Financiers Fear Madoff-style Fraud in Israel

Israel Securities Authority considers risk reduction moves.

Senior figures in Israel's financial industry fear that a Madoff-style fraud could happen in Israel. The private investment fund market is considered the most vulnerable arena, since in Israel, as in the United States, it is unsupervised.

The greatest fear is focused on risk capital funds, whose combined assets peaked at about $10 billion. The investment portfolio field is considered to face a very low risk of this type of fraud. The money managed by institutional bodies is well supervised, so the risk there is nonexistent.

Israeli law obligates anyone raising money from the public to report to the Israel Securities Authority and face supervision. Reporting is not required, however, when there are no more than 35 investors, or when the money comes from professional investors such as institutions or wealthy businessmen that the state judges can look after themselves. The second exception covers the entire field of private investment funds, including real estate, hedge and above all, risk capital funds. The upshot is that when it comes to private investment funds, Israel follows the American supervisory model, of a lack of supervision.

In Israel there are a few dozen private investment funds, which invest mostly in risk capital funds rather than in hedge funds, as in the rest of the world. In the absence of supervision, there is no way to know where this up to $10 billion comes from and who is managing it.

In the wake of the exposure of Bernard Madoff's massive fraud, the Israel Securities Authority is considering adopting the British supervisory model, TheMarker has learned. That would mean introducing registration, internal auditing and conflict of interest standards for private investment funds.