Hf. Eimskipafélag Íslands fined ISK 20m by the Icelandic Financial Supervisory Authority for violation of the duty to disclose information

The Icelandic Financial Supervisory Authority (FME) has ordered Hf.
Eimskipafélag Íslands to pay an administrative fine of ISK 20m. The company is
fined for delaying the disclosure of insider information relating to the
financial difficulties of Innovate Holdings Ltd., Eimskip's subsidiary in the
UK, last spring. 

Eimskip purchased a 55% shareholding in the UK company Innovate in 2006 and
subsequently acquired the entire company in 2007. In February 2008, the affairs
of Innovate were discussed in a Board meeting where it was revealed that
projections relating to Innovate were not being met. The general opinion was
that the company was experiencing temporary difficulties. The Board decided to
support Innovate, as is often done when companies are believed to be
experiencing temporary difficulties. In the opinion of the company, there was
no clear information available at Eimskip at that time to the effect that the
financial position of Innovate was as bad as was subsequently discovered, i.e.
that Innovate would have to be written-off entirely from Eimskip's books. If
the former managers and the Board of the company had been of the opinion that
Innovate's financial position was as poor as subsequently became apparent, the
Board would naturally not have made the decision to support Innovate with
substantial funds through May. Thus the company's assessment of the financial
position of Innovate was clearly shown by its actions. On 20 February 2008, the
then-CEO of the company left and the Assistant CEO temporarily filled the
position until the current CEO was recruited to the company in May 2008. At the
Annual General Meeting on 18 March 2008, a new Board of Directors was elected
and three new members joined the Board. 

At a meeting in the beginning of May, the greater seriousness of Innovate's
status than had previously believed was presented and the Board subsequently
decided to cease financial support. The decision was made on the grounds that
the position of Innovate was much more serious than the previous managers and
Board had thought. Furthermore, the company's Board decided to delay the
disclosure of information on the operating problems of Innovate to protect the
legitimate interests of Innovate, Eimskip, shareholders, creditors, employees
and clients of Innovate. The actions taken were in accordance with UK
legislation and according to the advice of British consultants and attorneys.
Directly thereafter, an effort was made, with the help of British consultants,
to put Innovate assets into a sales process and to obtain as much value as
possible for the assets of Innovate to minimise the damages to Eimskip and the
creditors of Innovate which would result from the company's bankruptcy. If
information on impending bankruptcy of Innovate had been disclosed at that
time, the Board of Eimskip is of the opinion that it is clear that substantial
value would have been lost, as the clients and employees of Innovate would
probably have left the company with the result that the value of the operation
would have been severely limited. The company's Board of Directors, together
with its managers, worked on the matter in good faith with UK consultants and
attorneys. The Board of Directors of Eimskip believe that they had valid
authorisation to temporarily delay the disclosure of information on
difficulties in the operation of Innovate, and it is the opinion of the Board
that the company's duty to disclose information formed in May. By temporarily
delaying the disclosure of information on the operating problems of Innovate
from May to June, Eimskip's Board was protecting legitimate interests and
preventing the company from suffering further damages and loss. Eimskip's Board
of Directors is of the opinion that it was successful in protecting the
interests of Innovate's creditors and in cancelling guarantees for which
Eimskip was responsible on behalf of Innovate, in particular guarantees to
Glitnir Bank hf., amounting to a total of GBP 9.5m. Finally, a concentrated
effort was made protect the interests of creditors, a measure Innovate was
obliged to take according to UK legislation. 

The Financial Supervisory Authority has reached the conclusion that the company
violated the Act on Securities Transactions by failing to immediately report in
February the difficulties in Innovate's operation. The Authority does not
accept Eimskip's argument that the duty to disclose information did not form
until May and that the company had authority to delay the disclosure of
information. 
FME's ruling reveals that the violation persisted for a very long time, just
under four months, and that during this period there was considerable trading
in shares in the company. Such scope of trading during the period, as well as
the changes in the rate of shares in the company after the information was
disclosed, increases the seriousness of the company's violation and is a good
example of the effect this had on the market, particularly on those who
purchased shares in the company during the period. Furthermore, FME was of the
opinion that Eimskip was unable to show that the exemption granted by the third
paragraph of Article 122 of the Act on Securities Transactions applied to the
company and, therefore, that Eimskip violated the provisions of the first
paragraph of Article 122 on the immediate disclosure of insider information.
The ruling of FME reveals that the administrative fines are imposed regardless
of whether violations of the Act are committed wilfully or negligently, as
provided for in the fourth paragraph of the Act on Securities Transactions.
FME's ruling also states that the specified article of law does not
specifically distinguish between the degree of wilfulness or negligence.
Moreover, the Board of FME was of the opinion that there were no grounds to
refer the matter to the National Commissioner of the Icelandic Police for
official investigation. Rather the nature of the matter is such that the
Authority believes the matter should be settled by means of an administrative
fine in accordance with the authority granted to FME. 
On determining the amount of the administrative fine, account was taken of the
merits of the case and available information, particularly with respect to the
seriousness of the violation and the conduct of the management of Eimskip, the
length of time the violation persisted and the scope of trading during the
period. It was deemed appropriate to order Eimskip to pay an administrative
fine of ISK 20m. 

The company will review the grounds for the ruling with its attorneys and
subsequently make a decision on whether to initiate proceedings to invalidate
the ruling. The company has three months to reach a decision in this respect.