Phenomenal Holdings, Phenomenal New Holdings and company directors have been slapped with a NIS 1.3 billion class-action suit charging that the companies shuffled their funds' holdings to the detriment of clients. The goal was to facilitate a buyout by Psagot Investment House, says the suit, which was submitted to the Tel Aviv District Court on Sunday for approval.

Phenomenal Holdings and Phenomenal New Holdings were formerly known as Prisma Provident Funds and Prisma New Provident Funds. According to the suit, from October to December 2008, Prisma aggressively unloaded heavy volumes of corporate bonds and replaced them with cash and government bonds to enable a quick and easy transfer of fund management to Psagot.

"During this period, when Prisma's activity was offered to the highest bidder and when the described illegal activity took place, clients of Prisma's provident funds suffered exceptionally negative returns, losing on average about 17% of their savings during the brief period," the suit reads.

The class action, submitted by attorneys Amit Manor, Yuki Shemesh, Shlomo Moshkovich and Yaniv Stiss, says anyone who had savings under Prisma's management at the time and is unaware of the circumstances could think the losses stemmed from falling market values or other economic factors.

"But in this case, much of the loss in savings by Prisma's provident-fund clients resulted from activities lacking good faith, contaminated by extreme conflict of interest with unreasonable and unrestrained negligence ... with the intention of enabling the sale of the provident funds' management to another investment house," the lawyers say.

For its part, Markstone Capital Partners, the owner of Phenomenal Holdings and Phenomenal New Holdings, said that the suit hadn't yet arrived at its offices. "When it does we'll study it and respond accordingly," Markstone said.

Figures in the suit show that over the last three months of 2008 the proportion of negotiable corporate bonds halved from 28% of the funds' overall investments to 14%.

"During the three months, Prisma unloaded more than NIS 4 billion in corporate bonds, flooding the local market with inconceivably large amounts of these securities," the suit says. "Over this period, Prisma's total corporate bond sales exceeded those of all other provident funds combined by hundreds of millions of shekels, at a time when Prisma's share of the provident-fund market was only 10%."

The plaintiffs complain that Prisma's dumping of huge amounts of corporate bonds on the market stung prices. "Prisma's harmful actions had a devastating effect not only on Prisma clients but also on all corporate bondholders in Israel," they say.

The plaintiffs submitted calculations by Doron Avramov, a professor of finance at the University of Pennsylvania's Wharton School and Hebrew University's business school. According to these calculations, Prisma's provident-fund clients lost during the period in question, on average, twice the amount of clients with other provident funds. The lawsuit says Avramov conservatively estimates the excess damage to Prisma clients at NIS 1.3 billion, at least.

Avramov points out that the change to Prisma's holdings of negotiable corporate bonds was exceptional for the provident-fund market at the time. He says the statistical probability of such a drastic reduction under reasonable management considerations is three standard deviations from the market average; in other words, infinitesimal.

Avramov says that out of NIS 4.28 billion in corporate bond sales during the relevant period, NIS 3.28 billion represented excessive sales with no economic justification - neither due to client withdrawals nor a drop in the bonds' value, for example.

Avramov examined two possible reasons for the bond sell-off. First, that the sale was intended to raise the share of cash and government bonds in the funds' investments. This would prepare the funds for a sale to a larger investment house, like Psagot. The second possible reason was to match Prisma's investment portfolio with Psagot's to prepare for their merger.

Government bonds and cash, according to Avramov, are the most liquid and negotiable assets in an investment portfolio and enable the assets of various funds to be matched quickly at minimal transaction costs.

"A high mix of cash and government bonds allows for a relatively easy and quick merger with any managing entity, including Psagot," says Avramov. "Obviously, any managing entity buying an investment portfolio prefers to purchase cash and assets resembling cash in liquidity in order to manage the investment portfolio after."

Besides Phenomenal Holdings and Phenomenal New Holdings, the suit also charges a number of directors who served the companies, including Ezra Attar, Francine Dadi, Meir Vidal, Yuval Gavish and Noam Braverman.

In 2008, Prisma had trouble maintaining its asset base, while many clients withdrew their funds that totaled, according to the plaintiff, NIS 2.26 billion in the first nine months of the year, or 9% of average managed assets at the time. The figure was NIS 1 billion for the third quarter alone. According to the numbers submitted in the case, at the end of September 2008, Prisma managed assets totaling NIS 24 billion in its 56 funds.