Terra Securities Scandal
   HOME

TheInfoList



OR:

The Terra Securities scandal was a
scandal A scandal can be broadly defined as the strong social reactions of outrage, anger, or surprise, when accusations or rumours circulate or appear for some reason, regarding a person or persons who are perceived to have transgressed in some way. Th ...
that became public in November 2007. It involved highly speculative investments by eight
municipalities of Norway Norway is divided into 11 administrative regions, called counties (''fylker'' in Norwegian, singular: ''fylke''), and 356 municipalities (''kommuner/-ar'', singular: ''kommune'' – cf. communes). The capital city Oslo is considered both a county ...
in various
hedge fund A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance, such as sho ...
s in the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
bond market The bond market (also debt market or credit market) is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the secondary market. This is usually in the form of bonds, b ...
.Mark Landler
"U.S. Credit Crisis Adds to Gloom in Arctic Norway"
''New York Times'', December 2, 2007 (Retrieved on December 2, 2007)
The funds were sold by Terra Securities to the municipalities, while the products were delivered by
Citigroup Citigroup Inc. or Citi (Style (visual arts), stylized as citi) is an American multinational investment banking, investment bank and financial services corporation headquartered in New York City. The company was formed by the merger of banking ...
. The municipalities involved were
Narvik ( se, Áhkanjárga) is the third-largest municipality in Nordland county, Norway, by population. The administrative centre of the municipality is the town of Narvik. Some of the notable villages in the municipality include Ankenesstranda, Ball ...
,
Rana Rana may refer to: Astronomy * Rana (crater), a crater on Mars * Delta Eridani or Rana, a star People, groups and titles * Rana (name), a given name and surname (including a list of people and characters with the name) * Rana (title), a histori ...
,
Hattfjelldal Hattfjelldal ( sma, Aarborte) is a municipality in Nordland county, Norway. It is part of the Helgeland traditional region. The administrative centre of the municipality is the village of Hattfjelldal. Other villages include Grubben, Svens ...
and
Hemnes Hemnes is a municipality in Nordland county, Norway. It is part of the Helgeland traditional region. The administrative centre of the municipality is the village of Korgen. Other villages include Bjerka, Bleikvasslia, Hemnesberget, and Sund ...
in
Nordland Nordland (; smj, Nordlánnda, sma, Nordlaante, sme, Nordlánda, en, Northland) is a county in Norway in the Northern Norway region, the least populous of all 11 counties, bordering Troms og Finnmark in the north, Trøndelag in the south, N ...
,
Vik Vik (Old Norse: vík) means wick or bay in Norwegian and Swedish (''vig'' in Danish), and it may refer to the following: Places Iceland *Vík í Mýrdal, a village in southern Iceland Iran *Vik, Iran, a village in Zanjan Province, Iran Norway *V ...
and Bremanger in
Sogn og Fjordane Sogn og Fjordane (; English: "Sogn and Fjordane") was, up to 1 January 2020, a county in western Norway, when it was merged to become part of Vestland county. Bordering previous counties Møre og Romsdal, Oppland, Buskerud, and Hordaland, the cou ...
,
Haugesund Haugesund () is a municipality on the North Sea in Rogaland county, Norway. While the population is greater in the neighboring Karmøy municipality, the main commercial and economic centre of the Haugaland region in northern Rogaland and southern ...
in
Rogaland Rogaland () is a Counties of Norway, county in Western Norway, bordering the North Sea to the west and the counties of Vestland to the north, Vestfold og Telemark to the east and Agder to the east and southeast. In 2020, it had a population of 47 ...
, and
Kvinesdal Kvinesdal is a municipality in Agder county, Norway. It is located in the traditional district of Lister. The administrative centre of the municipality is the village of Liknes. Other villages in Kvinesdal include Feda, Fjotland, and Storekvi ...
in
Vest-Agder Vest-Agder (; "West Agder") was one of 18 counties (''fylker'') in Norway up until 1 January 2020, when it was merged with Aust-Agder to form Agder county. In 2016, there were 182,701 inhabitants, around 3.5% of the total population of Norway. I ...
, all large producers of
hydroelectricity Hydroelectricity, or hydroelectric power, is Electricity generation, electricity generated from hydropower (water power). Hydropower supplies one sixth of the world's electricity, almost 4500 TWh in 2020, which is more than all other Renewabl ...
. The investments were very complicated. They were geared, and they involved high risk through a small upside but a very large downside. Terra Securities, now bankrupt, was a subsidiary of
Terra Markets Terra Markets AS (formerly known as Orion Securities AS) is a Norwegian investment banking firm in the Norne Securities group. Terra Markets employs 75 professionals in brokerage, equity research, market making and corporate finance. The equi ...
, which is owned 66.73% by
Terra-Gruppen Eika Gruppen, formerly Terra-Gruppen, branded as Terra is a strategic alliance among 77 local Norwegian savings banks that co-ordinates work within the areas defined as falling within the alliance. The group supplies products and services to banks ...
, an
alliance An alliance is a relationship among people, groups, or states that have joined together for mutual benefit or to achieve some common purpose, whether or not explicit agreement has been worked out among them. Members of an alliance are called ...
and
co-branding Co-branding is a marketing strategy that involves strategic alliance of multiple brand names jointly used on a single product or service. Co-branding is an arrangement that associates a single product or service with more than one brand name, ...
company owned by 78 local
savings banks A savings bank is a financial institution whose primary purpose is accepting savings deposits and paying interest on those deposits. They originated in Europe during the 18th century with the aim of providing access to savings products to all ...
in Norway. The remaining 33.27% was owned by the management of the company. Citigroup is the third largest bank in the United States.


Background

In 2001, Vik municipality found a
loophole A loophole is an ambiguity or inadequacy in a system, such as a law or security, which can be used to circumvent or otherwise avoid the purpose, implied or explicitly stated, of the system. Originally, the word meant an arrowslit, a narrow verti ...
in the ''Municipality Act'' and invested borrowed money in the
stock market A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include ''securities'' listed on a public stock exchange, as ...
, by first investing and then seeking permission later. This utilization of the loophole was confirmed by the
Norwegian Ministry of Local Government and Regional Development The Royal Norwegian Ministry of Local Government and Regional Development ( no, Kommunal- og regionaldepartementet) is a Norwegian ministry established in 1948. It is responsible for the housing and building, regional and rural policy, municipal an ...
in 2002, because the money borrowed was secured in future income. Vik had borrowed through DnB Markets based on annual payments of NOK 10M, secured through income from hydroelectric power production. This money was then invested in
bond Bond or bonds may refer to: Common meanings * Bond (finance), a type of debt security * Bail bond, a commercial third-party guarantor of surety bonds in the United States * Chemical bond, the attraction of atoms, ions or molecules to form chemica ...
s through Terra Securities in 2001 and 2002. In the same year, in 2001, the four Nordland municipalities Narvik, Rana, Hemnes and Hattfjelldal borrowed money to invest in complicated bonds issued by Citigroup and sold through Terra Securities. The municipalities also signed a confidentiality clause with Terra, which ensured that no independent third party could evaluate the quality of the investments. It has been questioned if such a clause, under the circumstances, was legal. In Narvik's case, part of the capital came from the municipal sale of 50% of Narvik Energi, the municipal power company, in 2002 to
DONG Energy Dong or DONG may refer to: Places * Dong Lake, or East Lake, a lake in China * Dong, Arunachal Pradesh, a village in India * Dong (administrative division) (동 or 洞), a neighborhood division in Korea Persons *Queen Dong (1623–1681), princes ...
and HelgelandsKraft. The other three municipalities had ownership in HelgelandsKraft (Rana 26.8%, Hemnes 7.0% and Hattfjelldal 2.5%) as well as
property tax A property tax or millage rate is an ad valorem tax on the value of a property.In the OECD classification scheme, tax on property includes "taxes on immovable property or net wealth, taxes on the change of ownership of property through inheri ...
income from power stations owned by Statkraft. These municipalities were investing future income from these sources. The main advisors in Terra were Knut Anders Opstad and Harald Norberg. They had tried to sell the investments to all municipalities with income from power production by contacting the Association of Norwegian Power Municipalities, but had been rejected by the organization.


Nature of the investments

After the reinvestment in 2007, the municipalities gained a potential upside on their investments of between 0.5% and 3.0% above risk-free placements, but instead risked losing not only their entire investment, but in a worst-case scenario ''twice'' what they invested. A total of NOK 451 million was invested, but was 'geared' by borrowing an additional amount corresponding to ten times the investment, so that – in reality – the municipalities were actually investing between NOK 4 and 5 billion. In a worst-case scenario the municipalities could lose NOK 900 million. The investment model was so complex that the CEO of Terra Securities could not confirm that even he actually understood how it worked. The deficit from the investment came in late 2007 caused by a credit bubble in the United States. The investments made by Haugesund involved a placement of NOK 227.5M as a security for Citigroup, in case loans to United States municipalities were defaulted beyond 3.32%; Haugesund would have to pay this to Citigroup. The mayor of Haugesund, Petter Steen jr. claims that he thought the municipality was buying a bond in Statkraft. Instead they were selling such a bond as security for the hedging they were performing for Citigroup. Total investments in Terra/Citigroup scheme: * Bremanger: NOK 170 million * Hattfjelldal: 103M * Haugesund: 220M * Hemnes: 84M * Kvinesdal 32M * Narvik: 52M * Rana: 297M * Vik: 38.5M


Reaction to the scandal

After the financial newspaper
Finansavisen ''Finansavisen'' is a Norwegian language, Norwegian business newspaper published by Hegnar Media in Oslo, Norway. History and profile ''Finansavisen'' was first published on 1 October 1992 by Trygve Hegnar, who is also editor-in-chief. The paper ...
began reporting the case, and the municipalities suspected that they had been misled, they hired expertise from the law firm Lund & Co. as well the financial advisory firm Pareto. The
Financial Supervisory Authority of Norway Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of Production (economics), production, Distribution (economics), distribution, and Consumption (economics) ...
announced that they would perform an investigation of the case, regarding the legality of the products sold and the information provided by Terra.
Minister of Local Government and Regional Development The Minister of Local Government and Modernisation ( no, Kommunal- og moderniseringsministeren) is a Council of State (Norway), Councillor of State and Chief of the Norway, Norwegian Ministry of Local Government and Regional Development (Norway), ...
Magnhild Meltveit Kleppa Magnhild Meltveit Kleppa (born 12 November 1948 in Fister, Norway) is a Norwegian politician for the Centre Party. Kleppa is educated as a teacher at Kristiansand Teacher Training College in 1970. She worked as a teacher from 1967 to 1992. Sh ...
asked the County Governor of Nordland to investigate whether the agreements made were legal according to the ''Municipality Act''. Terra-Gruppen started an internal investigation, but has since only relocated the two advisors, claiming that top management could not be held responsible for any issues in connection with the products. However, Sverre Leiro, CEO of
NorgesGruppen NorgesGruppen ASA is a Norwegian grocery wholesaling group which also runs various retail Retail is the sale of goods and Service (economics), services to consumers, in contrast to wholesaling, which is sale to business or institutional cu ...
and one of the two independent members of the board of Terra-Gruppen resigned on 23 November 2007, claiming that remaining as a board member could tarnish his and NorgesGruppen's
reputation The reputation of a social entity (a person, a social group, an organization, or a place) is an opinion about that entity typically as a result of social evaluation on a set of criteria, such as behavior or performance. Reputation is a ubiquitous ...
. On 26 November 2007, Terra announced that they were willing to take the downside of the investments made in 2007 by the four Nordland municipalities, a total loss of NOK 150M. This would result in a net loss for the municipalities of NOK 150M. By 27 November the municipalities had rejected the offer. Local politicians in Narvik feared that they would be forced to sell the remaining stake in Narvik Energi if they could not extract themselves from the agreement with Terra. On 28 November 2007, the
Financial Supervisory Authority of Norway Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of Production (economics), production, Distribution (economics), distribution, and Consumption (economics) ...
announced that they would withdraw all operating licenses held by Terra Securities. Director of the authority, Bjørn Skogstad Aamo said the reasons were "numerous and serious breaches of requirements for good and correct information to clients". Subsequently, the company filed for
bankruptcy Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor ...
and the CEO of Terra-Gruppen, Ola Sundt Ravnestad, announced his resignation. Ravnestad will receive NOK 5.5 million in remuneration after he retires from the job. Due to the bankruptcy of Terra Securities, Citigroup announced, on 30 November 2007, that they would sell the funds on the open market, essentially inflicting a cost of approx. NOK 350M on the municipalities. On 7 December 2007 Tønsberg District Court gave the eight municipalities
arrest An arrest is the act of apprehending and taking a person into custody (legal protection or control), usually because the person has been suspected of or observed committing a crime. After being taken into custody, the person can be questi ...
in all personal property of the broker Knut Anders Opstad, including his private
holding company A holding company is a company whose primary business is holding a controlling interest in the securities of other companies. A holding company usually does not produce goods or services itself. Its purpose is to own shares of other companies ...
, Opstad Invest AS. Representatives for the municipalities indicated they would also seek arrest of the other involved parties' property. On 17 June 2008, the municipality of Rana dismissed their Chief Municipal Officer, Jan Reitehaug, and the Financial Director. This was the result of an independent consultant report that concluded that the municipality had breached four paragraphs of the ''Municipality Act'' as well as the municipalities' own financial policies. Furthermore, it revealed that the Chief Municipal Officer did not realise that the representatives were brokers — but thought they were merely advisors. The administration also failed to obtain political approval for several of the transactions, and failed to register broker fees because they did understand what they were. In August 2008, several of the municipalities announced they were considering taking legal action against Citigroup, in either the United Kingdom or the United States, to hold Citigroup responsible for the losses. On 8 September, the eight municipal councils involved unanimously voted to hold DnB NOR and Depfa Bank liable for their losses, by issuing loans that were illegal according to the Municipality Act. The municipalities will no longer honour the loan commitments, and stop payments. Kjell-Idar Juvik claimed he hoped the banks would be willing to negotiate the matter, and hoped to avoid legal proceedings, but said that municipalities would not hesitate to bring the matter to court. DnB Nor announced that following day that they are considering taking legal action against the municipalities to force them to continue payments.


Press coverage

The incident has been subject to extensive press coverage with headlines and entire first pages in both local and national newspapers, as well as in-depth research articles in the financial press. TV coverage has involved both news and debate programs on several channels, along with the inevitable ironic comments by comedians in various satirical TV shows.


Parties involved


Municipalities

*Eight municipalities were involved. It is claimed that they were inadequately informed by Terra Securities representatives of the high risks involved. Also, the legality of furnishing "future expected income" as security for loans has been questioned. The municipalities risk huge losses from their speculative investments. The municipalities have been represented by their mayors: ** Asgeir Almås (
Labour Labour or labor may refer to: * Childbirth, the delivery of a baby * Labour (human activity), or work ** Manual labour, physical work ** Wage labour, a socioeconomic relationship between a worker and an employer ** Organized labour and the labour ...
,
Hattfjelldal Hattfjelldal ( sma, Aarborte) is a municipality in Nordland county, Norway. It is part of the Helgeland traditional region. The administrative centre of the municipality is the village of Hattfjelldal. Other villages include Grubben, Svens ...
) ** Karen Margrethe Kuvaas (Labour,
Narvik ( se, Áhkanjárga) is the third-largest municipality in Nordland county, Norway, by population. The administrative centre of the municipality is the town of Narvik. Some of the notable villages in the municipality include Ankenesstranda, Ball ...
) ** Kjell-Idar Juvik (Labour,
Hemnes Hemnes is a municipality in Nordland county, Norway. It is part of the Helgeland traditional region. The administrative centre of the municipality is the village of Korgen. Other villages include Bjerka, Bleikvasslia, Hemnesberget, and Sund ...
) ** Erik Lidal (
Centre Center or centre may refer to: Mathematics *Center (geometry), the middle of an object * Center (algebra), used in various contexts ** Center (group theory) ** Center (ring theory) * Graph center, the set of all vertices of minimum eccentricity ...
,
Vik Vik (Old Norse: vík) means wick or bay in Norwegian and Swedish (''vig'' in Danish), and it may refer to the following: Places Iceland *Vík í Mýrdal, a village in southern Iceland Iran *Vik, Iran, a village in Zanjan Province, Iran Norway *V ...
) ** Odd Omland (Labour,
Kvinesdal Kvinesdal is a municipality in Agder county, Norway. It is located in the traditional district of Lister. The administrative centre of the municipality is the village of Liknes. Other villages in Kvinesdal include Feda, Fjotland, and Storekvi ...
) ** Petter Steen jr. (
Conservative Conservatism is a cultural, social, and political philosophy that seeks to promote and to preserve traditional institutions, practices, and values. The central tenets of conservatism may vary in relation to the culture and civilization i ...
,
Haugesund Haugesund () is a municipality on the North Sea in Rogaland county, Norway. While the population is greater in the neighboring Karmøy municipality, the main commercial and economic centre of the Haugaland region in northern Rogaland and southern ...
) ** Kåre Olav Svarstad (Labour, Bremanger) **
Geir Waage Geir Norten Waage (born January 21, 1967) is a Norwegian politician for the Norwegian Labour Party. Since 2007 he is the mayor of Rana. Waage was one of the four mayors that fronted his municipality and seven others in the Terra Securities scan ...
(Labour,
Rana Rana may refer to: Astronomy * Rana (crater), a crater on Mars * Delta Eridani or Rana, a star People, groups and titles * Rana (name), a given name and surname (including a list of people and characters with the name) * Rana (title), a histori ...
)


Financial services companies

* Lund & Co. (judicial) and Pareto Group (financial)—have acted as advisors for the municipalities. * Terra Securities (now bankrupt) – sold the funds to the municipalities, allegedly without informing of the true nature of the risk. *Terra Securities IS (Retrieved on December 2, 2007)—an "inner company". The owners received almost 200 million NOK from this company last year. The role of this company and its relation to the now defunct company Terra Securities ASA is not fully known. *Owners of Terra Securities (
Terra-Gruppen Eika Gruppen, formerly Terra-Gruppen, branded as Terra is a strategic alliance among 77 local Norwegian savings banks that co-ordinates work within the areas defined as falling within the alliance. The group supplies products and services to banks ...
owned by 78
savings banks A savings bank is a financial institution whose primary purpose is accepting savings deposits and paying interest on those deposits. They originated in Europe during the 18th century with the aim of providing access to savings products to all ...
as well as the executive managers Ola Sundt Ravnestad and Odd Arne Pedersen)—Have received hundreds of million NOK from Terra Securities since the illegal transactions were initiated. They risk legal action from involved parties, and loss of goodwill. * DnB NOR— Gave loans to the municipalities to make the investments. Legality of loans are questioned.


Banks

*
Depfa Bank DEPFA Bank plc was until 2014 a Dublin-based German-Irish bank. It provided financial services to the public sector and also provided financing for larger infrastructure projects. The name derivates from ''Deutsche Pfandbriefbank''. History DEP ...
— Gave loans to Haugesund and Narvik. *
Citigroup Citigroup Inc. or Citi (Style (visual arts), stylized as citi) is an American multinational investment banking, investment bank and financial services corporation headquartered in New York City. The company was formed by the merger of banking ...
— Issued the bonds to Terra, who sold on the securities to the Norwegian municipalities. While "the risks were clearly conveyed by Citigroup to Terra" (according representatives from Citigroup), the risks of the prospects were allegedly not communicated to the final buyers. The scope of commissions and other remunerations from the purportedly illegal transactions is not known. The letter dated November 27, 2007 from ''The Financial Supervisory Authority of Norway'' to ''Terra Securities ASA'', states that "''The Supervisory Authority contends that Terra Securities ASA's presentation appears inadequate and misleading, as central elements such as the possibility of potential extra payments and losses, together with the size of these, has been omitted.'' (...) The material from Citigroup is significantly more detailed than the material from Terra Securities ASA. However, this document also lacks information about crucial risk issues for the municipalities, namely the risk of having to furnish additional security in the form of cash. (...) ''The Supervisory Authority contends that Citigroup's presentation, as well as the presentation from Terra Securities ASA, appears inadequate and misleading because central elements such as information about potential extra payments and the scope of these are omitted.''" (translated)"''Terra Securities – Kommune fond linket obligasjon''" (document discussed in "Letter from The Financial Supervisory Authority of Norway to Terra Securities ASA (2007-11-27). Forhåndsvarsel om tilbakekall av tillatelse.")"''Citigroup Municipal Investors TOB Capital Municipal Portfolio''" (document discussed in "Letter from The Financial Supervisory Authority of Norway to Terra Securities ASA (2007-11-27). Forhåndsvarsel om tilbakekall av tillatelse.") * SEB Merchant Bank— Acted as a
broker A broker is a person or firm who arranges transactions between a buyer and a seller for a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal. Neither role should be confu ...
between Citigroup and Terra Securities, and was initially opposed to the Citigroup funds scheme.


Government agencies

*
Financial Supervisory Authority of Norway Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of Production (economics), production, Distribution (economics), distribution, and Consumption (economics) ...
— Control authority that withdrew Terra Securities' licence.(Retrieved on December 2, 2007) The Authority is making further enquiries concerning the legality of the conduct of certain persons and parties involved in Terra. *
Norwegian National Authority for the Investigation and Prosecution of Economic and Environmental Crime The National Authority for Investigation and Prosecution of Economic and Environmental Crime ( no, Økokrim) is Norway's central unit for fighting economic and environmental crimes. The unit, created in 1989, has its main office in Oslo. Økokr ...
— The police unit that will eventually charge any parties deemed to have violated Norwegian law. * County Governor of Nordland— Investigating whether the municipalities have breached the ''Municipality Act'' during the investment process.


Individual brokers

* Harald Norberg and Knut Anders Opstad—The two brokers who actually sold the funds to the municipalities.


Outcome

Terra Securities ASA filed for bankruptcy on 28 November 2007, the day after they received a letter from the
Financial Supervisory Authority of Norway Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of Production (economics), production, Distribution (economics), distribution, and Consumption (economics) ...
announcing the withdrawal of permissions to operate. The letter stated, "The Supervisory Authority contends that Citigroup's presentation, as well as the presentation from Terra Securities ASA, appears insufficient and misleading because central elements like information about potential extra payments and the size of these are omitted."


Documentary film

In 2012, the documentary ''Finanseventyret'', directed by
Oddvar Einarson Oddvar Einarson (born 7 February 1949) is a Norwegian movie director. He made his debut with the film '' Time i nyttelære'' in 1967 and has since directed a number of films, some of the best known being: '' Kampen om Mardøla'' (1972), '' Prognose ...
, was released. and the documentary "Når boblene brister" (2012), directed by Hans Petter Moland,


References


External links


Model of the investment
(E24 Næringsliv)
Terra-Gruppen
{{DEFAULTSORT:Terra Securities Scandal Political scandals in Norway Corporate scandals 2007 in Norway Eika Gruppen Citigroup DNB ASA Great Recession