The details behind the suspicions of fraud and breach of trust, which brought about Monday's remand of father and son controlling-shareholders, Arie Mualem and Ezra Harel, are only now coming into the public domain. In the next few weeks, it appears more and more will become clear in one of the worst affairs to hit the Israeli financial markets in recent years. Yesterday's Israel Securities Authority request to continue Ezra Harel's remand was the first public expression of suspected fraud, breach of trust, intentional lack of reports designed to mislead the reasonable investor, and offenses by Rogosin managers and employees.
Harel's custody was extended yesterday for one day and he is expected to be freed on NIS 4.5 million bail this afternoon. His father Arie Mualem made bail yesterday at NIS 3.5 million.
The Securities Authority suspects that during the years that Harel and Mualem controlled Rogosin, the company made tens of millions of shekels in deals that primarily benefited the pair of controlling shareholders. The related party deals were not approved by the general assembly and were not reported to the public. The watchdog claims these deals led Rogosin to its inability to pay NIS 75 million to bondholders.
The Securities Authority's request to keep Harel in custody during the investigation mentioned three suspect deals.
The Authority claims that a company owned by Harel and his Rogosin partner Menahem Atzmon (already questioned and freed on bail) paid 19 million Deutsch marks for the Rostock port, almost every pfennig of which came out of Rogosin coffers. Rogosin granted the company a loan in exchange for an option on 25 percent of the privately-held company.
Four days after Rogosin exercised the option in 1999, Harel transferred ownership of the remaining 75 percent of the port to another privately-held, Harel-Atzmon company. Rogosin's exercising of the option allowed its controlling shareholder, Harel, to take bank credit of $20 million. Since Harel had a personal interest in the company exercising its option, the move needed to be approved by the company's shareholders' meeting, like any other related party deal.
Another suspicious deal involves Hartan Hotels, which constructed the Baron's Farm Hotel in Zichron Yaakov. Hartan was 70 percent owned by Lidan, controlled by the Harel family. Hartan was in dire financial straits already in 1997 with a NIS 25 million equity deficit, a NIS 137 million deficit in working capital and a NIS 16 million net loss. Accountants tacked a going concern warning on the 1997 financials, saying that to keep operating, the company would need bank financing.
This didn't stop Rogosin from investing $2 million in Hartan, putting up a NIS 7 million deposit as collateral for the rest of the investment. Rogosin never got the shares. Hartan kept disintegrating. In 1999, Israel Discount Bank sought to foreclose on collateral and appoint a receiver to help it recoup Hartan's NIS 185 million.
To wiggle out of this conundrum, Discount, Rogosin and another Lidan-Rogosin company, Bilu Investments, signed a three-way deal. The bank would postpone the liquidation petition, and Rogosin and Bilu would buy all of Hartan's debt to the bank over NIS 90 million - for NIS 20 million.
The NIS 90-million Hartan debt to the bank was to take precedence over its NIS 95-million debt to Rogosin and Bilu. Rogosin then released Lidan from a guarantee it had signed.
The two deals helped out Hartan and controlling shareholder Lidan on two fronts - Hartan could get more credit, and there would be no hearing on liquidating it. Nonetheless, Rogosin and then-listed Lidan didn't report the agreements. At the time, Harel planned a buy back for Lidan, meaning its improved situation was important to him. Nothing in the buy-back offer mentioned Lidan and Hartan's new and improved financial situation.
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