Nordic: Dane crash

A bumper fraud is the least of Denmark’s worries, with insolvencies hitting record figures. But Tom Phillips finds optimism for the country from those
in the know

Stein Bagger

Stein Bagger

The high-profile case of a jet-setting fraudster who is alleged to have conned ­millions from customers, banks and an international accountancy firm has kept the Danish ­public hooked for the past six months.

But aside from the story of how Stein Bagger, who newspapers have dubbed ­’Denmark’s Madoff’, managed to bankrupt a company is a diversion from the a less salacious crisis in the economy that now sees it hold the record for the highest ­number of insolvencies in Scandinavia.

Both February and March broke records, with insolvencies hitting 500 a month. Unemployment is expected to peak at 190,000 in two years (around the 3.5 per cent mark) and, while many of the country’s lawyers are benefiting from the spike in insolvencies, they are concerned about the lack of other work in their M&A and real estate practices.

The reason for the high number of ­insolvencies lies in Denmark’s fast growth over the past decade. It is a familiar story. Denmark grew faster than its Scandinavian neighbours, property boomed, prices increased and homeowners borrowed more and more. Then the property market crashed, new companies folded and the country’s 150 regional banks struggled, ­leading to the unusual situation now of there being more insolvencies in the regions than in the capital Copenhagen.

“Denmark’s had good times for 10 years and people became complacent about investing in property,” sums up Steen ­Rosenfalck, managing partner of UK and Denmark firm Miller Rosenfalck. “There’s a tradition of small, local trading banks and their exposure to the credit crises was tremendous.”

The increasing economic ­problems have been played out against the background of an extraordinary case of fraud, which began in a crowded banquet hall in Copenhagen in November last year.

Nearly 1,000 people at the top of ­Denmark’s business ­community joined together, at the invitation of accountancy firm Ernst & Young, to celebrate the achievements of, among others, ­Bagger. Bagger was up for ­Entrepreneur of the Year and two other awards for the ­tremendous growth of ­software company IT Factory.

Bagger did not collect the award himself on the night because he was fleeing from what investigators have since called ­Denmark’s biggest scam in decades.

After handing himself in at a police ­station in Los Angeles, Bagger’s company was declared insolvent and a ­liquidator began trying to unravel how DKr1.2bn (£140m) had disappeared, seemingly into thin air.

Bagger, who pleaded guilty to charges of aggravated fraud and forgery, is accused of changing details on the length of time ­contracts would be leased by IT Factory, from five years to three months, then either forging signatures or signing on behalf of ­managers to confirm the amendments.

IT Factory’s auditor, KPMG, is accused by the claimants of not checking these ­amendments, which were described as “highly unusual” by a lawyer close to the case.

Many were caught up in the fraud, with Danske Bank reportedly losing DKr350m and IBM Denmark more than DKr100m.

Danske Bank in particular has faced ­criticism for lending millions to IT Factory while at the same time receiving the ­company’s annual report, which showed no such leasing contracts within it.

There are very little assets in the ­company (the Danish public has revelled in reports of attempts to recover diamonds and a yacht), but the receiver, Boris Frederiksen, a partner at Law Firm Poul Schmith, which acts as the sole legal adviser to the Danish state, is due to launch a claim before the end of May on behalf of the claimants.

Jan Bech, a partner at Lett Law Firm, is being instructed by some of the claimants, including leasing ­company De Lage ­Landen. “It’s a high-profile case because the press are interested in all the more unusual aspects, but what Stein Bagger has done is not ingenious, it’s plain fraud,” says Bech. “The most amazing thing is that he was able to pull it off for so long.”

Law firm Bech-Bruun was deeply involved in the outcome from the ITF case after it was instructed to reorganise the ­parent company JMI Invest.

The company was left in a deep crisis with more than DKr475m of debt and with no free cash. Bech-Bruun established an agreement with the creditors and arranged for the sale of the 18 companies in the ­portfolio.

Ole Borch, the Bech-Bruun partner who led on the case, was appointed chairman to the board of JMI Invest. Borch says the ­situation in Denmark is worse than ever.

“I’ve been working in insolvency for 27 years and I’ve never seen anything like this,” he says. “I strongly believe those who say this is as bad as the 1930s.
“But we were surprised by the attitude of the banks – they’ve been more proactive with reconstructing businesses than I’ve ever seen before.”

Borch says Danish banks have accepted that the companies and themselves might be better off if they see some losses but keep the customer.

The economic situation in Denmark has caused a huge upturn in insolvency ­instructions for Danish law firms. On the flip side, though, the lack of available ­financing has caused a massive drop in M&A.

Rosenfalck agrees that this is a difficult time for law firms in the country.

“There’s a sense of crisis in the legal ­market and business market generally. However, the Danes are very entrepreneurial and there’ll be lots of small businesses popping up from the undergrowth,” he says. “The ­situation is worse in Sweden, where their companies are struggling and they’re much more embedded into the economy. ­Denmark will bounce back.”