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On the eve of the Shavuot holiday, Clal Industries and Investments (TASE: CII) issued a laconic announcement. It said it had completed the deal selling chunks of the Barak long-distance carrier to a privately held investment fund called Sky.

Sky, run by Zvi Yochman, is expected to invest about $20 million under Barak's debt arrangement, in exchange for which it is to get 20%-30% of Barak's share capital.

That laconic announcement followed another laconic announcement in March from Clal Investments, about the same issue. Then it described the deal with Sky. If you persevered until Section 5 of that announcement, you would discover the following:

"The Sky investment fund is a limited partnership whose limited partners are Israeli institutional investors, provident funds, pension funds, and the big insurance companies in Israel, including as a substantial investor Clal Insurance Holdings, which is controlled by IDB Development."

Now: IDB Development is the parent company of Clal Industries. It is therefore also on the selling side in the Barak deal.

How substantial Clal Insurance's stake in Sky is, we learn only from the following penultimate paragraph in the announcement. That  reveals that out of Sky's $20 million investment in Barak, Clal Insurance is responsible for $5 million. In other words, Clal Insurance put up a quarter of Sky's capital.

Unholy dealings?

The devil is in the details, they say. Here are some impish details about Sky's investment in Barak.

Clal Insurance, which is also owned by IDB, is investing $12 million of the money belonging to its insurance customers in a privately held investment company, Sky, which is managed by one of Israel's more highly esteemed economists, Zvi Yochman. That company, Sky, is now buying a bankrupt long-distance carrier in receivership from ? IDB.

Do not suspect the parties of being in some kind of unholy deal. Yochman himself said the investment received prior permission (pre-ruling) of the Israel Securities Authority and the blessing of the Clal Industries auditing committee.

But the fact is that $12 million of the money belonging to Clal Insurance's insurance customers will be used to buy another asset from the IDB group - a pure insider transaction - without permission of any audit committee on behalf of the insurance customers.

Perhaps the investment in Sky, and through it the investment in Barak, is an excellent one for the Clal Insurance customers. They may be less than thrilled though at the pileup of conflicts of interest in which their money is involved..

Among other things, Clal Insurance owns Clal Finance Batucha, which provides the trading services for Clal Insurance customers' money on the stock exchange. Clal Insurance also owns an underwriting company, that issues (sells) corporate shares and bonds to the public. That includes the public of Clal Insurance customers.

Clal Insurance also wants to become a primary dealer in government bonds, selling them to the public, including the public of its own insurance customers. Does anybody want to stake his life that in this enormous spaghetti of business between Clal and the money of insurance customers that it manages, the interests of the insurance customers are fully protected?

There are Chinese walls in place, vows Clal Insurance CEO Avigdor Kaplan, between Clal's operations as a company and investment of the money of its insurance customers. The banks also pointed to their crumbling Chinese walls and we see how the advice of their investment counselors has changed once the banks had to sell their provident and mutual funds.

If all the insurance companies have to offer their customers are Chinese walls, their customers have reason to worry. Especially, as the insurance companies have zero intention of adopting the Markstone model.

Markstone, a gigantic private equity fund, bought up provident and mutual funds and declared that it would not engage in trading securities, in offerings or in market making, to prevent any conflict of interest when managing the money of its customers. One has to wonder why the insurance companies don't like that model.