Kaupthing executives held by Iceland police

By GUDJON HELGASON and JANE WARDELL

REYKJAVIK, Iceland

Two former executives of collapsed Icelandic bank Kaupthing were ordered on Friday to be held in police custody while prosecutors consider a criminal case against the pair.

Reykjavik District Court approved a request from the special prosecutor responsible for investigating the Icelandic banking crash of October 2008 to hold former CEO Hreidar Mar Sigurdsson for 12 days.

Magnus Gudmundsson, the former head of Kaupthing's Luxembourg operations, will be held for seven days.

Both men were detained Thursday -- the first high-profile arrests in the wake of the banking crash, which crippled Iceland's economy and forced out the tiny Nordic country's former leaders.

Gudmundsson was dismissed Friday from his current position as co-CEO of Banque Havilland SA. The Luxembourg-based private bank said in a brief statement that it had relieved Gudmundsson of his executive duties, leaving Jonathan Rowland as sole CEO.

Iceland's Special Prosecutor Olafur Thor Hauksson said that Sigurdsson is suspected of falsifying documents and breaking laws on stock trading for personal gain. He requested both men be held in custody to prevent the possibility of them tampering with evidence or interfering with the ongoing investigation.

Hauksson was appointed by the Iceland's post-crisis government to investigate whether there was any criminal activity in the lead up to the banking crash.

Britain's Serious Fraud Office is still carrying out its own investigation into suspected fraud at Kaupthing, with a focus on efforts by the bank to attract British investors to its "high yield" deposit account, Kaupthing Edge. About 30,000 British individuals, companies and organizations made an investment.

When it opened the investigation in December, the British agency said it would also look closely at a series of decisions that appear to have allowed substantial value to be extracted from the bank in the weeks and days prior to its collapse.

The demise of Kaupthing, one of several Icelandic banks to collapse, sparked a political dispute between Reykjavik and London because it failed after the British government invoked anti-terrorist legislation to freeze the U.K. assets of another collapsed Icelandic bank, Landsbanki.

Britain's Treasury said the move was necessary to ensure the money that British savers had placed in the bank would not be whisked back to Iceland.

But Iceland's prime minister at the time, Geir Haarde, criticized the move as an "unfriendly act" and blamed the decision for inspiring panic that led to the subsequent collapse of Kaupthing. A cross-party committee of British lawmakers was also critical of London's handling of the situation.

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Jane Wardell reported from London.