgage is new collateral for RT [Robert Tchenguiz, brother of Vincent]". Besides this loan, companies within Tchenguiz Family Trust, run by Vincent, received a loan from Kaupthing's UK affiliate, Kaupthing Singer&Friedlander (KFS).

Tchenguiz feels that his dealings with the bank were highly professional. "I had done business with Kaupthing in London, with Ármann Þorvaldsson [former CEO of KFS]. My relationship with him, and later the Icelandic bank, was highly professional, in my estimation. They had very strict requirements regarding collateral, conducted due diligence reviews and performed well when I took my only lown with them. But Kaupthing's directors were also aggressive and risk-seeking in their loan policy. Most international banks reduced their loan granting considerably at the onset of the liquidity crisis in the summer of 2007. Kaupthing, however, continued granting loans.

But we have to ask ourselves whether these Icelandic banks were in fact banks. Their balance sheets suddenly comprised 50 billion dollars, almost everything was financed on the market and their equity ratio was perhaps ten percent. Were they in fact banks or hedge funds? I believe that at some point they turned into hedge funds. They were considered to be banks, but only a small fraction of their operations was in traditional banking."

More difficult in Iceland

The collateral for Tchenguiz's loan was based on the second mortgage in projected rental cashflows for 150 years. The first mortgage was held by his biggest creditors, who had lent him approximately 1.5 billion pounds, ca. 300 billion ISK at the current exchange rate. Among these were banking giants such as Bank of America/Merrill Lynch, HBoS and Royal Bank of Scotland.

Tchenguiz says that everything went smoothly until Kaupthing collapsed in October 2008. "We had other loans at KFS, totalling over 100 million pounds and after working with the bank's liquidator for about three years, we have seen a very good return on that loan.

But in Iceland, everything was more difficult from the beginning. We kept telling Kaupthing's resolution and winding-up committees that we had to find a way to work together to maximise the returns. But we had trouble communicating and these people were in a hurry. They wanted to be repaid very quickly. However, the collateral we had put up against the loan assumed a long-term repayment process. That was the business model. We wanted to refinance the loans every few years as the cashflow increased due to higher lease income, enabling us to procure higher loans which we could then use to repay other loans, such as this Kaupthing loan."

Robert's Influence

As has been noted, Robert, Vincent's brother, was the largest individual debtor to the Kaupthing banking group. There has been an ongoing dispute between him and Kaupthing's estate ever since the banking crisis, concerning the settlement of highly complicated loan agreements, margin calls and court cases. One of these cases concerned the sales proceeds of a share in the British supermarket chain Somerfield.

Vincent believes that these disputes influenced his discussions with Kaupthing. In fact, he says that the effect was enormous. "Of our three portfolios put up as collateral for the Pennyrock loan, one had gone to creditors, destroying the business model to repay these loans. We did not understand why they did this and were very upset with Kaupthing. So upset that we sued them in an Icelandic court for 1.5 billion pounds [ca. 300 billion ISK] as repayment of the equity value of our group.

"We then filed a comparable suit in the UK in April 2010 to see if the jurisdiction could lie there. We suspected that a UK court's handling would not be as emotionally tinged as it could possibly be in Iceland."

There was subsequently much wrangling about where the case should be tried, with Kaupthing obviously preferring Iceland, while the Tchenguiz brothers believed that they had a better chance of being awarded damages in a UK court. According to Vincent, the dispute took a dramatic turn early last year. "In February 2011, a British judge suggested that the jurisdiction should be in the UK. In March 2011, I was arrested."

Wanted to Be Gaddafi

The SFO carried out searches at twelve premises in London and Iceland and nine were brought in for questioning. These were, besides Vincent, his brother Robert, two of his employees and five former Kaupthing employees, among them the bank's former non-executive chairman Sigurður Einarsson and Ármann Þorvaldsson.

The SFO's investigation of Robert Tchenguiz and several Kaupthing executives commenced in December 2009. According to documents Fréttablaðið has reviewed, including British court documents, Vincent was not connected with the investigation until September 2010, when UK accountaning firm Grant Thornton, hired as advisors and investigators by Kaupthing's estate, informed SFO employees of their belief that documents suggested that companies owned by Vincent had filed forged papers when procuring the Pennyrock loan.

Vincent Tchenguiz's arrest did not go unnoticed by the UK public, being one of three major news stories in the following days. The other two were Muammar Gaddafi's reaction to the insurrection in Libya, which he still governed at that time, and the crisis in the Fukushima nuclear plant following the Japan earthquakes. Tchenguiz says that he often compared these three news stories, wondering in whose shoes he would like to be. "At the time I thought: Gaddafi!"

Said There Were "Other Measures"

When asked if he believes the CFO's actions to be connected to his dispute with Kaupthing's resolution committee, Tchenguiz replies that one must draw one's own conclusions, i.e. he does not answer the question directly. "It is possible that the civil case was in the minds of those who provided the information to the SFO. Our suit against Kaupthing revolved around events that took place after the bank's collapse, actions taken by its resolution and winding-up committees and potential damage caused by their decisions."

I was expecting something to happen in March 2011, I just didn't know what. I wasn't particularly surprised when I was arrested, as I had gotten word from Kaupthing that they were considering doing something. They, the resolution committee, told me, as I remember it, that there were "other measures" to get to me. The person who said that did not explain what these measures were."

Conflicting Stories

Tchenguiz believes that the documents on which the SFO investigation was based came, at least in part, from Kaupthing's advisor, Grant Thornton. "While I was in custody I gained access to the documents on which the actions against me were based. I saw right away that practically everything pertaining to me directly contradicted Kaupthing's arguments in the civil case. I found that peculiar as the investigation seemed to be based, at least partly, on documents from Grant Thornton. They provided all the documents in the criminal case that the SFO was trying to build, as well as in the civil case, but still these documents told a separate story in each case. I immediately asked myself how this could be.

It was absolutely clear that Kaupthing was fully informed of the fact that the loan was secured against a second mortgage, as the groups other debts totalled 1.5 billion pounds [ca. 300 billion ISK]. These kinds of debts do not go unnoticed."

A few days after the arrests, on 16 March 2011, a British judge ruled that the case fell under UK jurisdiction. Two days later, the Icelandic Supreme Court, confirming the Reykjavik Municipal Court's earlier decision, ruled that disputes about the legitimacy and amounts of claims against Icelandic banks in liquidation should be settled in Iceland, so everything pointed to court proceedings taking place in both the UK and Iceland.

Kaupthing filed a report with the UK court in June 2011 and at the end of the month, the SFO received a copy. Tchenguiz believes that it contains information that completely undermines the charges against him, such as the fact that Kaupthing had been informed of the fact that the collateral procured against the Pennyrock loan held another mortgage. It nevertheless took the SFO almost a year to drop its investigation of him.

Vincent believes the delay was due to several factors. "One being that the case was very prominent in the media and held great interest for the public. This being so was a choice made by the SFO, as they informed the media of the arrests beforehand, so they could be ready outside. The relationship between Iceland and the UK has also been very frosty due the banks and the extensive coverage of the effect of their collapse here. That also had an effect.

Legal Review

Immediately following the arrests, both Vincent and his brother Robert requested a legal review of the documents on the basis of which warrants to launch the investigation of them were issued.

In December 2011, the SFO admitted for the first time that their search and arrest warrants were issued on the basis of false information. The SFO was subsequently ordered to return the documents seized from Vincent. However, the investigation continued as before.

In February this year, the SFO issued a three page written apology to Vincent Tchenguiz and admitted again that the office's actions had been based on false information.

In April a High Court judge reprimanded the SFO harshly for failing to produce any evidence that could have warranted the search of Vincent's premises. According to court documents, judge Sir John Thomas said that the SFO had displayed "sheer incompetence" and he had "never seen anything like it".

On 18 June, the SFO announced that it had ceased its investigation of Vincent Tchenguiz. Last Thursday it was announced that former Kaupthing employees Ármann Þorvaldsson and Guðni Níels Aðalsteinsson were also no longer being investigated. Proceedings against Robert and other suspects will continue.

Will Sue the SFO

Tchenguiz has announced his intention to sue the SFO, demanding 100 million pounds, ca. 20 billion ISK, in damages.

He states that the financial ramifications of the office's investigation were very serious. The biggest creditor of his real estate company Peverel called in a loan a few days after the arrest, forcing the company into moratorium.

All plans to refinance the approximately 2 billion pound debt, ca. 400 billion ISK, of Tchenguiz's other real estate companies also fell through when potential lenders pulled out of the negotiations. "Of course, the banks thought: Oh my god, has he done this?" Due to the reports in the media, they understandably had to reconsider their position towards me and their association with me."

Eventually, Vincent managed to calm his creditors and keep his companies. "Otherwise, this would have been the end of me. Then this investigation would probably have lasted for many more years. It is impossible to try to prove your innocence when you're ruined and all your assets have been taken from you. When a business model becomes worthless, no one will believe that it would have worked to repay your debts. All this began in October 2008. Now it is mid-year 2012. We have wasted three and a half years that could have been used for something else than this struggle."