Taking Stock / A Convenient Silence

Two minutes after the interview had begun, Alan Hevesi opened a little drawer in his large wooden desk, hefted his feet onto it, and leaned back in his chair.

"I have the best job in the world," the state comptroller of New York told the surprised correspondents from TheMarker. "I don't report to anybody. I decided to invest in Israel because I'm a Zionist and because I believe in the Israeli economy. I like your Ehud Olmert," he added.

Hevesi's statement was bizarre, to say the least. A public official in charge of $100 billion worth of pension savings should have better explanations on why he allocated a quarter billion dollars saved by New York's employees in an Israeli investment fund run by two Israelis with zero experience in managing private investments.

But Hevesi was not prepared for questions like that, certainly not from Israeli journalists. He didn't think he had to explain anything to anybody. David Loglisci, his chief investment officer, felt it appropriate to explain the massive investment a little more convincingly, but he had no satisfactory explanations either, other than to argue that Markstone's fund managers had passed his stringent tests.

We left Hevesi's office on 633 3rd Avenue in Manhattan without understanding why the City of New York had decided to put money into an Israeli private equity fund. All that was left was to admire the reputation and special capacities of Elliott Broidy, at the time a complete unknown to us. But he was the man who founded Markstone and who persuaded Hevesi and his lieutenants to place a quarter billion dollars in it.

Six years later, the mystery is solved. Last week Broidy confessed to bribing New York officials. Hevesi and his friends in the city allegedly received a million dollars worth of money and goodies in exchange for placing $250 million in Markstone.

Loglisci, who told us at the time that he expected returns of 20% to 25% from the fund and that if he could he'd invest his personal money there too, did no such thing with his allegedly ill-gotten gains. He took his $300,000 share and invested it in a low-budget movie.

A week has passed since Broidy revealed all to the New York prosecutor, a week since we learned that Markstone was managed by crooks. A week has passed since it turned out that Elliott Broidy, Ron Lubash and Amir Kess never did pass the real test, of the markets, when they raised $250 million from the pension fund of New York employees. And?

And Israel's institutional investors are mum. Not a peep.

Don't be surprised by their silence. And don't hold your breath waiting for them to take action against the rot-ridden fund. Don't expect the capital markets commissioner at the Finance Ministry, Yadin Antebi, to open a vigorous investigation in his last month in office.

Why? Because people who live in glass houses don't throw stones. Some of those Israeli institutional investors just want the Markstone scandal to go away. They're afraid that if they start to shoot arrows, their projectiles will boomerang back at them.

The $250 million that Hevesi and Loglisci invested in Markstone on behalf of New York's widows and orphans are what gave Israel's institutional investors the legitimization, and the imprimatur, to invest vast amounts of money in Markstone too, on behalf of Israel's widows and orphans.

None of Israel's institutionals had heard of Elliott Broidy. Lubash and Kess had no experience in managing other people's money, let alone the $800 million the fund secured. The fund secured that money because when other major potential investors heard that the New York pensioners had a quarter billion dollars inside, they figured the New Yorkers had done their homework and had good reason to get in. That money from New York, courtesy of Hevesi, was like a magnet for more money.

Markstone fooled the Israeli institutional investors. It presented the entirely false picture that one of the biggest investors in the world had faith in Markstone's management. (No such thing: Broidy has admitted to paying bribes.) Now Israel's institutional investors have to get rid of their Markstone holdings.

But they won't peep and will only take steps if they absolutely have to. They're afraid of something that should have happened a long time ago: a public inquiry into how they choose investments in private equity funds and illiquid assets.

Markstone isn't the only one to have tapped Israel's institutional investors for money. Billions of shekels belonging to Israel's widows and orphans have been placed into illiquid assets, the kind that financiers call "alternative assets." Usually they have no market price. The main parameter by which investment is made is by the reputation of their management.

What tests do Israel's institutional investors make the funds undergo before investing in them? Did they study the managers' past performance? Did they hire "gatekeepers," as is done abroad? That is, did they hire external consultancies who objectively grade the performance of the managers handling investments at the private equity funds, venture capital funds and hedge funds asking widows and orphans for their money?

In recent years in this column, we have asked the regulator to thoroughly investigate the way institutional investors invest in illiquid assets such as private equity funds. We suggested that on behalf of the widows and orphans the regulator demand that the institutionals publish their investigative procedures, benchmarking and due diligence they conduct when investing money. We urged that every investment in an illiquid private fund or other asset be fully exposed to the public.

We were stonewalled. The Israeli regulator had better things to do with its time. For example, last week the regulator announced a new rule forbidding Israeli institutional investors to publish their monthly returns. From now on, returns will be published annually.

In other words, instead of improving transparency, disclosure and information, we're focusing on reforms that reduce the amount of information available to Israeli savers.

Markstone had one big investment in Israel: the investment firm Prisma. Two years ago it became apparent that one of Prisma's provident fund managers had retroactively rerouted losses and profits between accounts in the provident funds. This is a criminal act.

Following this disclosure, the Finance Ministry wondered if retroactive rerouting was taking place at other pension fund management companies. It seems it was possible, or has happened, at other bodies. Yet no detailed report has ever been published. Nor have any criminal investigations been launched, let alone charges pressed, against the pension thieves.

The first significant criminal charges to be pursued against a major Israeli investment fund comes - how unsurprising - from New York. There they have regulators who know that people managing other people's money sometimes fall into errant ways when allocating hundreds of millions of dollars.

If we had a serious regulator in Israel, if we had a serious securities investigative authority, or a serious white-collar crime squad, they'd have raided the insurance companies last week, as well as the pension funds and provident funds. They would have demanded to see documentation on the billions poured into private equity funds and other illiquid assets. At best they'd discover that billions had been invested without even minimal checks and analyses.

At worst they'd discover cases a la Elliott Broidy right here in Israel.

Naturally, it's harder to investigate here, where the norm in corruption isn't cash, but jobs and investment strategies based on wink-wink nudge-nudge: I'll invest other people's money in your fund today and tomorrow you do the same for me. I'll approve a loan for you if you approve one for me. One hand washes another and investigative processes are ludicrous.

The members of the club know well that omerta is the most important thing: Today I do a favor for you, tomorrow you do one for me. Most importantly, we never tell anybody how we make our decisions.

The Markstone affair presents a golden opportunity for external directors at all the bodies managing other people's money in Israel to declare a stable-cleaning and to set new rules for making investments.

But it seems nobody particularly feels like it. They all feed from the same trough and they like the way things are, with hundreds of millions of shekels streaming in each year to the members of the elite club.

Prime Minister Benjamin Netanyahu is silent. So is Finance Minister Yuval Steinitz. Soon the two will be announcing their choice for Israel's next commissioner of capital markets to take Antebi's place. What kind of regulator will he be? What investigative and enforcement tools will he have?

Will they staff the office with a weakling who issues circulars about publishing or not publishing returns? Or will they bring us, for the first time, a lion? We need somebody who understands that until heads of institutional investors and big public companies are thrown into jail for a long time, the stain on the capital market will just continue to spread.