So, what lies at the heart of the case against the Tchenguiz boys?

As police and the Serious Fraud Office take the property entrepreneurs in for questioning, Laura Chesters talks to their associates gathered on their luxury yacht anchored in Cannes
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The Independent Online

As the sun set over the Cote d'Azur on Thursday, property player Vincent Tchenguiz's yacht, Veni Vidi Vici, began to fill for his lavish party at Mipim, the annual property expo in Cannes.

But Vincent and his brother, Robert, were nowhere to be seen, still recovering from an astonishing 24 hours. The day before, when Vincent was due to fly by private jet to France, the pair were held in London police cells for nearly 12 hours by the Serious Fraud Office, which had sent 135 police officers and SFO investigators to the homes and offices of the brothers and their teams.

As the raids began at 5.30am on Wednesday in London and Reykjavik, the Tchenguizes were arrested by police. In all nine men were arrested as part of a long-running investigation into the 2008 collapse of Kaupthing, one of Iceland's three biggest banks.

Friends and acquaintances drinking Vincent's champagne and eating the steak and fois gras or the scallops with squid ink risotto at Thursday's party talked of their sympathy and concern for the brothers. "They are probably just scapegoats. Maybe it's punishment for Robbie trying to sue Kaupthing for his losses," said one.

Many guests on the boat believe the Tchenguizes to be just like hundreds of other businessmen who borrowed huge amounts from banks during the free and easy lending of the mid-2000s. But they would say that, wouldn't they?

So how did two Iranian-born, Iraqi-Jews, educated in the US and living in London since their twenties, become heavily involved in an Icelandic banking crisis and what is at the heart of the 16-month investigation?

Robert, 50, and Vincent, 54, borrowed billions from Kaupthing in the mid-2000s boom, beside other well-known businesses and investors including the Candy brothers and Jon Asgeir Johannesson, who was behind the retail group Baugur – which once owned, then lost, half of the British high street. Sir Tom Hunter and All Saints retail entrepreneur Kevin Stanford also had close ties with the bank.

The bountiful lending by Kaupthing and its bank rivals – Glitnir and Landsbanki – came to a crashing halt in 2008. The banks had grown quickly, lending cheaply to investors in retail, property and finance across Europe on a highly leveraged basis, and with little security from its borrowers. Robert Tchenguiz became the biggest Kaupthing borrower, racking up £2bn in loans.

Kaupthing was nationalised after international lenders refused to refinance short-term borrowing in the midst of the world financial crisis, causing a run on the bank's online deposits. It collapsed in October 2008 with debts worth more than 12 times Iceland's GDP.

Iceland took a $4.6bn loan from the International Monetary Fund and since then regulators and investigators have been poring over the books to see if fraud, foul play or stupidity was to blame for the collapse.

The SFO launched its investigation at the end of 2009 and said at the time it was looking at the "decision-making processes, which appear to have allowed substantial value to be extracted" just before its collapse.

Investigators also found evidence that Kaupthing and the other Icelandic banks made a large proportion of their loans to shareholders.

Robert Tchenguiz owned a 1.5 per cent stake in Kaupthing and held shares in Exista, Kaupthing's majority owner. The complex nature of these financial transactions is at the heart of the investigations. One entrepreneur on the Cannes-moored boat on Thursday quoted Shakespeare's Hamlet: "As Polonius warned, neither a borrower nor a lender be, and it looks like Robert was both, to himself."

Although Robert and Vincent Tchenguiz are best known for their links to property, Robert diversified into other businesses and it is these deals that are under the spotlight, rather than property transactions.

The brothers first set up their property company, Rotch, in 1982 but in 2002-03 separated it into R20, run by Robert, and Vincent's Consensus Business Group.

The brothers were proud of their complex financial engineering and debt structures and were not shy of shouting about the clever ways they financed and refinanced their deals. Structures such as op-co/prop-co became their buzz words and traditional property people began to see the brothers as financiers rather than part of the tight-knit property industry.

R20 began diversifying into buying stakes in retail and leisure businesses. Robert lost out on a deal to buy Selfridges, but in 2005 was part of a consortium which bought the supermarket chain Somerfield. He later bought stakes in the pub group Mitchells & Butlers and the supermarket giant Sainsbury's. He also bought the Laurel pub group with the backing of the bank.

His investment in listed companies was often through contracts for difference – CFDs – which allow punters to make (or lose) money on movements in the share price without actually buying the stock. Kaupthing helped him convert some of these CFDs to shares. But following the banking crisis and the Icelandic collapse, Robert was called to pay up on his CFDs – leaving him with a huge paper loss. His stakes were seized after he lost a battle to keep them and the beginning of the end began.

When asked, last year about his situation following the collapse of Kaupthing, Robert confided: "When you borrow from a bank, you might think there could be a small chance the borrower could go bust. But no one would ever think the bank would."

Meanwhile, Vincent had stuck to mainstream property, residential land buying and residential management businesses. But he also began diversifying, investing in clean technology companies and green energy.

A family trust controlled by Robert sued Kaupthing's administrators last year claiming the bank went back on its promise not to call in the security on Mitchells & Butlers and Sainsbury's CFDs. The case is being fought by Kaupthing's administrators.

But this week, following the arrests, and subsequent release without charge on Wednesday evening, the team's lawyers are now poring over documents and accounts. The two men arrested in Iceland – thought to be Armann Thorvaldsson, the head of Kaupthing's UK arm, and its former chairman, Sigurdur Einarsson – were released but were questioned again on Thursday and one was questioned on Friday.

Down on the French Riviera, Vincent's boat party was hosted by his right-hand man, Julian Thorpe. Mr Thorpe, who was not wanted for questioning, spent the week at Mipim, hosted the party, and returned to England on Friday evening.

R20 director Tim Smalley was met by police at the airport on his return on Wednesday, having been called back from Mipim after landing at Nice airport.

The brothers, their team and their lawyers will face a long wait – investigations of this nature take an age. But there is likely to be a progress update in the autumn. The SFO has a long slog on its hands and a poor track record for securing convictions.

It is still investigating Mayfair property investor Achilleas Kallakis, who is awaiting trial for fraud. The only notable property player to have been sent to prison following an SFO investigation is Gerald Smith of Orb Estates who was sentenced to eight years in prison in 2006 after pleading guilty to theft totalling £34m.

The Tchenguiz brothers maintain their innocence and are co-operating fully with authorities. Whatever the outcome, the process will be a long and painful one, just as the boom of the mid-2000s was swift and pleasurable.