Banker denies market manipulation

Iceland's most controversial banker, Sigurdur Einarsson, the former executive chairman of failed bank Kaupthing, has been made an official suspect by fraud prosecutors examining alleged market manipulation relating to an investment in the bank by Qatari royal Sheikh Mohammed Bin Khalifa al-Thani weeks before its collapse a year ago.

Einarsson, who lives in London, is thought to be the first head of a major European bank to be classed as a criminal suspect since the credit crisis.

The investigation, by prosecutors from Iceland's anti-fraud unit, centres on the purchase of a 5.01 per cent stake in Kaupthing by a company owned by the sheikh in mid-September 2008 as market confidence in the bank was crumbling. The investment came three months after the Qatari royal family led white knight investors into a stake in Barclays, collectively injecting £4.5 billion ($9.8 billion) into the UK bank.

In a stockmarket statement, Kaupthing did not mention Sheikh Mohammed's investment had been financed via a complex corporate structure using loans from Kaupthing itself. "We are delighted to welcome Sheikh Mohammed as a shareholder," Einarsson said. "We are continually focused on attracting new investors to the bank and are happy to see our strategy of increasing the diversity of our shareholder base has proven fruitful."

Less than three weeks later the bank failed, owing billions.

An investigative team led by special prosecutor Olafur Hauksson has established the Kaupthing loans used to fund the controversial share purchase were in part covered by a personal guarantee by Sheikh Mohammed. However, investigators are also focusing on a second loan to another of his companies, advanced without collateral or guarantee.

This cash was used to repay Kaupthing, clearing the sheikh of almost all his personal liability.

Investigators suspect the net effect was to give the impression the sheikh had invested 25.6 billion Icelandic kronur ($285 million) to become Kaupthing's third largest shareholder when behind the scenes he had taken little or no economic risk.

Einarsson denies market manipulation. In a private letter leaked to the Icelandic press, he said: "Sheikh al-Thani took considerable financial risk investing in Kaupthing shares. [The purchase was] not some final actions of a collapsing bank, but much rather decisions that were to be the beginning of a new offensive." He said the second loan was for a separate investment, which could not be executed before the bank's collapse.

Hauksson's investigators are understood to have eight other suspects who are connected to the failed bank official. Central figures include the bank's chief executive Hreidar Mar Sigurdsson, and shipping and oil entrepreneur Olafur Olafsson, a major Kaupthing customer and shareholder with contacts in Qatar.

The list is also believed to include Halldor Bjarkar Ludvigsson, who worked in Kaupthing's loan department and now oversees the failed bank's Nordic assets on behalf of creditors. Ludvigsson may later be reclassified as a witness, but his involvement is embarrassing for the bankruptcy protection committee that has responsibility for Kaupthing assets.

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