former client and shareholder of Iceland’s Kaupthing Bank claimed Friday that the financial firm used deposits to artificially inflate its share price for a year before the bank collapsed in 2008

<p>former client and shareholder of Iceland’s Kaupthing Bank claimed Friday that the financial firm used deposits to artificially inflate its share price for a year before the bank collapsed in 2008 — allowing senior executives to sell their holdings at a high price.<br /><br />Kevin Stanford, a British retail entrepreneur who co-founded the fashion chain Karen Millen, alleges that the banks used deposits from British customers of its Kaupthing Edge accounts to make loans that would fund acquisitions of Kaupthing shares. The Kaupthing Edge account, which had about 30,000 investors in Britain, is the focus of an ongoing investigation by Britain’s Serious Fraud Office.<br /><br />In a 12-page letter dated March 11, Mr. Stanford’s attorney wrote that Kaupthing loaned Mr. Stanford £81 million, or $130 million, to purchase Kaupthing shares just two months before the bank collapsed. Kaupthing accepted the same shares as collateral for the loan, according to the letter.<br /><br />“During August 2008, our client was approached by the then chairman of Kaupthing Luxembourg, Magnus Gudmundsson,” according to a copy of the letter obtained by DealBook. “Mr. Gudmundsson offered to purchase £81 million worth of shares in Kaupthing Iceland on our client’s behalf.” On August 6, 2008, Mr. Gudmundsson sent an email to Mr. Stanford, saying “Please keep this trade confidential,” the letter said.<br /><br />“Kaupthing Iceland had insufficient liquidity to make loans in 2008 and so began to devise ways in which it could generate sufficient liquidity to make the loans to finance the purchase of its own shares and therefore maintain its share price,” the letter said.<br /><br />It also said that “the shares purchased with these loaned funds were previously owned by senior employees of Kaupthing who were selling down their positions.” The content of the letter was previously reported by The Times of London.<br /><br />Ritchie Irvine, Kaupthing’s lawyer at DWF, could not immediately be reached for comment. A spokesman for DWF at communications firm Bell Pottinger and a spokeswoman for the Serious Fraud Office declined to comment.<br /><br />The Serious Fraud Office and the Icelandic prosecutor’s office arrested nine men in London and Reykjavik on Wednesday to question them in connection with the failure of Kaupthing, once Iceland’s biggest investment bank. Two of them were the well-known London property entrepreneurs Robert and Vincent Tchenguiz, who were released after a few hours of questioning.<br /><br />In a statement published Monday, Robert Tchenguiz called the arrests “disproportionate and aggressive,” saying they were “designed to generate maximum publicity.” He also said that his arrest followed repeated offers to speak to investigators about his business relationship with Kaupthing but that the offers had been ignored.<br /><br />“I hold the SFO responsible for the ensuing loss and damage which my family, my business and my reputation have suffered,” Mr. Tchenguiz said.</p>

former client and shareholder of Iceland’s Kaupthing Bank claimed Friday that the financial firm used deposits to artificially inflate its share price for a year before the bank collapsed in 2008

former client and shareholder of Iceland’s Kaupthing Bank claimed Friday that the financial firm used deposits to artificially inflate its s...

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