Kevin Stanford, the chairman of young fashion chain All Saints and co-founder of womenswear business Karen Millen, has claimed that collapsed Icelandic bank Kaupthing used cash from British deposits to artificially inflate its own share price.

In a letter seen by The Sunday Times, Stanford claims that Kaupthing operated a scheme to prop up its shares for at least a year before it hit the buffers in October 2008.

Stanford alleges that British savings made through online savings account Kaupthing Edge were funnelled to the bank’s wealthiest customers on condition they used the cash to buy shares in the bank.

The claim came within days of a series of high-profile raids by the Serious Fraud Office in connection with the Icelandic bank. Seven people have been arrested including property tycoons Robert and Vincent Tchenguiz, although the inquiry is not related to Stanford’s allegation.

Stanford, one of Kaupthing’s largest clients with borrowings of £400m, says he was one of a number of rich individuals hoodwinked in to buying shares in the bank. He claims to have lost £130m as a result of the alleged share-propping scheme.

Stanford said that cash raised as deposits by British savers was swapped for loans held by its Icelandic parent company. The cash was passed to a Luxembourg subsidiary where it was used to fund the share purchase.

The scheme allowed Kaupthing to stave off rumours about its financial health and to allow Kaupthing executives to sell some of their own shares in the bank, said Stanford.

Stanford sent a legal letter late last week to DWF, the law firm acting for Kaupthing Singer & Friedlander, a part of the bank’s British arm that is in administration. It follows demands for the repayment of a $2m loan taken out with Kaupthing in 2007 for the purchase of a helicopter.

Last month, Stanford appointed Ernst & Young to secure emergency funding for All Saints.