The Kaupthing conundrum

The Serious Fraud Office has staked its reputation on the high-profile investigation into the collapse of Iceland's biggest bank

More than two years after the collapse of Kaupthing, how much do we really know about what went on at Iceland's biggest bank? Well, we do know that the Serious Fraud Office (SFO) has pinned its reputation to an investigation of how British savers' money on deposit at the bank's UK business was used.

The SFO swooped to arrest nine men last week, including Kaupthing's former executive chairman, Sigurdur Einarsson, and its UK investment banking boss Armann Thorvaldsson.

We also know that Robert Tchenguiz, the London-based entrepreneur who is the highest-profile of those arrested, has come out fighting. He accuses the SFO of staging a publicity stunt and says he had offered to answer the agency's questions. He is threatening legal action to seek redress for the damage done to his reputation and business.

Mr Tchenguiz's brother Vincent was also raided by the SFO. The brothers, who built their fortunes in property investment, went public with their arrests on the day and have vowed to prove that they are innocent.

Kaupthing's rise and fall is a story that, with the benefit of hindsight, beggars belief. It is also a convoluted tale of how some of the most flamboyant figures in the world of (mostly) British business got unwisely entangled in one of the biggest debacles of the financial crisis.

In the boom decade of megabanks, Kaupthing was a minnow compared with rescued lenders such as Royal Bank of Scotland or Citigroup. But, along with its similarly aggressive rivals Landsbanki and Glitnir, Kaupthing nearly brought down its own country because Iceland let its banks get so large relative to the size of its economy. Once one of the world's richest countries per capita, Iceland was forced to go to the International Monetary Fund for a bailout in 2008.

Iceland's banks went on an expansion spree which resulted in Kaupthing's bosses taking up residence in London. The UK capital was the deal centre of the world where swashbuckling financiers were building empires taking in the booming property, sport, retail and leisure sectors. Ownership or stakes in Newcastle United FC, JJB Sports, J Sainsbury and Mitchells & Butlers were snapped up with Kaupthing's help.

That all changed when the debt markets froze but even as Kaupthing was running out of cash in 2008, its bosses claimed the bank was in fine fettle and could ride out the crisis.

However, the Icelandic government's 2,300-page report into the country's financial meltdown found that its biggest shareholders were also its biggest borrowers. Robert Tchenguiz owned 1.5 per cent of Kaupthing itself and was also a shareholder in its biggest shareholder, Exista, which was a fund set up to invest in Kaupthing shares.

According to the Icelandic government's report, Robert Tchenguiz's borrowing from Kaupthing increased to £1.7bn, plus more from subsidiaries, even as his businesses were "going downhill".

"It seems that the boundaries between the interests of the banks and the interests of their biggest shareholders were often blurred and that the banks put more emphasis on backing up their owners than can be considered normal," the report said. Robert Tchenguiz has said he lost £1bn in the financial crisis and that his businesses were so intertwined with Kaupthing that it made sense for the bank to continue backing them to protect its own business. The brothers have made a civil claim for £1.8bn against Kaupthing for fraudulent misrepresentation.

The UK's Financial Services Authority (FSA) also gave the bank a clean bill of health as the bank amassed deposits from retail savers, charities and local councils through its high-interest Kaupthing Edge account in the UK. It is the fate of these funds, deposited by British savers, that lies at the heart of the SFO investigation.

Kevin Stanford, the entrepreneur behind the Karen Millen and All Saints retail brands, on Friday linked shareholdings in the bank with the loss of Kaupthing Edge deposits.

Mr Stanford claimed in a letter from his lawyer that the bank used money from Kaupthing Edge savers to make loans to buy Kaupthing shares that supported the share price while executives sold their shares. Mr Stanford is trying to recover £81m he borrowed to buy the shares after he lost the money when the bank collapsed, the letter says.

Tony Shearer, the former chief executive of Singer & Friedlander, the investment bank Kaupthing bought in 2005, has accused the FSA of ignoring his warnings at the time that Kaupthing's bosses were not fit and proper people to run a UK bank.

Other Kaupthing relationships that have been examined by the SFO include its links with Mike Ashley, the owner of Newcastle FC, and with Mr Ashley's associate Chris Ronnie.

As the SFO has found in the past, fraud is a very hard charge to make stick. The financial crisis has so far thrown up far more people who were deluded, incompetent or unwise than it has those found guilty of criminal behaviour.

The Tchenguiz brothers and others caught up in the cat's cradle of Kaupthing's affairs claim they are the victims too and will continue do so unless the SFO can prove otherwise.

Key players: Close to the Edge? Kaupthing's major clients

Kevin Stanford

The retail entrepreneur emerged in documents leaked in 2009 as Kaupthing's fourth-biggest shareholder. In a letter from his lawyer last week, he blew the whistle on Kaupthing's alleged use of UK savings deposits to purchase Kaupthing shares and keep the bank's share price up. The Karen Millen founder alleged that he was lent £81m to buy the shares. The letter claims Mr Stanford was asked by the bank to keep the trade confidential.

Chris Ronnie

Mr Ronnie bought a 29 per cent stake in JJB Sports in 2007 alongside Exista, the fund that was set up to buy shares in Kaupthing, The deal was financed using a loan to Exista made by Kaupthing Singer and Friedlander, the UK arm of the Icelandic bank. Mr Ronnie, was installed as chief executive of the sports retailer but was fired in 2009.

Mike Ashley

Kaupthing advised the sports retail tycoon on his ill-fated takeover of Newcastle United FC in 2007 and his purchase of a stake in Blacks Leisure.

The Serious Fraud Office has been looking at the relationship between the Sports Direct entrepreneur and Iceland's banks, and in particular Kaupthing. Mr Ashley's long-time associate Chris Ronnie, see top right, raised eyebrows when he bought a stake in Sports Direct's arch rival JJB. The SFO last year dropped its investigation of Sports Direct over fraud and price fixing.

Nick and Christian Candy

The Candy brothers were among Kaupthing's most valued borrowers as it helped finance their development of thousands of luxury flats in London's most desirable locations. The Icelandic bank took stakes in a Candy project in Los Angeles as well as their Noho Square development in London, with Kaupthing's UK subsidiary providing a £200m loan for the latter project. The brothers went to war with Kaupthing in the courts once the bank had collapsed.

Robert and Vincent Tchenguiz

The Tchenguiz brothers were arrested last week and questioned for several hours in London over their involvement with Kaupthing. Robert Tchenguiz was both a shareholder in the bank and its biggest borrower. The brothers became high-profile figures in the City during the financial boom as they rode the wave of commercial property. They have brought a claim against Kaupthing for £1.8bn, have insisted they have done nothing wrong and have threatened legal action.

Jon Asgeir Johannesson

The pin-up boy for Iceland's aggressive march into the British retail market, Mr Johannesson's Baugur group was backed heavily by Kaupthing and its rivals Landsbanki and Glitnir. Kaupthing financed Mr Johannesson's purchase of Arcadia in 2001 and his purchase of a stake in Mosaic, the retailer behind brands such as Oasis, Principles, Warehouse and Karen Millen.