Taking Stock

IDB and Maariv: When Law Enforcement Becomes a Kitten

The legal system acts tough with government and workers, but is generally docile when it comes to big business.

Tomer Appelbaum

Israel’s judiciary, law enforcement and investigation forces, from the police to the Supreme Court, have been slow to produce investigations, indictments, convictions, ideas, norms and rulings for the scary world the people have begun to notice in recent years, in which a clique of businessmen allied with politicians and journalists threatens, and sometimes manages, to dominate and distort the economy and democracy.

Except for a few spasms, such as Tel Aviv District Court Judge Khaled Kabub’s statement a year ago — “The economy is dominated by four groups. What competition could there be in such a market? When it’s controlled by a handful of companies that do everything, how much power do these groups have over the legislator when he seeks to institute changes and increase their competitiveness? Here, the legislature fails to do this, because [the business] families have clout on the political level, to the point of changing governments. It is hard for the legislature to deal with these companies.” Or the warning issued by Deputy Attorney General Avi Licht on the danger of the gas monopoly to democracy (which did not prevent him from helping the prime minister to override regulation and force through his plan for Israel’s gas economy).

But last week there was a significant milestone, hopefully not the last, in the arousal of the usually apathetic, fossilized and conservative legal world, against the destructive processes happening here, where uninhibited businessmen get their hands on tens or hundreds of billions of shekels of the public’s money and have commensurate clout on politicians, regulators and the press.

Over the last three years, Ram Caspi and Giora Erdinast, star lawyers to the local oligarchy, tried to convince Judge Ofer Grosskopf of the Central-Lod District Court that the directors of the giant Discount Investment Corporation, which was part of the IDB, largest conglomerate in Israel, acted in good faith and based on normal business considerations, when they let the chairman of the pyramid, Nochi Dankner, and CEO Ami Erel spend hundreds of millions of the public’s money on buying a failed and bleeding newspaper, Maariv.

Grosskopf, an unusual figure in the Israeli world of law, a law professor with expertise in the interface between law and economics, an academic who opted for practice, heard them, the directors they represented, the economist Menachem Perlman that they brought to defend the acquisition, said last week: I’m not buying your story. I don’t believe you.

The judge put it thus: “Beyond general statements, no tangible benefits that the acquisition of Maariv could bring to Discount Investment Corp. were presented to the board — no one argues today that the acquisition of Maariv was done to make profit directly from its activities. In the words of Mr. Erel, ‘To me the newspaper is not a newspaper, I do not care about the paper of the newspaper.’ Indeed, the possibility that Maariv could be turned into a profitable paper seemed even then to be a utopian vision, perhaps even fantastical. Under such circumstances the question naturally arises what justification was presented to the board of directors to make this deal. Well, the answer lies, it seems, in Andersen’s tale ‘The Emperor’s New Clothes’: Maariv was presented as a new garment the group needed to gratify its customers. Unfortunately, there was no board of directors who cried or even whispered, "The emperor is naked."

Grosskopf then wrote five paragraphs that should be a lesson to his colleagues in law and academia, demonstrating not only knowledge of economics, business and law but mainly the importance of common simple sense, deviating from the legal conservatism that almost always serves the people in positions of power and wealth.

Ofer Vaknin

Erel presented the justification for buying Maariv thusly, Grosskopf wrote: “The Discount Investment Corp. Group is at disadvantage against two of its competitors, the Bezeq group and the Hot group, in part because of the enormous investment of these companies, some 500-600 million shekel a year, in acquiring content in movies and original productions. Maariv is a producer of written content through its newspapers. In the coming years convergence can be expected between the world of television and Internet, and the content Maariv produces will be incorporated into the new media. The investment in Maariv actually constitutes the acquisition of access to the content Maariv produces, and considering the large amounts spent by Hot and Yes on buying content, it seems worthwhile to invest 140 million shekels in this.

“That is verbatim, as on the face of it, it is hard to see how the sentences add up logically. How are the investments of Bezeq and Hot in movies and original productions and Maariv’s news production connected? How does Maariv, which is mainly a printed newspaper, become part of the convergence between TV and Internet? How in practice can the content of Maariv be combined into the new media in a way that makes profit for? How do the enormous costs of the rivals on content justify an investment of 140 million shekels in buying Maariv? In the language of the metaphor, how will the new clothes be useful in glorifying the existing body?

“The protocol has no answer for these questions, probably for the simple reason that none of the directors asked these obvious questions, and therefore were not answered by the management (see testimony of Mr. Erel. All there is in the protocol in this context is Mr. Dankner’s repeating a similar mantra to that used by Mr. Erel — ‘The acquisition is a response to the group’s lack in the area of media and investment’ — and a statement inconsistent with the passion with which the content argument was made beforehand — ‘You can also see the investment as a social and democratic move.’

“Moreover, it arises from Mr. Erel’s testimony that at the stage at which the transaction proposal was brought before the board, management had no clear vision how Maariv would be integrated into Discount Investment Corp.’s business. The only thought was that Maariv creates content, and assuming it could be brought to breaking even, there was no reason not to buy it at the bargain price at which it was being, based on the belief that along with other investments in content, ‘everything would mix in together, ultimately everything together’. Later in his testimony, Mr. Erel compares the acquisition of Maariv to the explanation Sir Edmund Hillary gave for his decision to climb Mount Everest: ‘He said — Because it’s there. Here was a chance, an opportunity, at this price, and we went for it.”

“During the talks before me, the counsel for the respondent directors asked to complete what their clients had not done in real time. Armed with the opinion of Mr. Menachem Perlman and the affidavits of Prof. Niv Ahituv and Mr. Erel, they lavished clever explanations on the importance of content in the communications market, the ‘synergy’ between ‘content’ vendors and communications platforms, the ‘convergence’ between the media, and so on. But when the providers of the opinion and statements were taxed about the specific deal and had to explain in retrospect, after much thought, what this ‘synergy’ in the ‘converging’ communication’s world is, that should develop for companies like Cellcom and Netvision from the content that Maariv is capable of providing, they fell silent. All they could supply was stuttered explanations, that would be highly unlikely to persuade the board of directors if they had been presented in real time, such as the acquisition of Maariv would facilitate the group’s access to journalists working in Maariv, or that the paper could be given free to customers of Cellcom.”

Nochi’s secret asset

This is the place to explain the larger context of things implied by Grosskopf, regarding why Dankner decided to buy Maariv and why no director shouted that the emperor was bare to the wind (or, specifically, that the king of the business sector was leading a parade that threatened to trample democracy).

When buying Maariv in 2011, Dankner controlled the pyramid of companies called IDB, whose assets included insurance giant Clal Insurance, the mobile operator Cellcom, the supermarket chain Super-Sol, the cement monopoly Nesher and dozens of other giant companies. At its peak, Dankner’s pyramid controlled more than 180 billion shekels of the public’s money (your money). His share of the pyramid was minuscule and mostly leveraged. After the “social protests,” his share sank into the red. Today he owes half a billion shekels, which he’ll never be able to pay, but continues to live like a king.

Nochi had another asset: Danny Dankner, a cousin who chaired Bank Hapoalim and whose financial status was apparently pretty lousy back then. The two cousins maintained an independent image, that they were only coincidentally cousins, but when Nochi was arrested on share manipulation charges and his private diary was read, it revealed that he had lent Danny Dankner, chairman of the bank, 59 million shekels.

That loan was only one small aspect of their relations (see chart). Nochi controlled IDB partly thanks to Bank Hapoalim lending 10 billion shekels to him, and 150 million shekels to his private company, Tomahawk. Maariv was also a shared hobby for the cousins: Hapoalim kept Maariv alive with big loans (an internal Bank of Israel report says the loans had no economic logic); and IDB rescued Maariv from insolvency, giving it hundreds of millions of shekels through buying stock and financing its losses.

Bank Hapoalim isn’t the only publicly traded financial institution incestuously involved with IDB. TheMarker reporter Sivan Aizescu revealed in 2011 that IDB, one of the most leveraged business groups in Israel (owing billions to the general public) had no less than 12 directors who also sat on boards of financial institutions — banks and insurance companies that manage your pension savings.

As Grosskopf suspected, buying Maariv in March 2011 using public money wasn’t designed to boost DIC’s profits or to bring Cellcom users free news. It was designed to boost the Dankners’ clout. Yet the press, politicians and regulators asked no questions at the time, when the two cousins controlled almost half a trillion worth of public money.

That’s a lot of money. If you burn a 100-shekel note every minute, it would take you 9,800 years to burn through that.

What democratic institutions could stand up against half a trillion shekels controlled by one man and his cousin? Ministers? Knesset members? Journalists? The big law or accounting firms? Property assessors, economists, academics? “Unfortunately,” Grosskopf wrote, “not one director on the board shouted or even whispered ‘The Emperor is naked.’” Nor did anybody else shout against the corruption spreading in the highest echelons of the capital market and banking system, or the feebleness of the regulator.

The phenomenon Grosskopf describes - directors rubbing shoulders with tycoons, professors and experts rubber-stamping shady deals like the acquisition of a failing newspaper — is another facet of economic concentration. The more concentrated the economy, the smaller and more concentrated the clique of businessmen who control giant companies, banks and insurance companies and the less able directors are to maintain independence. Professors of economics, business administration and law who sat on the boards of the pyramids, banks and insurance companies knew were that if they dared speak out against shady deals in which the big bosses had an interest, they’d be ousted from the club, and would have practically zero chance of positions as directors or as experts in the business sector.

One cannot overestimate the importance of Grosskopf’s statement that none of the directors of the biggest concern in Israel shouted that the emperor is naked. The IDB directors mostly sat on boards of other giant companies and finance companies too. The corporate governance structure at IDB that Grosskopf exposed, which totally collapsed, is typical of most of the giant concerns in Israel that manage 1-2 trillion worth of the public’s money.

Why should we think the directors at these bodies are any better than their colleagues at IDB, who let Dankner buy a newspaper in a deal devoid of economic sense, and to spend 100 million of the public’s money to buy himself political power?

Dankner and his minions are water under the bridge, a reminder of the bad old days before the social protest, enactment of the economic concentration law and exposure of the pyramids system. Now it’s time to connect the dots between the Grosskopf ruling and the economic concentration and the weakness of regulation and government in Israel against the interest groups.

The second chart shows the circle of money and power in Israel. It shows how concentration in the business sector boosts the profits of the monopolies and financial institutions, which increases their economic power. That in turn makes it easier for a given pyramid to plant loyalists at the financial institutions, openly or secretly. Clout at Bank Hapoalim or Clal Insurance gives the pyramid people even more influence over the business scene, regulation and the press. The more powerful a given tycoon becomes, the more businessmen wanting political power themselves gravitate towards him. When Dankner was riding high, his people had close ties with Ofer Eini, chairman of the Histadrut labor federation, who wielded tremendous power at the private monopolies. Interest group meets interest group and together they influence the laws, rules and market structures for their own greater good.

For example, when Dankner ruled the business sector, his people had close ties with Eini, who then controlled the biggest labor federation in Israel and wielded tremendous power at the private monopolies. It isn’t money that attaches to money, as they say; it’s power linking to power: interest groups that connect to interest groups, and together they change the laws, regulations and market structures to the deprivation of the general public welfare.

To maintain the status quo and receive legitimization, interest groups maintain very close relationships with the world of philanthropy, which also gains them more ties to politicians and bureaucrats. To the causes, what matters is the cause — the hungry child, the sick — and care less that the money arose from ties between big money and government that are actually holding the economy back.

Moreover, the more concentrated the system, the tighter the ties between the businessmen, the politicians, bankers and the interest groups — the more able they are to influence politics and regulation, their share of the public resources and their political influence, legally, not by doing anything criminal.

The second chart shows the last part of the circle of power and corporation: the interest groups influence the ministers, MKs and regulators, who become captive; they influence the press and finally the directors, as the judge showed in the Maariv case.

Grosskopf’s ruling, which allowed a derivative lawsuit against the DIC directors to proceed, should be required reading for everybody studying law, economics, communications and political science. It should be the starting point of an urgent discussion for anybody wanting to save Israel’s democracy from turning into oligarchy. The ability of a handful of people who control enormous economic resources to lead parades with not only the emperor but their thousands of cronies and employees marching stark naked should guide us in our effort to understand the parade about the gas that the prime minister and the gas tycoons are leading. Learn from Grosskopf’s ruling: when economic and political power join forces, it isn’t in anybody’s interest to shriek that the emperor is bare-ass to the wind.