Allegations of a London derivatives scandal involving Kaupthing are being vigorously pursued – but not by British regulators, whose funding and powers look increasingly circumscribed.
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.
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.