SFO in the dock after collapse of Icelandic bank fraud inquiry

The Serious Fraud Office was yesterday embarrassingly forced to scrap its three-year investigation into fraud at the failed Icelandic bank Kaupthing.

The case has cost the taxpayer millions of pounds, but David Green, who took over as director of the SFO in April, was forced to halt the inquiry after he found "there is insufficient evidence to justify its continuation".

The focus of the investigation had been on the involvement of the property magnate brothers Robert and Vincent Tchenguiz in the collapse of the bank. The SFO's case centred on the fact that Robert Tchenguiz was a major shareholder in Kaupthing through an investment vehicle known as Exista.

His losses on stakes in companies such as Sainsbury and Mitchells & Butlers around the time of the credit crunch also hit the Icelandic bank.

But the investigation was beset by errors. Problems arose in March last year after some 135 police and fraud investigators swooped on the homes and offices of the brothers, as well six others, including Kaupthing's former executive chairman Sigurdur "Siggi" Einarsson.

The SFO conceded there were factual errors with the evidence it used to obtain the search warrants against the brothers after a judicial review found that the warrants were obtained by misrepresentation and non-disclosure to the judge.

Lord Goldsmith QC, representing Vincent Tchenguiz, told judges Sir John Thomas and Mr Justice Silber in May that the SFO made "false" and "misconceived" allegations.

The former attorney general said: "The nature and extent of the SFO's admitted errors … point to collective institutional failure."

The investigation against Vincent was dropped as a result of the judicial review, and against Robert yesterday when the investigation was discontinued.

Robert Tchenguiz said he welcomed the decision by the SFO to clear him formally of wrongdoing in the collapse of Kaupthing. "I recognise the SFO have an important role to play in investigations of this nature, and have done my utmost to assist them in any way I can," he said. "I look forward to closing this chapter and getting on with business."

Questions will be asked of the SFO following the collapse of the case. But one former senior official at the SFO said last night: "Some very basic things went wrong with the Kaupthing investigation and someone's got to take the blame. But there's a culture of buck-passing and time-serving at the agency which needs to be dealt with."

The official said a lack of adequate funding left the agency facing an uphill battle in its fight against "those with big pockets who can afford the best legal brains".

Andrew Oldland QC, a former prosecutor at the SFO, blamed the collapse of the case on "political failures".

"If you look back to the beginning of 2011, the future of the SFO was uncertain. Its budget was cut from £52m to £38m, and that had a very direct effect on a number of senior personnel at the SFO, many of whom decided to leave."