Hreidar Mar Sigurdsson, the former chief executive officer of Kaupthing Bank hf, was arrested yesterday after an investigation into the collapse of Iceland’s largest bank, two people familiar with the probe said.

Reykjavik police arrested one person, who they didn’t identify, on suspicion of forgery, market manipulation and violating the law in pursuit of personal financial gain, Iceland’s special prosecutor said in a statement.

The individual is being held in solitary confinement to protect the integrity of the investigation, the prosecutor said in an e-mailed statement. The probe is supported by information from the Financial Supervisory Authority and other data, according to the statement.

State television later showed video of Magnus Gudmundsson, the CEO of Luxembourg-based Banque Havilland, a former Kaupthing unit, in police custody. Gudmundsson is being detained at the Reykjavik Police Department, according to a duty officer, who declined to be identified citing department policy.

The video below is an interview by Paperjam two years ago with Magnus Gudmundsson.

Kaupthing, Glitnir Bank hf and Landsbanki Islands hf collapsed in October 2008 after they amassed $61 billion of debt, equivalent to 12 times the country’s gross domestic product. The government took over the three banks and was forced to seek an International Monetary Fund bailout as its currency lost as much of 80 percent of its value.

Sigurdsson Defense

Sigurdsson, 39, who led Kaupthing as it expanded overseas, was forced to step down after the government seized his bank. He defended himself in an Aug. 20 interview, saying Kaupthing officials believed all the loans they made were “good, well- secured loans.”

Kaupthing’s biggest mistake was not moving the bank’s headquarters outside Iceland in 2006, when it had outgrown the island’s economy, Sigurdsson said in the interview with local broadcaster RUV.

“Mistakes were made,” he said. “I’m obliged to offer my apologies to the bank’s shareholders, the bank’s lenders and the bank’s employees. I should have prepared the bank better for the storm that hit it.”

Sigurdsson gave the interview after Prime Minister Johanna Sigurdardottir said Kaupthing had lent 1.5 trillion kronur ($11.5 billion) in transactions that were “if not illegal, completely unethical.” Sigurdardottir cited leaked documents showing the loans were granted to 10 “interlinked parties.”

Both Sigurdsson and Gudmundsson currently live in Luxembourg.