Taking Stock / Six Years for Israel's Enron

The whole sordid affair really is worthy of the sobriquet, "Israel's Enron." Okay, the figures aren't really comparable. The collapse of the La Nationale insurance company thundered throughout the land - but this is a tiny land, and the figures were commensurately modest. You can't fairly compare the numbers with Enron's. But the two scandals did have points in common.

Both had been top-ranking companies with high market profiles that were respected by investors from small to big; both cooked their books to a crisp in order to create the fiction of massive profit; and the sheer complexity of their financial statements enabled their managements to fool analysts and investors for years on end.

One morning, the public discovers, to its astonishment, that the company, which had appeared to be flourishing, was actually bankrupt.

When Enron fell, it took down tens of thousands of workers with it. In La Nationale's case, the extent of the damage to the economy is much smaller. But remember that La Nationale is an insurance company, and monster fraud in the case of an insurance company is especially injurious to the public's confidence in a sector that is built entirely on the public's confidence.

After all, what is an insurance company? It is a financial institution the customer pays each month (the premium) in exchange for a piece of paper (the policy), in the hope that 30 or 40 years down the line, he will get his money back.

There is another small difference between the two cases. Jeff Skilling, the CEO of Enron, was sentenced to 24 years in jail last week, less than five years after Enron imploded. It took Israel's law enforcers 12 years from the collapse of La Nationale to finally convict its CEO, Dr. Moshe Pereg, and to hand down his sentence.

Pereg was sentenced to six years, which is a very harsh sentence by Israeli standards when it comes to white-collar crimes. Here, we tend to crack down on car thieves and shoplifters, but white-collar criminals are treated with leniency.

But Israel's forgiving standards become irrelevant in the global capital market. Israel has to at least look at the line drawn by the American courts, which preside in the country with the biggest capital markets of them all.

Bernie Ebbers, CEO of WorldCom, got 25 years; Andrew Fastow, the CFO at Enron, got 10 years; and John Rigas, founder and manager of Adelphia, was sentenced to 15 years' hard time.

The heavy punishment meted out to the Wall Street miscreants reflects the degree of the American public's anger against the con men who sprouted like toxic mushrooms in the boom, and caused millions of Americans to lose huge amounts of money.

It also reflects the fact that in the United States, an enormous proportion of the public's assets, both short-term and long-term investments, are invested in shares, bonds and other corporate securities.

In Israel, the public has yet to grasp the ever-growing role that the capital market plays in the economy. A growing proportion of the public's assets, almost NIS 1.8 trillion, now lies in the hands of corporate and investment managers.

The authorities' handling of La Nationale was too little and too late, and too shoddy. There was no attempt to examine the role of the controls that should have protected the public: The board of directors, the auditors, the commissioner of insurance at the treasury - where were they? What did they do, or not do?

Nor did the class action mechanism that should protect investors achieve anything. The court ruled NIS 73 million compensation for investors; but of that sum, NIS 13 million went to lawyers and the rest compensated shareholders for only a tiny part of their losses.

In the last 10 years, Israel's capital market has forged ahead. Trading volumes have shot up, the market has become more advanced and sophisticated, liquidity has increased, and the number and variety of financial instruments has mushroomed. The Bachar reform severed the asset management companies from the banks, creating a market structure that rewards excellence and punishes mediocrity.

Showing no mercy or flabbiness to capital market criminals is an important part of the market's development. The people who manage NIS 1.8 trillion of our money have to be shown that alongside the American-style salaries that are becoming the norm, so has appropriate punishment.

The court that sentenced the CEO of an insurance company that systematically defrauded investors, customers and reinsurers to six years took a step in the right direction. But it cannot be said to have rammed home the message.