Israel’s Financial Trial of the Decade

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Dankner in court.
Dankner in court.Credit: Ofer Vaknin

Four and a half years after the IDB share offering that Nochi Dankner himself termed a “friends’ offering” and two years after he and Itay Strum were charged with stock manipulation, the affair is nearing the end.

On Monday, Judge Khaled Kabub is slated to read his verdict in Tel Aviv District Economic Court.

At first glance, the story is old news. Dankner lost control of IDB, together with most of his public and business status; he is in effect bankrupt, owing the banks hundreds of millions and will be forced to sell his home. Ostensibly, the verdict will turn on the question of whether his actions ahead of the share offering constituted criminal manipulation of the market or the legitimate marketing of securities.

But in fact Kabub’s decision, and above all the explanations he will give to support his verdict, will be the most important in a economic ruling of the decade. Why? Bear with me.

1. Dankner wasn’t just another tycoon. He was the king of the tycoons.

Business moguls can be ranked by profits, by turnover, by market value or any other economic gauge, but the real measure is social standing: whose has more power, connections, access to credit, media and political influence and the will to use it to crush their rivals and others who get in the way.

By the test of social standing, Dankner was unequaled. He was Israel’s No. 1 business figure. And that’s the issue. The person at the top provides a personal example to the business community, and Danker poisoned the country’s business culture. How?

2. Dankner controlled a hefty share of the public’s money.

He controlled over 400 billion shekels ($100 billion) of the public’s wealth through his IDB business pyramid, which included Israel’s biggest supermarket chain, Super-Sol, and mobile operator Cellcom Israel, but especially through the financial giants Clal Insurance and Bank Hapoalim. He invested the savings of Clal policyholders in funds managed by Credit Suisse, at the same time that he was taking personal loans from the Swiss bank.

He also had his company buy the businesses of friends for astronomical prices, for example Dan Tahori’s consulting firm. He put the money of policyholders into funds controlled by Dan Naveh, whom he appointed chairman of Clal Insurance.

Dankner’s successor as IDB’s controlling shareholder, Eduardo Elsztain, is demanding an investigation into the ties between the two.

Whose money?

3. What’s with Israel’s biggest bank and the public’s deposits that it manages?

Bank Hapoalim manages over 200 billion shekels in deposits from the public. These funds were controlled by Dankner through family ties with his cousin Danny Dankner, who was then chairman of the bank. The two had other ties that surfaced during the investigation that ended in Nochi Dankner’s prosecution in the current case. Investigators found a note for a 59 million-shekel loan from Nochi to Danny, most of which will never be paid.

Let’s get this straight. If the note is legit, it’s a loan that was never reported to a government agency, even though by all logic it and the dependence it created should have been the focus of a joint probe by the banks supervisor and the Israel Securities Authority. But as far as is known, there was no such investigation.

Why is this important now in connection with the stock manipulation case?

Because in a country in which anything goes as long as it’s not a crime, Judge Kabub has a chance to issue a ruling that will provide a way forward to proper norms.

4. Where were the gatekeepers?

Dankner’s and IDB’s collapse, puzzling and wasteful decisions involving the public’s money, such as the purchase of the Maariv newspaper and Israir Airlines, and of course the share offering to “friends,” all raise major questions: Where were the gatekeepers and the system of checks and balances? Why didn’t anyone raise a red flag? Where were the board members, who have a legal obligation to serve the company, not its controlling shareholder? Where were the Israel Securities Authority and the internal auditors and the ratings agencies? And why did the banks extend credit without guarantees? Dankner was allowed to do as he pleased.

5. Why did the gatekeepers fail in the “friends’ offering”?

The apparent answer is that Dankner bought their silence and their consent with carrots — wages and bonuses — but also sticks. Everyone knew or suspected that opposition to Dankner’s opinions or conduct would be met with public insult, dismissal and a future without other business opportunities.

Naked emperor

The board’s conduct over the purchase of Maariv has already been adjudicated. “Maariv was presented as the new robes that the IDB group needed to please its customers,” wrote Judge Ofer Grosskopf in his verdict. “Unfortunately, there was no boy on the board to yell or even whisper that the emperor was naked.”

In his anticipated ruling, Kabub must detail Dankner’s methods and the gatekeepers’ responsibility to the public.

6. Why did the friends take part in the share offering?

Kabub has many additional questions to answer, such as why the friends who bought the shares knowingly agreed to suffer losses.

As the investigation showed, the public did not take part in the offering. The “friends” who purchased the shares at Dankner’s request were leading business people who included Ishay Davidi of the FIMI Fund, Eliahu Insurance founder Shlomo Eliahu and top businessmen Yitzhak Tshuva and Ofer Nimrodi. Some of them acknowledged to investigators and in court that they knew they would lose money.

What would cause someone to join a venture knowing they stand to lose money? (Some of them used company funds, gambling with the public’s money rather than their own.)

The answer a few gave to that question — “to help a friend” cannot be complete. They were all experienced business people, so the only rational explanation is that they expected to be compensated for their losses, earning a hefty profit on their “investment” through other means.

How exactly? Perhaps by doing business with any of the many companies in the IDB group. If any of the friends needed money in the future, maybe Dankner could arranged access to the public’s money managed by Clal Insurance, for example, or whisper into the ear of his cousin at Bank Hapoalim. If a friend had a product to sell, maybe Super-Sol could give it a choice position on the supermarket shelves.

Since the majority of the funds involved would have belonged to the public, it is important that Kabub describes what actually happened, and that the court not show lenience if such misconduct occurred.

Back scratching

Dankner also hired senior government officials, at high salaries. Like other tycoons, he used to recruit senior officials from the Israel Securities Authority, the Finance Ministry and other agencies entrusted with supervising and approving his operations. He hired people who knew the best tricks better than the regulatory agencies themselves while sending the message: Scratch my back, I’ll scratch yours.

Dankner’s and IDB’s “friends’” share offering can be viewed as a symbol of Dankner’s methods, of the systemic failure in providing oversight of his business dealings and of the cultural and business direction in which the Israeli economy was moving, as long as he was at the height of his powers — until the social protests of 2011 and until portions of his system were exposed.

It’s a story of a businessman who amassed so much power that he stopped relating to the law, to ethics and to public norms as a system of limits within which he had to conduct himself.

Danker thought, for a long time justifiably, that the judicial system wouldn’t get in his way thanks to the cooperation that he was getting from the elites, from the business community and from regulatory agencies.

For years, the Israel Securities Authority chose not to confront him. Capital market institutions cooperated with him. Gatekeepers blindly rubber-stamped his decisions and an army of accountants, academics, lawyers and public relations people where at his disposal and gave their approval to his methods.

In this way, usually without an incriminating paper trail, Dankner used means that slowly but surely corrupted the Israeli business community and its norms.

That’s why Kabub’s verdict will be so important. When it comes to the share offering to friends, Dankner left enough tracks to provide the court with the opportunity to ask questions and uncover his methods. Opportunities like this are rare.

Dankner’s business downfall and that of a handful of other tycoons have in fact left a void, but if the court and other enforcement institutions just make do with a dry verdict rather than making the public aware of the rules of the game, it will only be a matter of time before new tycoons come along to perpetuate Dankner’s legacy.

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