Nochi Dankner wanted to remain a big tycoon, even though his IDB group had fallen on hard times. Itay Strum wanted to help Dankner. This meeting of interests led the two to conspire to criminally manipulate shares of IDB Holding Corporation, ahead of a share sale that came to be known later as the “friends’ offering” because so many Dankner associates bought into it.
This is the story laid out carefully by Judge Khaled Kabub of the economic division of the Tel Aviv District Court on over 280 pages in his ruling on Monday: It was hubris that brought the two down.
The verdict was clear-cut, but it does not present Dankner as a criminal fraudster. Instead it shows him as someone who conducted acts that were “prohibited and criminal, without thinking about their implications.” Kabub explained in his ruling that Dankner and Strum did not construct their fraud far in advance, but the “conspiracy between the defendants was proved unambiguously in the days before the offering.”
The prosecution faced a rather complex challenge. In order to convict a defendant accused of stock manipulation, they had to prove criminal intent to fraudulently influence the stock’s price. The Supreme Court has ruled in the past that the prosecution must prove the fraud was committed with “true intention.” This is the very highest level of proof required for establishing criminal intent. It is hard to prove without recordings or witnesses who can testify to the fraud.
Kabub rejected all the defense’s attempts to examine every fact and detail separately. Instead, the judge wove the mosaic of circumstantial evidence into a single picture, saying he needed to examine the actions of the two partners, Dankner and Strum, together. This overall picture portrait of criminality.
Kabub concluded his verdict noting that the picture leaves no room for doubt whatsoever. No possibility existed for finding financial logic in the actions of Strum and Dankner.
Moreover, the judge is a pioneer in the use of the “mixed motives” approach in financial criminal law. In Kabub’s approach, even a person who takes an action that has business logic, but also involves criminal intent, can be convicted. Kabub explained that even if he had found financial logic in Dankner and Strum’s actions, he would still have convicted them.
Throughout his entire ruling, Kabub rejected the entire line of defense, point by point.
1. Dankner’s claimed that IDB did not need the money raised in the share offering.
Kabub ruled that IDB was in a position of a severe lack of liquidity and needed every shekel, because Dankner forecast quite well the difficulties the holding company faced repaying off debt. Kabub noted that IDB reached a liquidity crisis, partly because of heavy losses from its investment in Credit Suisse and the reforms in the Israeli cellular market, which slashed the profits of its Cellcom Israel subsidiary.
2. Dankner claimed that the issue was a “friends’ offering” and a guaranteed success, so he had no i need to influence its results.
Kabub ruled that Dankner’s prestige and the trust of the financial markets in him were hanging in the balance. Dankner’s motive was his desire to preserve his control of IDB.
“As far as Dankner was concerned, this was a critical test, and as a result the enormous importance he saw in the move, whether he saw the issue as a ‘friends’ offering,’ or not,” wrote Kabub.
The most serious aspect of criminality, in the judge’s eyes, was Dankner’s campaign to coax investors into buying shares from Strum, outside the stock market, when logically he should have wanted them to buy into the share offering. Kabub said this behavior was surprising and troubling, based on his analysis of the meetings and conversation between Dankner and the investors, his “friends,” who he convinced to invest in the shares.
The verdict connects the dots, and the defendants, into a characteristic manner of criminal acts: Dankner found the investors, sent them to Strum, and Strum established their willingness to buy the shares outside of the stock market.
Dankner was aware of the fact that the investors would buy stock from Strum and not through the stock offering. Dankner’s willingness to send the investors to Strum is “evidence against him,” said the judge, who did not accept any of Dankner’s claims – and found no economic logic in this context.
Kabub ruled that Strum’s selling of shares outside the stock market served two purposes: Strum got rid of stock without lowering the price of IDB shares on the stock exchange, and he received money he needed to continue buying up more IDB stock. Add to this the frequent telephone calls between the two, which match up perfectly with Strum’s dealings in IDB shares.
Another detail: During Dankner’s questioning during the investigation, he made a number of statements that made it clear he knew very well that Strum’s actions would help raise the share price, but in court Dankner provided a different version that the judge called “playing dumb.”
3. Dankner claimed that his friends and colleagues who bought the shares did not care at all what the price was.
Kabub ruled that the prosecution proved that the buyers actually did care, they did not believe in the shares’ value and planned to get rid of the stock immediately after the offering.
“With all due respect to Dankner’s attempt to claim there is no contradiction between things, I received the impression from all the witness-distributors that it was quite clear to them that they would sell the shares they bought in the offering within as short a time [as possible] afterwards,” wrote Kabub.
4. Strum claimed that the decision to buy IDB stock in enormous quantities was logical from a business standpoint.
Kabub ruled that it was an exceptional act by Strum’s trading company, ISP, and the nature of the investment was different than usual. Strum hired the state’s witness in the case, Adi Sheleg, to carry out the actual manipulation in stock trading. Sheleg worked with Strum and never spoke with Dankner.
Sheleg testified that he received clear instructions from Strum to keep the price of IDB stock from falling. The defense proved during the trial that Sheleg spoke of a meeting with Strum at a time when it was shown that their mobile phones indicated they were in different places.
Similar to the decision by Judge David Rozen to partially rely on the testimony of state’s witness Shmuel Dechner in convicting former prime minister Ehud Olmert, so did Kabub in using Sheleg’s testimony only as support for other evidence. Sheleg became a rather marginal figure in the trial, but Kabub did describe his impression of Sheleg’s testimony as “positive and credible” – the exact opposite of what he thought about Strum’s testimony.
Strum tried to convince the judge that he invested in IDB for economic reasons, i.e. to make a profit. Kabub called Strum’s claims “zigzagging,” and said he acted against his own economic interests and those of ISP, and his version was “ridiculous” and “not trustworthy.”
Serious prison time
Kabub’s verdict belongs to the family of decisions by other judges in the Tel Aviv District Court, Rozen and Zvi Gurfinkel, who convicted Nochi’s cousin Dan Dankner in the Bank Hapoalim case. These judges, they too connected all the evidentiary dots into a clear criminal picture, with or without a state’s witness.
The sentencing hearing will be held in September. Stock manipulation is considered fraud, the most serious offense in securities law, and the maximum sentence is five years in prison. Kabub is the judge who raised the bar for punishment in securities crimes – he was the first judge in Israel to sentence a person to prison time for insider information.
Based on existing standards today, it seems the prosecution will ask to impose a harsh sentence on Dankner. He financed the manipulation, had the main motive, was the chief beneficiary, was an active participant and was aware of what he was doing. The prosecution will most likely ask for a sentence of between two to four years of actual prison time.
As a point of comparison, businessman Jacky Ben-Zaken, who was convicted of securities fraud for his attempt to raise the share price to allow his Financial Levers company to enter the TA-100 stock index, was sentenced to three years in prison. The circumstances surrounding Dankner’s crimes can be considered more serious because the stock offering was intended to rescue IDB from a crisis.
To a certain extent, the rhetoric of the sentencing will be more important than that of the verdict. Monday’s verdict is mostly dry and technical. In his sentencing decision, Kabub will have to relate to Dankner’s status in Israeli capital markets and as the owner of the country’s largest conglomerate.
By the way, IDB was convicted as a company for the stock manipulation too, because the acts of the owner and manager are also attributed to the company in certain circumstances. The company claimed that the creditors who later acquired the firm in the debt arrangement agreement were unable to evaluate the price of the risk of a conviction for the firm, so they must be protected.
Kabub noted that this claim was not enough to acquit the company, but it is possible it will be taken into account in determining the amount of the fine imposed on IDB.
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