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Glitnir bank’s winding-up committee launches major court proceedings in New York

As I mentioned in the last post, another dude who’s feeling the heat right now is old Jón Ásgeir Jóhannesson, former owner of Glitnir bank, as is his wife and a handful of cronies.

The Glitnir winding-up committee yesterday initiated court proceedings against them, as well as PriceWaterhouseCoopers, in New York. Yesterday it seemed that Jón Ásgeir had gone AWOL — they couldn’t find him to deliver the subpoena, since apparently he doesn’t have a fixed address. He is obliged to give a written statement of all his assets within 48 hours of the subpoena being delivered, and they will subsequently be frozen. He will also be banned from doing business anywhere in the world. For some reason the major focus has been on Jón Ásgeir, the owner, but presumably all of this applies to all the others implicated, as well.

This morning it was reported, however, that Jón Ásgeir had been located at “one of his apartments” in Manhattan.

The proceedings are being launched in the US because Glitnir raised funds in the US throughout 2007, primarily through the sale of bonds. Yesterday, when the news hit, Jón Ásgeir was apparently livid and threatened the Glitnir winding-up committee, saying they could face up to ten years in prison for “abusing the US judicial system”. When the head of the committee, Steinunn Guðbjartsdóttir, was approached for comment, she remarked: “Well, I didn’t expect him to be happy about it.” [Heheh. Droll. Very droll.]

The legal claim, as outlined on the Glitnir website, minces no words:

[The claim] accuses Jón Ásgeir Jóhannesson, who controlled around 39% of Glitnir’s shares via various entities, of seizing effective executive control of the Bank in April 2007, by ousting Glitnir’s directors and senior management and replacing them with Welding, Jonsson and other accomplices. Jóhannesson and the other named Defendants then used their control over the Bank to issue massive loans to, and fund a series of transactions with, other companies they controlled. In doing so, they flouted the Bank’s internal risk policies, as well as Iceland’s laws and financial regulations governing large exposure to connected parties.

To finance these diversions, the individual Defendants relied heavily on funds which Glitnir raised in the United States throughout 2007 and, in particular, through the $1bn sale of Bonds to investors located in New York and elsewhere in the United States in September 2007. The extent of Glitnir’s financial exposure to Jóhannesson and the companies and individuals who were connected to him was fraudulently hidden from US investors at the time of this fundraising.

In the event, Jóhannesson’s looting of Glitnir Bank failed to save Baugur, his own company, from failure; nor have the sums the individual Defendants siphoned from Glitnir ever been repaid to the Bank. The transactions made no economic sense for Glitnir, and put the Bank – and, by extension, its creditors – in extreme financial peril. Having depleted Glitnir’s cash reserves, the individual Defendants left the Bank heavily exposed to the global credit crunch which struck Iceland’s markets during the summer of 2007, and contributed significantly to its eventual bankruptcy.

Jóhannesson and the other individual Defendants could not have succeeded in their schemes without the complicity of PwC. PwC knew about Glitnir’s irregular related party exposures, reviewed and signed off on Glitnir financial statements which grossly misrepresented these exposures, and facilitated Glitnir’s fraudulent fundraising in New York.

The Defendants in the case are:

  • Jón Ásgeir Jóhannesson, former Executive Chairman of Baugur; former Chairman of FL Group; principal shareholder in both companies and, through them, controlled around 39% of shares in Glitnir Bank
  • Thorsteinn Jonsson, former Chairman of the Board, Glitnir Bank; also former vice-Chairman of FL Group
  • Jón Sigurðsson, former Director of Glitnir Bank; also former Deputy CEO of FL Group
  • Lárus Welding, former CEO and Chairman of the Risk Committee, Glitnir Bank
  • Pálmi Haraldsson, former vice chairman of FL Group’s Board of Directors
  • Hannes Smarason, former CEO of FL Group and former Director, Glitnir Bank
  • Ingibjörg Stefanía Pálmadóttir, wife of Jón Ásgeir Jóhannesson; former Director, Baugur
  • PwC, auditor to Glitnir Bank; performed reviews and issued letters on which investors relied in connection with the September 2007 New York bond offering

You can read the full claim, plus the full copy of the New York legal action, here.

The Glitnir winding-up committee apparently did a very sensible thing by enlisting the services of the company Kroll Industries, who are experts at advising in litigation matters. Seriously, we need all hands on deck we can get around here these days – which reminds me that there was also a news item this morning that Norway is sending over a team specialized in investigating financial crimes later this month.

Incidentally, apropos the last post, the details are a little sketchy, but it looks like British authorities have not formally issued a refusal to arrest and extradite Sigurður Einarsson.

~~ And just one more thing: big props to Fréttablaðið for giving very comprehensive and unbiased coverage of the proceedings against Jón Ásgeir and co. — its owners. It will be interesting to see if they all manage to keep their jobs.

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  • Easy May 13, 2010, 2:31 pm

    Well, all this sounds very good and promising, but unfortunatelly I won’t belive it untill I see somebody, anybody sentenced and jailed, I’m very doubtful that this will acctually happen. Jón Ásgeir is one of the ones that I belive might fall, but more because of his personal problems with the wrong people.

  • mb May 13, 2010, 2:58 pm

    Nice to see PriceWaterhouseCoopers thrown in there – because aside from the government oversight, these banks were presumably supposed to have independent auditors looking over there shoulders, and they should be just as accountable as the banks themselves. Enron took their accounting firm down with them (Arthur Anderson), but it doesn’t seem to have woken up the remaining big auditing firms that maybe they should actually do their jobs, instead of just selling autographs at the bottom of reports handed to them by the companies they’re supposed to actually audit.

  • TomThumb May 13, 2010, 6:42 pm

    Yipee-ty-yi-yey, Yipee-ty! Go get ’em!

  • cak May 14, 2010, 12:21 am

    “And just one more thing: big props to for giving very comprehensive and unbiased coverage of the proceedings against and co. — its owners. It will be interesting to see if they all manage to keep their jobs.”

    The journalists at Fréttablaðið just act as cowards.They never dared to dig deep into the whole Kreppa affir. And now when the mighty Jón Ásgeir is in trouble, they finally try to make real journalism.

  • sigga May 14, 2010, 12:46 am

    It is such a relief that this court action is taking place outside the Icelandic judicial system, not they I am not confident in their abilities as judges rather I am more worried about the lack of laws or punishment for offences such as these within our shores. The US for all its limitations is good at this sort of stuff and has a strong history of using financial crimes as a way of getting people behind bars. Would be great if some of our bankers had broken some tax laws in the US… even better chance of seeing them called to answer for their actions.

  • kevin oconnor,waterford ireland May 14, 2010, 1:39 am

    Herd them cats

  • kevin oconnor,waterford ireland May 14, 2010, 2:13 pm

    On herding cats look who surfaced in the Daily Mail but this pair Niceland’s reputation slips just that bit lower ha ha

    http://www.dailymail.co.uk/news/article-1278307/Icelandic-innocents-abroad-laugh-freed-honeytrap-robbery.html

  • Alan May 14, 2010, 2:39 pm

    Hi Alda – just wanted to alleviate the guilt for being an occasional visitor that never comments. Saw you first on the CIF website, where Icelandic posts are a little more bearable to follow than Middle East ones. Have always been fascinated by Iceland, initially drawn to it by a Desmond Bagley book I read when I was young, although the title eludes me just now.

    Anyway, really interesting and very readable posts, always worth checking in on. It is truly astonishing how the few have brought down the many.

  • jo6pac May 14, 2010, 3:53 pm

    sigga
    I’ll keep my fingers crossed that your right, because we have a problem here in the US in that we can’t put our own criminals in jail.

  • Joerg May 15, 2010, 6:32 am

    The attitude of the Fréttablaðið journalists might be understood as a step to emancipate from their owner, who is apparently about to loose influence, at least temporarily. It’s probably rather driven by fear to end up on the wrong side in history, than by real courage. But they could certainly serve as a model for mbl journalists.  

  • Flygill May 15, 2010, 9:34 am

    I don’t know why Icelanders seem so happy about this lawsuit. If the lawsuit is successful (and it appears the case is very strong), Iceland will get nothing. The case is being brought by the Glitnir Winding-Up Committee, so the money will go to pay off preferred creditors, who are foreign bondholders (such as the idiots who bought $2 billion of Glitnir bonds through an American placement). The money will not go to the Icelandic government, Glitnir shareholders and creditors in Iceland, or New Glitnir.
    JAJ and his pals have almost no assets in New York or in the USA. The money they siphoned off has flown to money heaven in bad investments, or is sitting in secret accounts in Tortola or the Caymans and most likely can and never will be recoverable.
    Even if the plaintiffs get a judgment against JAJ, it is valid only in the state of New York. The plaintiffs could in theory try to use this NY judgement to try to get a judgment in the UK or Iceland or elsewhere, but it would be difficult and they would essentially have to re-try the case. Plus you have the additional obstacle of having Icelandic law (the violations of Icelandic laws about the duties of officers and directors) being interpreted by a foreign court. In fact, JAJ’s lawyers will no doubt try to have the entire case moved to Iceland. And in Iceland, JAJ et al will argue that they were guilty of nothing more than bad business judgment. The lawsuit makes a big deal out of the fact that JAJ et al violated Glitnir’s internal lending-limits — but this was only Glitnir company policy, not some fixed Icelandic law. And then there is the factual matter of whether JAJ’s non-disclosure would really have affected the bondholders decision to buy the bonds — if JAJ had stated that related-party lending was x% vs. y%, would that have made a difference? I don’t think so. I bet the bondholders could barely find Iceland on a map and didn’t even read the disclosures.

    The main purpose of this lawsuit, as I see it, is to get damages, something like $1 billion, from Price Waterhouse Cooper in New York.

  • Flygill May 15, 2010, 10:34 am

    Wait a minute, I probably should not have called the case “very strong”. Mostly the complaint is little more than a catalogue of Glitnir’s loans to JAJ-related companies, like FL Group. And JAJ could plausibly argue that the purpose of these loans was to “save” FL Group et al, and thus help the bank.
    And another point – the causes of action (ie the legal claims of the lawsuit) are rather peculiar. Mostly they allege that JAJ et al violated Icelandic laws about the fiduciary duties of officers and directors. There are no allegations of fraud, civil conspiracy, and so on.
    So why is this case being brought in the USA? You have an Icelandic company accusing Icelandic citizens of violating Icelandic law. The natural location/jurisdiction for a lawsuit like this is of course — Iceland.
    If you want to be cynical and suspicious, you might conclude that the Glitnir Committee deliberately avoided attacking JAJ and his assets in Iceland, and is going through the motions in the USA to make it look like they are doing something, when in fact they are doing nothing. Plus trying to squeeze some money out PWC.

  • Rod May 15, 2010, 11:58 am
  • Flygill May 15, 2010, 12:26 pm

    Sorry for the multiple postings, but I stumbled across a very interesting post by Gunnar Tomasson, the clever economist, over at Silfur Egils.
    The news sites have announced that Landsbanki intends to file a lawsuit next week against some former officers and directors of Landsbanki (ie Bjorgulf Senior), for around 250 billion ISK.
    Gunnar writes:
    Ef lánabók Landsbankans innifelur svipaða sjálftökuafgreiðslu lána af hálfu eigenda bankans, þá myndi sú lagatúlkun leysa íslenzk stjórnvöld af meintri ábyrgð á Icesave reikningum Landsbankans í Bretlandi og Hollandi þar sem enginn eðlismunur er á fjármögnun sjálftökuútlána með skuldabréfum annars vegar og innlánum hins vegar.
    In other words, the Icelandic government, in the Icesave issue, will try to argue that there is no real difference between the money stolen and/or wasted in self-dealing loans by the insiders and the Icesave deposits, and the self-dealing and violation of officers/directors fiduciary duties should legally relieve the Icelandic government of any responsibility for Icesave.
    Personally I don’t think this argument will work (for reasons too complicated to explain here (ie agent-principal law)) but you can see that the Icelandic government will no doubt try to press this argument in the next round of negotiations.
    And if you are a suspicious person, you can conjure up further intrigues from the upcoming Landsbanki lawsuit. For instance, the government will be suing Bjorgulf Senior and using this lawsuit to try to put all the blame for Icesave on him. But blaming Bjorgulf has no cost (since Bjorgulf Senior is already bankrupt in Iceland) and leaves Bjorgulf Junior with all his money intact. Just as JAJ may be left alone in Iceland.
    Nothing is what it seems in Iceland, is it?

  • alda May 15, 2010, 1:18 pm

    Flygill – I don’t have the legal know-how to comment on the substance of your post, but I do know that there is such a thing as a sense of fairness and justice. That is precisely why the Icelandic public is happy about this affair. In general, I don’t think people’s first thought is the money that will be reclaimed for the nation – they are simply happy that justice may prevail.

    The SIC report, for example, did not recover any money for the Icelanders, but it certainly went a LONG way towards improving the mood of the nation. Some things can’t be counted in dollars and cents – or króna.

  • wally May 15, 2010, 5:51 pm

    well said Alda. That is exactly what I was thinking when I read Flygills post. I couldnt understand how someone could miss the point so completely.

  • John May 15, 2010, 8:54 pm

    Why is Norway sending a team specialized in investigating financial crimes to Iceland? Is it to help Iceland? Can’t Iceland investigate crimes of their own?Norway has no special skills in doing this

  • sylvia hikins May 16, 2010, 12:22 am

    Landisbanki are seeking 2 billion dollars from former owners including Thorsteinsson and Gudmunsson. These two have declared themselves bankrupt. Does that get them off the hook then?
    sylvia from viking wirra;

  • The Fred from the forums May 16, 2010, 5:32 am

    A reasonably prudent investor would probably care whether the bank’s internal controls had broken down, and concealing relevant information from investors goes against the principles of US securities law.

  • Great Eastern May 16, 2010, 12:00 pm

    Flygill, provided Icelanders try to prosecute some of their elite then why not to draw everything they can from the case?
    Let’s be fare. It was not failures of Iceland’s regulatory bodies only. PWC, British, Dutch regulators could have done more. They proved they do can find a law. Antiterrorist law for example.
    Now it is time to share the blame. Failing to make good publicity out of this case would be unprofessional on Iceland’s part. British, Dutch and others rightfully pressed Iceland to do something about this spectacular crash of Icelandic banks which accounted for the biggest share of bank’s losses in year 2009. Now finally Iceland made a move. The ball is for example in British hands if it will find a law to justify extradition of some people. Fare enough.

  • Great Eastern May 16, 2010, 12:09 pm

    btw, accusing rating agencies is a common issue these days. Again, it is fare enough accusation, isn’t it ?

  • kevin oconnor,waterford ireland May 16, 2010, 4:55 pm

    Sigurður Einarsson does not have to worry about extradition because the ash cloud is back

    http://www.dailymail.co.uk/news/article-1278647/UKs-major-airports-close-today-wind-blows-ash-south-Iceland-volcano.html

    He also suffers from sea sickness so a sea voyage would infringe his human rights, so he has very little to worry about really ha ha.