‘Unusual, dishonest lending’ at heart of SFO suspicions of Tchenguiz fraud

The Serious Fraud Office believed it had reasonable grounds to suspect Robert Tchenguiz of criminality after the collapse of Kaupthing bank, the High Court heard yesterday.

James Eadie, QC, said that there were clear indications of “highly unusual, collusive and dishonest lending” by the Icelandic bank to the tycoon when the fraud office applied for warrants to search Mr Tchenguiz’s office and home last March.

Mr Eadie said: “The picture that is presented is one which causes real concern: massive lending to a company structure that the lender considered might be under water from the very get-go in December 2007; serious questions about the adequacy of the security; money market loans entirely unsecured; loan-to-value ratios going through the roof; shares fixed in the bank’s books even though the markets had moved against them; and serious questions about the closeness of the relationship.”

Sir John Thomas, president of the Queen’s Bench Division, who is sitting with Mr Justice Silber in the judicial review into the SFO’s conduct, said: “There is absolutely nothing unusual in a bank being in a position where its security doesn’t cover the loan. It happens. Then you’re placed in the position where you dare not realise the security and you have to keep the borrower going even though he’s hopelessly insolvent.”

Mr Eadie laid out the reasons why the SFO had suspected that Mr Tchenguiz — who at the time of Kaupthing’s collapse owed the bank €2 billion — of fraud. It was alleged that £150 million of loans lent to Mr Tchenguiz did not appear to be secured by any collateral, while valuations of other securities, including shares in Mitchells & Butlers, were overvalued.

Between December 2007 and June 2008 Kaupthing allegedly provided a £649 million overdraft facility to Oscatello — a group of companies owned by the Tchenguiz Discretionary Trust — when there were “already indications it was under water”. The trust’s main beneficiary is Mr Tchenguiz.

It was also alleged that executives of Kaupthing when in London were “resident” in Mr Tchenguiz’s home and that normal banking protocols for lending money were overlooked. It is alleged that one loan to Mr Tchenguiz was “secured over a dinner at Scott’s with Kaupthing’s chief executive”.

Mr Eadie said: “Fraud doesn’t involve, as it were, someone disappearing with the cash over the hill, but it can involve a corrupt relationship which has persuaded a financial institution to prolong the existence of a business when it should have been shut down.”

Mr Eadie was also responding to earlier accusations by Lord Macdonald of River Glaven that the SFO had made “blatantly untrue misrepresentations” to Judge Paul Worsley, QC, when obtaining the search warrants. Lord Macdonald, acting for Mr Tchenguiz, said that the SFO alleged that nearly £1 billion had been taken out of the collapsed bank and put into the hands of Mr Tchenguiz but had failed to identify any evidence for the transfer. He also accused the SFO of failing to disclose to Judge Worsley that Mr Tchenguiz had offered to co-operate in any investigation.

The SFO has been heavily criticised for its handling of the arrest of Robert Tchenguiz and his brother Vincent and is fighting to keep its investigation alive. It is also expected to make further concessions about its handling of Vincent Tchenguiz’s arrest. It has already said it would “urgently review” whether Mr Tchenguiz should still be a suspect in this investigation.

Both Tchenguiz brothers deny any wrongdoing.