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Judges Owning Stock

Icelandic Judges Also Violated the Principle

Former Prime Minister Geir H. Haarde leaving the Impeachment Court in 2012. Photo: Haraldur Gudjonsson.

New revelations by the Wall Street Journal bring to mind some court cases in Iceland...

Today’s Wall Street Journal breaks an amazing story on its front page, the result of a long and thorough investigation by its journalists: In the United States since 2010 more than 130 federal judges have heard cases involving companies in which they held stock, instead of recusing themselves as they should under the law. The judges were appointed by nearly every American president from Lyndon B. Johnson to Donald Trump. Perhaps more interestingly, about two-thirds of their rulings were in favour of the companies in which they held the stock. In New York, Judge Edgardo Ramos, an Exxon stockholder, decided for example, on the recommendation of an arbitration panel, that an insurance company should pay Exxon 25 million, adding 8 million in interest to the tab. In Colorado, Judge Lewis Babcock held, with his family, stock in a Comcast subsidiary and in a legal case ruled in Comcast’s favour. In Ohio, Judge Julia Smith Gibbons wrote an opinion favouring Ford Motor in a dispute, while her husband held stock in the company. After she and two other judges on a panel heard arguments in the case, but before they ruled, her husband’s financial adviser bought two chunks of Ford stock for his client’s retirement fund. From the WSJ report it seems to me that some of the American judges did this inadvertently (like some of the individuals over whom they sit in judgement every day did things inadvertently). Moreover, in many cases perhaps the same decisions would have been made by other judges, with no financial interest in the companies in question. But these federal judges all seem to have violated the principle, found in both American and European law, that citizens have the right to a fair hearing by judges whose independence and impartiality are not in doubt.    

A Banker Judged by Former Shareholders

Some Icelandic judges also seem to have violated this principle, or so the European Court of Human Rights has concluded. In February 2020, the Court ruled in favour of an Icelandic bank manager, Sigridur E. Sigfusdottir, who had been convicted by a panel of five Supreme Court judges of fraud by abuse of position and of aiding and abetting market manipulation. Two of those judges had held stock in her bank before its failure in the 2008 Icelandic bank collapse, when all three major banks in Iceland fell. Reckless management of the banks was widely seen as the main cause of the collapse, although the Icelandic banks only fell after the U.S. Federal Reserve Board denied the Central Bank of Iceland the same liquidity assistance as it gave to the three Scandinavian central banks and after the British government had closed down branches and subsidiaries of Icelandic banks in the United Kingdom, while presenting an enormous rescue package to all other British banks. Not used to adversity in their hitherto prosperous and peaceful country, the Icelanders were shocked and bewildered after the collapse, and there were widespread calls for finding the culprits and punishing them severely. A Special Prosecutor was appointed, and he started investigating the operations of the three banks before the collapse, including Landsbanki where Sigfusdottir had been director of corporate banking.

The Special Prosecutor discovered that Sigfusdottir had participated in a transaction taking place shortly before the collapse: Landsbanki had lent an Icelandic investor a considerable amount of money to purchase shares in the bank, taking collateral in the shares themselves and in some additional stock owned by the investor. This was regarded by the Special Prosecutor as a case of market manipulation: the bank seeking artificially to uphold the market price of its stock. In 2013, he indicted Sigfusdottir and the two other members of Landsbanki’s credit committee who had approved the transation. The charges were, first, fraud by abuse of position and, secondly, aiding and abetting market manipulation.

In 2014, Sigfusdottir was acquitted by Reykjavik District Court. The Special Prosecutor appealed to the Supreme Court which in 2015 overturned this verdict. It found her guilty of both charges and sentenced her to 18 months in prison. In its decision it stated that Sigfusdottir’s ‘imprudent decisions on the granting of loans could thus have caused shareholders in Landsbanki Islands, large and minor, as well as the public at large, financial loss’. Here, some of the judges were really talking about themselves, as was revealed in 2016. Then it was leaked to the press that three of the Supreme Court judges who had convicted Sigfusdottir had owned shares in the Icelandic banks before the collapse. Markus Sigurbjornsson had owned a substantial amount of shares in Glitnir, most of which he had sold in 2007, whereas his colleagues Vidar M. Matthiasson and Eirikur Tomasson had owned stock in Landsbanki, Matthiasson a substantial amount and Tomasson less; in the collapse their stock had become worthless. At least some of the judges had not disclosed their ownership of this bank stock to a Committee on Judicial Procedure as they were obliged to do under law. Subsequently, Sigfusdottir referred her conviction to the European Court of Human Rights in Strasbourg, pointing out that under the European Convention of Human Rights she had the right to a fair trial by an independent and impartial tribunal, and arguing that this right had been violated.

The Strasbourg Court found that indeed Sigfusdottir’s right to a fair trial had been violated by the fact that one of the judges deciding her case, Matthiasson, had owned a substantial amount of stock in Landsbanki before the crash (worth about €63,000 before the collapse, but bought at a much higher price, 18 times the monthly salary of a Supreme Court judge), whereas Tomasson had only owned a few shares in the same bank (worth about €13,000), this amount being below the minimum obligatory to disclose to the Committee on Judicial Procedure, and Sigurbjornsson had owned stock in another bank (worth 9 times the monthly salary of a Supreme Court judge). In addition, Sigurbjornsson’s children had owned a few shares in Landsbanki, but an insubstantial amount. Thus, the Strasbourg Court concluded, it was only Matthiasson who failed the test for objective bias articulated in many of the Court’s decisions. The Court found however no subjective bias in the language adopted by the Supreme Court, as Sigfusdottir had also alleged. It awarded Sigfusdottir €12,000 in damages and €5,000 in costs. Subsequently, Iceland has settled claims of five other bankers, Sigurjon Th. Arnason, Ivar Gudjonsson, Sigurthor Ch. Gudmundsson, Margret Gudjonsdóttir and Karl E. Wernersson, who had their rights violated in a manner similar to that of Sigfusdottir, paying each of them €12,000 in damages and a further amount in costs, dependent on each case.

An Official Judged by Former Shareholders

It is noteworthy that the European Court of Human Rights considers €13,000 to be such a negligible amount of money that the impartiality of a judge owning and losing that amount of shares in a bank would not be affected by it, whereas in today’s WSJ report some of the judges in question held even smaller amounts in company shares. A more plausible rule would seem to be that a judge owning any amount of stock in a company should always recuse himself or herself in a legal dispute in which the company would be involved. Be that as it may, both the WSJ report on the U.S. federal judges and the recent decision by the European Court of Human Rights on Sigfusdottir’s application are relevant, I submit, in another Icelandic case, that of Baldur Gudlaugsson, the former Permanent Secretary of the Icelandic Ministry of Finance. Already a wealthy lawyer before he became a government official, Gudlaugsson had, shortly before the 2008 bank collapse, sold all his shares in Landsbanki, then worth about €1.5 million. He was in 2012 convicted of insider miconduct by the Supreme Court and sentenced to two years in prison, while the proceeds from his sale were seized. One of the Supreme Court judges deciding his case was the same Matthiasson who had convicted Sigfusdottir. In other words, Gudlaugsson who had at the last minute managed to avoid a loss on his Landsbanki stock (or so he may have believed) was judged by someone who had lost all what his Landsbanki stock had been worth. Even though Matthiasson’s loss of €63,000 was much less than the €1.5 million Gudlaugsson had tried to avoid losing, it was a substantial sum for any ordinary person.

It seems to me that just because of this fact, although revealed long after Gudlaugsson had been convicted (and after he had unsuccessfully applied to the European Court of Human Rights), his right to a fair trial by an independent and impartial tribunal had been violated. There were several other serious flaws in the process against him. When Gudlaugsson had in 2000 been appointed Permanent Secretary in the Ministry of Finance, he already owned a substantial amount of shares in an Icelandic shipping line. In 2005, this company changed hands and as payment its shareholders received shares in Landsbanki. Gudlaugsson had long thought, according to his testimony in court, that it was inconvenient for him as the Permanent Secretary in the Ministry of Finance to own shares in a bank, even if the banking sector was the responsibility of the Ministry of Business Affairs and not the Ministry of Finance, but he had postponed a decision on the matter. Gudlaugsson also pointed out that the difficulties of the Icelandic banks and the risk of owning shares in them (reflected in their high credit default swap spread) were common knowledge in 2008, much-discussed in public. When he sold his shares, thus he was not in possession of any privileged information about the imminent failure Landsbanki. Indeed, the IFSA had investigated his sale of the shares and determined as it announced to him in May 2009 that it would take no further action in the affair unless new information was presented. Gudlaugsson argued that no relevant new information had been presented when the IFSA suddenly decided some months later to reopen the case, subsequently referring it to the Special Prosecutor who indicted him. (It should be added that at the same time as the IFSA had decided not to take any further action against Gudlaugsson, a new left-wing government had taken power, with a diehard old Socialist as Finance Minister, while Gudlaugsson, perhaps not very wisely, had refused voluntarily to relinquish his position as Permanent Secretary.)

Moreover, and bizarrely, the Supreme Court found Gudlaugsson guilty of an offence different from the one with which he was charged. In the law on financial regulation a distinction is made between three kinds of insiders: primary insiders such as staff members of banks and other financial institutions; temporary insiders who because of their position find out something which is not public knowledge; and secondary insiders who receive information somehow, perhaps accidentally or from leaks, both from primary or temporary insiders. Gudlaugsson was indicted by the Special Prosecutor as being a secondary insider who had come across information, not as a temporary insider. This is an important distinction. According to Icelandic law, temporary insiders have to be registered on a list of insiders, and notified of this, and they have the right to comment on or object to this registration. Accordingly, Gudlaugsson’s defence was all directed against the charge that he had been a secondary insider breaching trust. But the Supreme Court convicted him of having been a temporary insider who had as such been guilty of misconduct. The conviction was not consistent with the charge, as a retired Supreme Court judge, Jon S. Gunnlaugsson, cogently argues in a recent book, When Justice Failed (as the English excerpt is called). These points were also made in a dissenting opinion by a Supreme Court judge, Olafur B. Thorvaldsson, who wanted to acquit Gudlaugsson.

A Former Prime Minister Judged by Former Shareholders

It should be emphasised that the Gudlaugsson case was not really about whether it had been prudent of him to own shares in a bank while he was Permanent Secretary of the Ministry of Finance, or to sell them as the financial crisis was intensifying, or to refuse to step down from his position at the Ministry after a new left-wing government took power. A possible lack of judgement is not a crime. Gudlaugsson had the misfortune to be almost the first person to be prosecuted after the bank collapse when the Icelanders were still angry and bewildered, searching for culprits. But the rule of law should not be about public relations. The Gudlaugsson case was about whether the Special Prosecutor had provided sufficient evidence that the accused, in his possible capacity as a secondary insider, was guilty of insider misconduct. It was also about what can only be regarded as an egregious error by the Supreme Court, to convict Gudlaugsson for something of which he had not been charged. Thirdly, in the light of today’s revelations in the Wall Street Journal and the recent decision of the European Court of Human Rights in the case of Sigfusdottir v. Iceland, it is also about whether Gudlaugsson had seen a violation of his right to a fair hearing by an independent and impartial tribunal.

Perhaps I am not impartial because I am an old friend of Gudlaugsson. But if I were a judge, I would recuse myself from any case in which he would be involved. The cautious and conscientious Gudlaugsson is however about the last person in my circle of friends whom I would have expected to go to prison, and it was almost surreal to visit him there, as I once did. But this is irrelevant to the facts of his case which are clear and uncontestable. Today’s revelations in the Wall Street Journal also bring to mind the case of Geir H. Haarde, Prime Minister in 2006–2009, who was in 2012 convicted by the majority of an Impeachment Court (nine judges against six) of having violated a constitutional stipulation to discuss important matters at ministerial meetings, because he had never set the impending banking crisis on the agenda at such meetings. On its own, his conviction on this minor or even minuscule issue was almost farcical, as I argued in the Wall Street Journal at the time. But the interesting fact, only revealed in 2016, is that three of the judges in the majority on the Impeachment Court, Markus Sigurbjornsson, Vidar M. Matthiasson, and Eirikur Tomasson, had owned shares in the fallen banks, while Sigurbjornsson had also kept some money in a Money Market Fund. They lost the value of all their stock, and Sigurbjornsson lost some of his money in the Money Market Fund. In the midst of the crisis, Haarde had decided not to rescue the banks, but instead to close them down, transferring domestic operations to new banks and putting foreign subsidiaries into resolution. Did the fact that three of the judges who heard the case against Haarde had, unbeknownst to the public, lost significant amounts of money by his decision violate his right to a fair hearing by an independent and impartial tribunal? The arguments for a positive answer are obvious. It would be interesting to hear the arguments for a negative answer.     

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