UPDATE 2-UK fraud agency drops Tchenguiz, Kaupthing probe
* Says insufficient evidence to continue vs Robert Tchenguiz
* Latest embarrassment for UK's Serious Fraud Office
* Probe of Vincent Tchenguiz already abandoned (Adds lawyer comment, details, background)
By Tommy Wilkes
LONDON, Oct 15 (Reuters) - Britain's Serious Fraud Office has dropped its probe into property tycoon Robert Tchenguiz and his role in the collapse of Icelandic bank Kaupthing, bringing to a close a lengthy and embarrassing investigation for the fraud-buster.
The SFO said on Monday there was insufficient evidence to continue with its three-year investigation into suspected fraud at Kaupthing in the UK before the bank's collapse at the height of the credit crunch.
David Green, the new SFO chief, had already stopped the probe into Robert's older brother Vincent in one of his first tasks earlier this year, but carried on with the investigation into Robert.
In a statement Robert Tchenguiz said he welcomed the SFO's decision.
"I recognise the SFO have an important role to play in investigations of this nature, and have done my utmost to assist them in any way I can. I look forward to closing this chapter and getting on with business," he said.
The agency has faced severe criticism for its handling of the case, which began when the Iranian-born brothers - who often make the headlines in the British media over their lavish parties and luxury lifestyle - were arrested in March 2011 in dawn raids at their homes and offices.
More than 135 police and fraud investigators swooped on 10 business and residential premises in London and two in Iceland.
In July two top judges slammed the agency, already accused of "sheer incompetence" in the investigation, for obtaining search warrants unlawfully.
Robert Tchenguiz, meanwhile, has said he would seek damages and bring proceedings against the agency for his arrest last year.
The investigation stemmed from the brothers' dealings with Kaupthing, which they tapped for large loans shortly before it buckled in the 2008 financial crisis. British retail depositors lost millions in the collapse.
Green, appointed head of the SFO in April, took over the case from his predecessor Richard Alderman. Green has since said the agency will focus on big cases and improve intelligence and quality control.
In July he reopened the SFO's investigation into failed hedge fund Weavering Capital, marking a U-turn after the fraud agency ended a 2-1/2 year probe in 2011.
Despite the criticism of the SFO, some point to its small annual budget, which at 32 million pounds is lower than the hundreds of millions of pounds some of the UK's regional police forces receive each year.
"The new director is intent on ensuring the SFO is successful as a prosecuting agency, with the emphasis on successful. That's a difficult job for any agency to do," said Jonathan Pickworth, a partner at law firm Dechert.
"The SFO has got very limited resources and it has to make sure it uses those resources to the best effect. This decision means they can move on from here."
The SFO also said on Monday it would continue its close cooperation with Reykajavik's Special Prosecutor's Office, which continues with its own probe into the bank's collapse. (Reporting by Tommy Wilkes; Editing by David Cowell)
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