ISA Head Sternly Warns Capital Market Players

"No one is or will be immune to investigation by the Israel Securities Authority (ISA). Anyone who has to be investigated will find themselves in the interrogation rooms, even if they are in high places, or my friends," said ISA chairman, Moshe Terry in an interview with Haaretz.

Terry was referring to criticism that the ISA might be letting big fish swim outside its net and just fishing for smaller, weaker ones. Terry assumed his post nine months ago and the list of those he has so far investigated has no big names, even though the activities of a few big companies seem questionable.

Some examples were the system of recording Bezeq adopted in the Shamrock Pelephone deal, and the attempt by Israel Discount Bank to postpone write-downs under Accounting Standard 15, concerning the decline in the value of its investment in First International Bank of Israel (FIBI).

This was despite the vast difference between the value of the investment on Discount's balance sheet and its actual market value. Pressure on Discount has recently increased after the sale of FIBI to Zadik Bino at a value of less than half the bank's equity.

Many people are astonished at the power and status of former ISA chair Arie Mientkavich, now Discount's board chairman, in the role he plays in the bank's contacts with the ISA. Asked about Discount, Terry quickly suggest refering queries to the supervisor of banks, and emphasizes the different roles of the ISA and the supervisor.

"First, Standard 15 went into effect on January 15, so I suggest its results should be judged after the publication of first quarter financial reports," said Terry. "Second, it is the supervisor of banks who determines the rules and guidelines in the matter of Bank Discount. The supervisor is above accounting regulations because he also considers the stability of the banking system. Of course we coordinate with one another and Discount will not slip through any cracks."

Terry carefully avoided giving any hints about issues or people investigated recently by the ISA, saying only the ISA is working on several matters. He is aware of criticism of the slowness of the ISA in certain areas that seem to need investigating.

"Anything that seems problematic to you also seems problematic to us," he said, "and we are investigating. We just can't tell you about them." Terry feels that perhaps he should publicize who and what the ISA is investigating, so the public could be made more aware of the ISA's activities, but he knows this would ultimately harm the ISA.

"It is important to me that the public know that we see everything and check every suspicious movement in securities," Terry said. He noted that when the stock market is at a low point it is much easier to influence the price of a share with weak trade volumes. "We identify any irregular activity, particularly in shares, and handle it," he explained. "The ISA's computer system shows almost everything that happens on the bourse and can see the relationship between irregular actions and collate them into a trend. No manipulator can evade us."

Terry did hint that the ISA had made some mistakes in recent years. When asked about the ISA's role in protecting investors in companies in the Peled-Givony group, and the underhanded ploys used by Rogosin and its controlling shareholder Ezra Harel regarding bond holders, Terry declined to provide specifics. He did say that right after taking office he convened meetings to discuss the lessons of past mistakes.

Bond problems

Terry said the ISA is trying to determine the symptoms of irregular behavior by companies and their controlling shareholders. Every time something sets off a warning light, the ISA will respond accordingly. Such things as the resignation of a board member, or a problem with bonds, is sufficient grounds for an investigation. Terry said he now orders the investigation of a whole group of companies and not just one. Presumably this is one of the lessons of the Peled-Givony affair.

Terry views himself as responsible for every investigation, and follows each one closely. He said that when he took office he told investigators to treat anyone being questioned fairly and with respect. "These are weighty matters. One never knows at the outset how an investigation will end," said Terry. Sometimes investigators are sent to pick someone up at his home, where children are present. "The honor of those being interrogated or arrested must be preserved."

The issue of how business deals are evaluated has occupied much of Terry's time. One of his first decisions was to submit the professional recommendations that meet Standard 15 to the Accounting Standards Board. Terry would like internal auditors and accountants to take more responsibility for valuations. "The accountants are the ones who should make sure the valuation meets the financial and economic tests," he said.

Following the publication of the ISA's regulations regarding valuations, some valuations changed significantly. "Companies took their valuations back to be recalculated," said Terry, who figures that the ISA's involvement made companies take a more conservative approach to valuations.

Despite his daily involvement with investigations and enforcement, Terry, who has worked in the capital market, is very interested in working toward improving the markets. He loves answering questions on increasing the liquidity and negotiability and on introducing new players and products to the market.

Israel's securities law states that the ISA's job is to "preserve the interests of the investing public," and Terry feels that enhancing an investor's ability to sell shares is part of preserving his interests.

Terry would like to remove obstacles and simplify procedures for raising capital and in the coming months the ISA will institute changes to deal with these problems.

Late fines

Some of the market's structural problems are its high level of concentration; the control structure in many companies, in which the controlling shareholder owns over 70 percent of the shares; the low involvement of institutional bodies and the low trade volume in many shares.

Terry hopes to encourage companies to raise funds on the capital market, and to this end has set up a committee to shorten the fund-raising process via negotiable bonds. He said it is illogical for almost the whole credit market to be controlled by the banking system.

One of the problems facing companies is the requirement to issue a prospectus before each round of capital raising, which complicates and extends the process.

After the changes Terry is making, a company that wants to raise capital will have to produce a paper reflecting the company's ability to redeem the bonds, without relating to the company's growth capability or other irrelevant data.

Another change will be the redefining of securities violations. "It is unreasonable that any delay in publishing financial reports be considered a criminal offense," he said. Instead, he suggests heavy fines and is preparing a proposal to amend the law.

Other things that Terry wants to improve are the accessibility of the ISA for questions, in a process similar to pre-ruling, and the transparency of the ISA's activities. Terry also supports the entry of the pension funds to the capital market.

"We want to help the market. Anyone who approaches us sincerely with a problem will receive our assistance."