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How could it have happened? Whatever the answer, it did: Investors in Prisma Lahak China somehow didn't receive their due dividends for - wait for it - three and a half years. It's one of the most embarrassing, and costly, mistakes ever made by a publicly listed mutual fund, in Israel at least.

The error began when the fund was still owned, and being managed by, Bank Hapoalim. Its new owners, Prisma Investment House, failed to fix the problem: The fund had continued to receive management services from Hapoalim.

Two weeks ago, Prisma Lahak China admitted that its investors were due a whopping NIS 3.1 million in missing dividends to rectify the error. Of this, NIS 2.7 million will be paid by the fund's management company, and the rest, about NIS 440,000, will be forked over by the fund itself.

Since the fund has about NIS 88 million in assets under management, the compensation means that investors will be receiving 0.5 percent less returns.

Also, the error distorted the price of fund units. Investors who sold their holdings in Prisma Lahak China during this period received less than they could have: The unit price failed to incorporate the dividends. Of course, conversely, there were investors who bought into the fund on the cheap. In other words, shares were bought and sold at less than the true share price.

The error had impacted fund unit prices by 0.7 percent on September 17, up from 0.21 percent in June of 2004. The unit prices were affected by up to 1.6 percent, a peak that came on October 9, 2006.

Prisma will reimburse investors who cashed in units at a lower than fair price between June 8, 2004 and August 12, 2007. Unit owners who acquired fund units at less than the real prices will be debited.

Between August 13 and September 4, Prisma compensated investors who acquired units at overly high prices as a result of the error, and did not debit those who cashed in at the higher price. Reimbursement to investors will be handled through members of the Tel Aviv Stock Exchange.

The affair begs several questions: Firstly, how did the error drag on for so long? And why were the fund's prices never properly inspected and audited?

How could it possibly be that none of the elements involved in running Prisma Lahak China noticed that it wasn't paying dividends?

Prisma is in fact absorbing damages that Bank Hapoalim is largely responsible for, since Prisma completed the acquisition of Lahak from Bank Hapoalim in October 2006, exactly one year ago. However, Bank Hapoalim managed the fund for two and a half years, and continues to run it.

Although Prisma, the fund manager, says it will pay most of the compensation to investors, it will receive indemnification from Hapoalim.

"Following an internal review at our own initiative, we have learned that one of the fund's brokers failed to report on credited dividends. We notified the fund when we discovered the problem, and the dividends due to the fund have already been paid. The customers will be credited appropriately," a Hapoalim spokesman said.