Efi “The king of retail” Rosenhaus went to jail three weeks ago and nobody noticed. Maybe it’s because the public got bored with the endless coverage of his trial. Or maybe it’s because the IDB group, which owns Supersol – the supermarket chain Rosenhaus had managed – isn’t what it used to be when the crimes were committed. Supersol itself, once the biggest and most powerful supermarket chain, is struggling to maintain its status against heavy-discount chains.
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Actually, somebody did notice: every business manager in Israel. As an antitrust source said, “It had a terrific deterrent effect.” Though, he admits, while some figured Rosenhaus had it coming, others think the authorities picked on him unfairly.
The person seemingly most surprised at his incarceration for two months was Rosenhaus himself. “I don’t think he realized what he was doing could land him in jail,” suggested a source. “Even after the investigation began, he was very complacent.”
The antitrust source admits that he was also surprised himself, because while the courts had prated about clapping antitrust violators in jail, they didn’t put them there, unless through a plea bargain. Fines were imposed, and they were pretty paltry too.
There was no plea bargain for Rosenhaus, who wound up behind bars and not on the gravest of charges, says Boaz Golan, a lawyer with expertise on antitrust law. The court’s tolerance for white-collar crime has waned, he thinks.
In December 2008, Supersol controlled 40% of Israel’s food retail market. Rosenhaus saw that the rival chain, Mega, was running ads about special sales ahead of Hanukkah. Some goods were priced the same as, or lower, than Supersol was charging. Rosenhaus boiled over – at the suppliers, whom he pressed mightily and angrily, demanding they not give discounts to Mega. To drive home his point, Supersol stopped selling goods from certain suppliers.
Alpha male in a china store
Rosenhaus never thought these phone calls and some other antitrust offenses would lead to jail time. He hadn’t murdered anyone or stolen anything; he hadn’t bribed or committed fraud. He had acted in the way expected of people who had previously been named “Marketing Man of the Year” (which advertisers awarded two years before). He’d built his career on being an alpha manager in an industry where survival means crushing suppliers. Antitrust law? Cartel? He was just doing what everybody was doing. Somebody changed the rules and didn’t tell him.
The crackdown on white-collar crime is multifaceted. For one thing, the antitrust watchdog woke up. For another, in 2010 a special court for “economic” crimes was established and by now, its judges – including Chaled Kabub, David Rozen and some others – have become frightening names for white-collar offenders. Also, in 2009 the Israel Securities Authority set up “administrative enforcement,” enabling it to impose and fast-track sanctions without pursuing criminal charges. Finally, the public got fed up: the financial crisis of 2008 and social-justice protest of 2011 led people to understand that white-collar crime had a personal cost for them. Ergo, we see more white-collar criminals behind bars.
The case that screwed everybody
The watershed moment that changed everything was a piddling case about a picayune company whose VP, Efraim Kedetz, was convicted and appealed – leading the Supreme Court to shrug that lower-court judge Kabub was free to lay down whatever sentence he felt appropriate. “The Kedetz case screwed everybody,” moaned a market animal.
In 2008-2009, Kedetz was the marketing & sales veep at longtime-ailing firm Elspec Engineering. Revenues, profits and orders had been in a slump for years. But in late 2008, it seemed Elspec was turning a corner: it entered into negotiations to sell a system it developed – to lower the cost of using electric turbines – to a Spanish company. The deal was for more than 6 million euros (about $6.5 million). In March 2009, company CEO Yoram Harari flew over to sign final agreements.
All Elspec’s workers knew of the deal taking shape and ran to buy company stock, also telling their friends about the opportunity. Elspec stock rose 50% inside days, well before the company actually announced the deal.
The ISA noticed and growled. More than 20 people were investigated, with six winding up in court. Kedetz, who had bought the most stock (70,000-shekels-worth, on which he said he lost money), copped the heaviest sentence: 10 months in prison.
Rejecting his appeal, the appellate court ruled that the spread of “economic crime” and its dangers required that the court give greater weight to the public good. Justice Miriam Naor added in her ruling that future offenders against insider-trading rules would know from then on: jail time will await.
(Prison behind him, Kedetz is now back at Elspec, which did not judge their man. In some ways, he took the bullet for some 20 other people at the company. A knowledgable source claims they had no idea they were doing wrong: “They could have put the whole company in jail.”)
The sheriff isn’t scared
When it comes to whether deterrence works, the jury is out. “Deterrence by harsher punishments doesn’t work. That’s a fact,” says a man who did what he did, then did his time. Why not? Because deterrence can’t beat hubris and greed, he says frankly.
Until 2010, David Edry had been a VP at Psagot, the biggest investment bank in Israel. He had managed its proprietary portfolio – meaning money it invested on its own behalf – and is the main suspect, together with dealing room manager Shai Ben-David, of running government bonds for Psagot’s benefit.
Hubris doesn’t begin to describe quotes like these, heard in court: “You know, bro, I don’t play games, I won’t let the price rise like you want, you zeros, you nothings” and “I won’t let them raise the paper, bro, I’ll take everything down.” Or “We killed the market” and “We taught them a lesson.” Edry claims he hadn’t intended to manipulate bond prices like the prosecutors said, and intent is cardinal in white-collar cases. A lot of defendants, like Jacky Ben-Zaken and Noam Tepper, claim bad luck, bad timing and, mainly, absence of intent. And a lot of judges don’t buy it.
“They often all deny getting insider information. They say decisions to buy were based on reading the company’s financial reports, presentations to investors or knowledge of the company,” says Ronen Adini, a legal expert on the capital market. “But the issue is complex. It isn’t just about believing or not believing the defendant. Some say that if the defendant had insider information, the court does not have to prove causal effect between the information and use of it. The defendant can’t dissociate from it,” he notes.
Insider information is more complex than people realize. It isn’t just about hearing a whisper and buying or selling stock. One might give inside information to another who abuses it – in which case both would be considered criminals, even if the first guy with the information doesn’t whisper, “Buy the stock!”
The administrative enforcement powers given to the ISA are crucial, says Adini: it can give a slap on the wrist instead of fielding the heavy guns for cases that aren’t terribly serious but warrant attention.
Indeed, it seems people have no clue what “insider information” means. They don’t think twice about jabbing a buddy in the ribs and whispering, “Gimme a hot tip.” People also widely suspect that the only ones making money on the market are the ones with information that nobody else has.
As a result, among the defendants one finds not only investment managers and brokers, but people shocked at being tapped by the police. Or at least they are in denial.
Take the case of Avi Baziz, Kamada’s chief operating officer. When he learned about a giant deal Kamada was involved in, he texted an army buddy, Avihay Ratzon: “Buy [the stock] now, don’t say I didn’t tell you, can’t give details. You’ll know later.” Ratzon bought 240,000-shekels-worth of stock and shared the information with his brother. Baziz got six months and a 100,000-shekel fine, and lost his job.
Many of those caught cavil that “everybody does it,” one adding that “80% of the capital market is inside information.” Maybe, but that won’t fly in court.
The people want blood
Whether the criminal is brazen and knowing, or just some poor shlub, the investigation will be a shock. Developments on the third floor of the Israel Securities Authority were described in the case of Uri Ben Naftali and Oren Seroussi against the State of Israel, in which the men claimed they had been coerced into confessing.
Ben Naftali and Seroussi were brokers convicted of 65 violations, including share running, in 2011. They described interrogation sessions that lasted 11 hours; good-cop bad-cop role plays; intimidation techniques; constantly repetitive questions designed to break them; and the investigator stopping the tape to hammer things out off-the-record.
As inside-information expert and lawyer Gil Dachoach says, “For a normal person, just the ISA arresting you is a deterrent. From that perspective, the process is effective.” Market players are aware of the crackdown and are taking note, he says – though the ones doing the time feel they’re serving as examples, and it can be cruel. “These are normal people who find themselves in jail in Be’er Sheva,” adds Dachoach.
Unlike, say, a junkie, who likely doesn’t balance risk-reward before breaking into a kiosk, white-collar criminals are in a position to do the rational math first – not only what the penalty might be, but what the chances are they’ll get caught. And if they do?
Some say they try to see the bright side – jail teaching them there’s more to life than shekels. Dachoach doesn’t buy it. “Jail is jail you sit with six offenders. I think the way the crackdown is being handled is cruel and a bit populist. The people want blood. The public wants to see people hanging in the town square.”
Maybe, but the bottom line is that once white-collar crime was considered untouchable, but today the assumption is it will lead to prison. Dachoach just feels it happened a tad too fast.