Terra Securities scandal
| Company type | Subsidiary |
|---|---|
| Industry | Financial services |
| Defunct | 2007 |
| Fate | Bankruptcy following license revocation |
| Headquarters | Norway |
| Parent | Terra Markets |
The Terra Securities scandal came to light in November 2007 and involved speculative investment activities by eight Norwegian municipalities in various hedge funds tied to the U.S. bond market. These intricate, leveraged financial products were distributed by Terra Securities and originated from Citigroup. The municipalities implicated—Narvik, Rana, Hattfjelldal, and Hemnes in Nordland, Vik and Bremanger in Sogn og Fjordane, Haugesund in Rogaland, and Kvinesdal in Vest-Agder—are notable producers of hydroelectric power.
These investments involved considerable financial risk, offering modest potential gains but exposing the municipalities to significant losses. Terra Securities, now defunct, operated as a subsidiary of Terra Markets, which was 66.73% owned by Terra-Gruppen, a cooperative group of 78 local Norwegian savings banks; the remaining shares were held by company executives. Citigroup stands as the third-largest banking institution in the United States.
Background
In 2001, Vik municipality took advantage of a loophole within the Municipality Act to utilize borrowed capital for stock market investments, raising NOK 70 million through DnB Markets based on anticipated hydroelectric revenue. These funds were subsequently invested in bonds via Terra Securities.
During the same year, four municipalities in Nordland—Narvik, Rana, Hemnes, and Hattfjelldal—secured loans to invest in complex bonds issued by Citigroup and sold through Terra Securities. They entered into confidentiality agreements that barred independent assessments of these investments, which later prompted legal scrutiny.
Narvik funded part of its investment by selling a 50% stake in its municipal power company to DONG Energy and HelgelandsKraft in 2002. The other three municipalities held ownership interests in HelgelandsKraft and received property tax revenues from power stations owned by Statkraft, leveraging these future income streams for their investments.
The primary advisors from Terra were Knut Anders Opstad and Harald Norberg. They sought to promote these investment products broadly to municipalities with income from power production via the Association of Norwegian Power Municipalities but encountered rejection.
Nature of the investments
Following reinvestments in 2007, the municipalities stood to gain between 0.5% and 3.0% above risk-free returns but faced the possibility of losing their entire principal or, at worst, double their initial investment. Although the initial capital invested was , borrowing amplified this amount tenfold, effectively placing municipalities at risk for sums ranging from to . Potential losses could escalate to .
The complexity of these financial instruments was so high that even the CEO of Terra Securities acknowledged limited comprehension. The losses began materializing toward the end of 2007 as a result of the U.S. credit bubble collapse.
Haugesund’s arrangement entailed providing as collateral for Citigroup against defaults on U.S. municipal loans exceeding 3.32%. Mayor Petter Steen jr. believed the municipality was purchasing a Statkraft bond; however, it was actually pledging such a bond as security for Citigroup’s hedging strategy.
The total amounts invested by each municipality in the Terra/Citigroup scheme were:
- Bremanger Municipality:
- Hattfjelldal Municipality:
- Haugesund Municipality:
- Hemnes Municipality:
- Kvinesdal Municipality:
- Narvik Municipality:
- Rana Municipality:
- Vik Municipality:
Response to the Controversy
After Finansavisen exposed the issue, municipalities engaged legal and financial consultants from Lund & Co. and Pareto Group. The Financial Supervisory Authority of Norway initiated a probe into the legality of the products and Terra’s disclosure practices. Minister Magnhild Meltveit Kleppa called upon the County Governor of Nordland to examine adherence to the Municipality Act.
Terra-Gruppen launched an internal investigation, resulting in the reassignment of two advisors, while top executives denied accountability. Sverre Leiro, CEO of NorgesGruppen, stepped down from Terra’s board due to concerns over the company’s reputation.
On 26 November 2007, Terra proposed covering losses amounting to for four municipalities in Nordland; this proposal was declined by 27 November. Politicians in Narvik expressed worries that the agreement might compel the sale of Narvik Energi shares.
The Financial Supervisory Authority revoked all licenses held by Terra Securities on 28 November, citing severe violations regarding client information protocols. Following this, Terra Securities declared bankruptcy; CEO Ola Sundt Ravnestad resigned and received a severance package of .
Citigroup revealed on 30 November plans to liquidate funds on the open market, which would result in approximately in expenses for the affected municipalities.
On 7 December, Tønsberg District Court froze personal assets belonging to broker Knut Anders Opstad and his company Opstad Invest AS. Municipalities indicated their intention to pursue assets from other involved parties as well.
After a report uncovered breaches of the Municipality Act and internal regulations—including confusion between brokers and advisors and lack of political consent on transactions—Rana Municipality dismissed its Chief Municipal Officer and Financial Director on 17 June 2008.
By August 2008, multiple municipalities were contemplating legal proceedings against Citigroup in either the UK or US courts to reclaim their losses. On 8 September, eight municipal councils unanimously held DnB NOR and Depfa Bank accountable for issuing unlawful loans under the Municipality Act and ceased payments on those loans. Kjell-Idar Juvik expressed willingness to negotiate but confirmed readiness for court action. DnB Nor stated it might initiate legal measures against municipalities to recover payments.
Media Coverage
The scandal attracted widespread media attention, dominating headlines and front pages across local and national newspapers, along with comprehensive coverage in financial publications. Television networks broadcasted news segments and debate programs on various channels, complemented by satirical commentary.
Municipalities
- Eight municipalities participated in the case, alleging insufficient risk disclosure by representatives from Terra Securities. Concerns were raised about the legality of securing loans based on "anticipated future income," which exposed these municipalities to substantial potential financial losses. The mayors representing these municipalities were:
- Asgeir Almås (Labour, Hattfjelldal Municipality)
- Karen Margrethe Kuvaas (Labour, Narvik Municipality)
- Kjell-Idar Juvik (Labour, Hemnes Municipality)
- Erik Lidal (Centre Party, Vik Municipality)
- Odd Omland (Labour, Kvinesdal Municipality)
- Petter Steen jr. (Conservative, Haugesund Municipality)
- Kåre Olav Svarstad (Labour, Bremanger Municipality)
- Geir Waage (Labour, Rana Municipality)
Financial services firms
- Lund & Co. (legal) alongside Pareto Group (financial) acted as advisors to the involved municipalities.
- Terra Securities (now defunct) marketed the funds to municipalities, allegedly without fully disclosing associated risks.
- Terra Securities IS—an affiliated entity whose proprietors received close to 200 million NOK last year; its precise function and connection to Terra Securities ASA remain ambiguous.
- The proprietors of Terra Securities (Terra-Gruppen, owned by 78 savings banks, together with executives Ola Sundt Ravnestad and Odd Arne Pedersen) have obtained hundreds of millions NOK since the transactions commenced and face possible legal proceedings and reputational harm.
- DnB NOR extended loans to municipalities for these investments; the legality of these loans has been questioned.
Banking institutions
- Depfa Bank—provided financing to Haugesund and Narvik.
- Citigroup—issued bonds sold by Terra Securities to Norwegian municipalities. Although Citigroup representatives assert that risks were clearly communicated to Terra, the ultimate purchasers reportedly were not fully informed. Norway’s Financial Supervisory Authority criticized both Citigroup’s and Terra Securities’ disclosures as inadequate and misleading, particularly for omitting critical risk factors such as potential additional payments and cash collateral obligations.
- SEB Merchant Bank—served as intermediary between Citigroup and Terra Securities and initially opposed Citigroup’s fund arrangement.
Governmental bodies
- Financial Supervisory Authority of Norway—the regulatory agency that revoked Terra Securities’ licence and is investigating the legality of actions taken by involved parties.
- Norwegian National Authority for the Investigation and Prosecution of Economic and Environmental Crime—law enforcement unit responsible for pursuing any legal violations connected to Terra.
- County Governor of Nordland—examining whether municipalities violated the Municipality Act in relation to their investments.
Individual brokers
- Harald Norberg and Knut Anders Opstad—brokers responsible for selling the investment funds to municipalities.
Outcome
Following the withdrawal of its operating licence by the Financial Supervisory Authority, Terra Securities ASA filed for bankruptcy on 28 November 2007. The Authority condemned both Terra and Citigroup for delivering insufficient and misleading information, particularly failing to disclose potential additional payments and their amounts.
Documentary film
Two documentaries addressing the scandal were released in 2012: Finanseventyret, directed by Oddvar Einarson, which highlights municipal financial losses in Narvik, Hemnes, Rana, and Vik; and Når boblene brister, directed by Hans Petter Moland.
External links
- Investment model (E24 Næringsliv)
- Terra-Gruppen