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A recent ruling by the Supreme Court on the understanding of the Consultancy Law concerning investment advice handed out to bank customers has put paid to an out-of-court settlement on the case of Bank Leumi and its mutual fund.

According to market estimates, the Israel Securities Authority and Leumi representatives had met, and were reaching an accord in which Leumi would admit to wrongdoing, and pay a fine.

Now, however, instead of reaching a compromise, the ISA, which has been conducting a thorough investigation into the bank and the Pia fund, may now decide to take Leumi and its managers to court.

The investigation began when Bank Leumi managed to raise a spectacular NIS 1.7 billion for a new mutual fund on its first day. ISA chairman Moshe Terry brought Leumi CEO Galia Maor and chairman Eitan Raff into his office in November 2003 for explanations. Only a few weeks later, Leumi group company Pia managed to raise NIS 700 million within a few days for a new mutual fund. The ISA extended its investigation, pored over documents, and even questioned customers about what convinced them to invest their monies in the new funds. The suspicion was that bank customers were pressured by the bank's investment advisers to put their money in the Leumi financial vehicle.

A spokeswoman for Bank Leumi said yesterday that no settlement had been proposed to the bank and that, in any case, Leumi had no intention of admitting to an infringement of a law that it had not committed.

A spokesman for the Israel Securities Authority refused to comment.

Earlier this month, in a Supreme Court hearing, a three-justice panel rejected the ISA's interpretation of the Consultancy Law, and ruled that its letter of instruction to the banks, regarding what investment advisers may say, be regarded only as the ISA's opinion, and not legally binding.

The court broadly hinted that it believed the ISA had no authority to require the banks to act according to its interpretation. Judge Ayala Procaccia essentially presented the Securities Authority with two alternatives: act to see the Consultancy Law amended to include clear criteria for what bank clerks can and cannot say; or find a specific case in which it believes a bank clerk violated the law and file criminal indictments to be examined by the courts. It may have just found it.