Last week, about a dozen UK-based witnesses were questioned at the headquarters of the Serious Fraud Office over a suspected €500m market manipulation effort in the opaque and unregulated London credit derivatives market. Investigators believe an attempt may have been made to manipulate prices at the height of the banking crisis in the autumn of 2008.
Those questioned are not suspected of wrongdoing, but are thought to have important evidence relevant to the case. They include London-based investment bankers, some of whom worked at Deutsche Bank in 2008, and, remarkably, the fashion designer Karen Millen.
An even bigger surprise, however, is that those asking the questions were not officials from the SFO or the Financial Services Authority. They were prosecutors from a tiny, debt-laden island in the Atlantic: Iceland.
The focus of their attention is credit default swap (CDS) contracts entered into in London in relation to Kaupthing, then a struggling Icelandic bank run by executive chairman Sigurdur Einarsson from offices in Hanover Street, Mayfair.
Said to be advising Kaupthing on its CDSs at the time were London-based credit market experts at Deutsche Bank. Millen and her ex-husband Kevin Stanford, unwittingly embroiled in the affair, were major UK-based customers of the bank. Further, in 2008 the wider Kaupthing banking group's liquidity was greatly helped by billions of pounds of deposits by UK retail savers with online bank account Kaupthing Edge. These savings accounts were ultimately guaranteed by UK taxpayers.
Why then, you might ask, are the UK authorities not investigating? The answer is that both the FSA and SFO have indeed examined the case – very closely, in fact – but, after a lot of hand-wringing, have ruled out a criminal prosecution. The reason given is that it would be costly and "untriable" in front of a jury in a British court because of the complex financial instruments involved. The FSA, meanwhile, is limited by the fact that the multitrillion-pound market in CDS trades falls outside its power to prosecute for market abuse.
So all UK criminal investigations into a suspected €500m scandal at the heart of the City, involving some of the most controversial financial instruments invented in recent years, have been ditched because the British framework for dealing with financial fraud cannot cope.
We know some of the details of the suspected fraud from a 2,300-page report into the banking crisis commissioned by the Icelandic parliament. Published in 2010, it said: "In the fall of 2008, Kaupthing … loaned its key clients roughly €500m for the purpose of [entering into] credit default swaps on Kaupthing itself. The clients themselves took no risks but they would have made substantial profits if the bank would have withstood … difficulties."
The report went on to note that on the other end of at least some of the contracts were Deutsche Bank or its clients. Einarsson has suggested the CDS trades were Deutsche Bank's idea – something the German bank is understood to deny strongly.
Whatever the truth, the fact that UK authorities admit they are defeated by the complexity of this case is a damning indictment of their statutory powers, and the scant resources devoted to upholding the integrity of the London financial markets.
Take a look at the prospects for the bodies responsible for policing the City in future, and the situation only looks more alarming. Martin Wheatley, chief executive designate of the FSA's successor, the Financial Conduct Authority (FCA), has made clear that while he wants the FCA to keep up a stream of criminal and disciplinary cases, he believes more resources should be focused on supervision that will prevent large consumer losses.
Meanwhile, SFO director Richard Alderman will step down next month. His four-year tenure has been marked by a purge of senior staff and a 40% budget cut. If it survives at all, in two years' time the SFO will have to scrape by on less than £30m. His successor David Green's main claim to fame is folding his last employer, the Revenue and Customs Prosecution Office, into the Crown Prosecution Service. It remains to be seen whether a similar fate awaits the SFO.
Sadly, it seems that the coalition's bold commitment to "take white-collar crime seriously" with the creation of a new super-agency – merging the functions of the SFO, FSA and Office of Fair Trading – has fizzled out. Never have the words of Lord Roskill's report, which 25 years ago led to the setting-up of the SFO, rung more true. Writing in the wake of scandals in the Lloyd's insurance market, he said: "The public no longer believes that the legal system … is capable of bringing the perpetrators of serious frauds expeditiously and effectively to book. The overwhelming weight of the evidence laid before [my committee] suggests that the public is right. While petty frauds, clumsily committed, are likely to be detected and punished, it is all too likely that the largest and most cleverly executed crimes escape unpunished."
More trouble coming down the conveyor belt at Tesco
Not so long ago, there looked to be five candidates at Tesco to succeed Sir Terry Leahy as chief executive. Philip Clarke got the gig and, one year on, three internal rivals have left or will do so – Andrew Higginson, David Potts and Richard Brasher. The last named was head of the UK business but Clarke has decided he wants day-to-day control of the UK stores himself, explaining there can only be one captain of the ship.
But what if Clarke's exercise in micromanagement backfires? What if sales in the UK stores continue to disappoint, despite the heavy investment that Clarke plans to unleash? What if shareholders decided a new captain is required? Where would they turn?
Tesco's cupboard of alternative bosses suddenly looks bare. Tim Mason, 53, who joined the board as long ago as 1995, is the last man standing among the high-fliers of the Leahy regime. He was the long shot among the five candidates because he is known primarily these days as the executive struggling to put a lid on the £700m or so of losses at Fresh & Easy, Tesco's US startup. But he is also deputy chief executive and group marketing director, so presumably would be first in line in an emergency.
After Mason, though, there isn't a single executive whom the City would recognise as a credible successor. Strange as it sounds, Tesco would perhaps have to look outside its own walls for a chief executive, were Clarke to fail. That would be a first.
Management turnover was perhaps inevitable after Leahy, who did the job for 13 years. We have seen the same plot at many other companies – disappointed candidates are inclined to leave; the new boss tends to want to stamp his authority on the company.
If Tesco made a mistake, it is perhaps in the chairman's job. Sir Richard Broadbent has only been in place since July 2011 – that's no time at all to establish a presence as the keeper of the company flame in what could prove a tumultuous time. The Tesco boardroom looks an unpredictable place.
