CHANDELIERS inscribed with clover hang from the ceiling of room three in the Royal Courts of Justice.
The Serious Fraud Office needed four leaves’ worth of luck as its lawyers prepared for a legal challenge from Robert and Vincent Tchenguiz, the property tycoons whose headline-grabbing deals and wild parties made them poster boys for the financial boom.
Initially, the SFO was pursuing the brothers, not vice versa — but a series of calamitous miscalculations has turned the tables. Suddenly, the agency finds itself fighting for survival.
The Tchenguizes hired the best legal minds in London for a judicial review of the lawfulness of search warrants issued last year as part of the SFO investigation into Kaupthing, the collapsed Icelandic bank.
On the eve of the hearing last month, the SFO admitted that its entire case against Vincent would have to be reviewed “as a matter of urgency”.
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The castigation did not stop there. Lord Goldsmith, the former attorney-general, acting for Vincent, accused the SFO of “lurching from one eleventh-hour concession to another”. Lord Justice Thomas, presiding, said officers had not been able “to see the wood for the trees”.
Court documents seen by The Sunday Times reveal in detail how Britain’s premier fraudbusters appear to have got it so badly wrong.
They suggest that investigators failed to read important paperwork and neglected to check that their allegations could be substantiated. A changing cast of staff resulted in mistakes. Resources were so tight that those with the most intimate knowledge of the inquiry did not have time to help draft and check the information used to secure the search warrants.
In his witness statement, Paul Brinkworth, the SFO official brought in to review the case, claimed: “I am of the view that the errors ... occurred for a variety of inter-linked reasons.”
His evidence points to an organisation riven by budget cuts, ineffective management and low morale. At times it seems investigators did not understand the financial intricacies on which their allegations were based.
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The revelations come amid lingering uncertainty over the SFO’s future after the Home Office examined plans to break it up last year. The agency also faces the threat of another judicial review if it fails to reopen a criminal inquiry into the demise of Weavering Capital, the hedge fund.
How did it come to this? One stark fact is the drop in the SFO’s budget, from £51.5m in 2008 to £33.9m — although insiders say the 2008 number was inflated by the funds required for a couple of “blockbuster” investigations.
The SFO was in crisis then, too. Richard Alderman, former head of special civil investigations at HM Revenue & Customs, replaced Robert Wardle as director in April 2008. Two months later, an independent report commissioned by Wardle and the attorney-general — none other than Lord Goldsmith — savaged the SFO for its dysfunctional culture.
Alderman had arrived with a mandate to turn round the SFO. The process was predictably painful. Some of the old guard who left at that time believe the seeds of the Tchenguiz debacle were sown by his shake-up, which saw seasoned investigators and lawyers replaced by civil servants.
“He misdiagnosed the illness, then applied the wrong prescription,” said one.
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Alderman’s allies say he had to combat a macho culture and instil a new sense of professionalism. “Without changes, the SFO would have ceased to exist,” said one.
Part of Alderman’s overhaul involved striking innovative deals with companies that admitted some wrongdoing. This annoyed the judiciary, which felt its powers to set penalties were being superseded by the agency, and irked some staff, who felt it was tantamount to letting criminals buy their way out of the dock.
The Tchenguiz brothers’ fortunes were already waning when Alderman took charge at the SFO. Born in Tehran to Jewish-Iraqi parents, they left Iran in 1979 and built property empires based on debt. Vincent, now 55, amassed a £3.5 billion portfolio that made him one of the country’s biggest landlords. Robert, 51, ploughed the profits of property trading into listed companies, including Mitchells & Butlers, the pub chain, and J Sainsbury, the supermarket.
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The brothers partied at Robert’s mansion in Kensington and on the Côte d’Azur aboard Vincent’s 130ft yacht, called Veni, Vidi, Vici — I came, I saw, I conquered.
The Tchenguiz businesses were shaken when the credit crunch struck and stock markets slumped. Robert was forced to hand back assets to his lenders. When Kaupthing collapsed in October 2008, the brothers’ links to the bank came to regulators’ attention.
Weil Gotshal & Manges, the law firm, and Grant Thornton, the accountant, worked for the Resolution Committee, which was put in place to wind up Kaupthing. By the end of 2008 they had flagged up concerns about “highly irregular” lending to Robert. The SFO and authorities in Reykjavik began to investigate.
The inquiry soon focused on £180m of lending to the brothers in early 2008. About £80m was used to extend the overdraft of Oscatello, a holding company linked to Robert. The other £100m went to Vincent’s companies in what was called the Pennyrock loan.
The 147-page document the SFO used to persuade a district judge to issue search warrants for the brothers’ homes or offices was based on several allegations. Oscatello was alleged to have been technically insolvent. Vincent was accused of a raft of things: using the same collateral, his portfolio of 250,000 residential freeholds, to secure both loans; overstating their value by using a 150-year calculation, rather than a 50-year one; and neglecting to tell Kaupthing about higher-ranking claims on the assets from other banks.
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The claims against Vincent have since disintegrated. According to Brinkworth’s statement, the allegation of double-pledging crept in because of misunderstandings as SFO investigators edited the dossier. “It appears ... that the error, once made, became entrenched, and the underlying information was not checked,” he said.
The suggestion that Vincent exaggerated the portfolio’s value arose as SFO staff misinterpreted what was said in a conference call with Grant Thornton, he suggested. The source of the allegation that he hid other claims on the assets is still uncertain, “given the passage of time and the pressured circumstances of the final stages of drafting the information”, Brinkworth said.
The witness statement of Sean Jeffrey, one of Vincent’s solicitors, is damning. He said serious allegations about complex transactions had been drafted “by individuals within the SFO who did not understand the allegations they were making”.
Incredibly, the SFO had paperwork that disproved many of the allegations — including the Pennyrock loan agreement, which “it appears ... was not read, or its significance was not appreciated”, Brinkworth said.
In its defence, the SFO has pointed out the complexity of the brothers’ financial affairs. James Eadie, the agency’s barrister, has said there were indications of “collusive and dishonest lending”.
At 6.30am on March 9 last year, at the start of the property industry’s annual conference in Cannes, 135 police and special investigators raided the Tchenguizes’ premises. The brothers were held for 14 hours before being released on police bail. They immediately vowed to clear their names.
Alderman, whose four-year term as director ended last month, has delivered a written apology to the judge who ordered the search warrants. The SFO has already agreed to quash Vincent’s warrants and said it will review his status as a suspect by the middle of this month. It intends to continue its inquiry into Robert. Judgment on the judicial review is expected soon.
David Green, the new director, has said he wants to improve the SFO’s conviction rate and move away from the “perception of compromise” created by the trend towards plea deals. Confronting the Tchenguiz brothers will be an early test of his nerve.