Taking Stock / He Coulda Been a Contender

Everybody pees in the pool, but not from the diving board. That was the headline leading the Haaretz capital market section on November 6, 1997, the day Shlomo Eisenberg managed to push a sweetheart shareholders deal through a balky shareholders assembly. The deal diluted the public's holding in Arad Investment & Industrial Development, which Eisenberg controlled, for a very low price, via a highly complex financial maneuver.

Eisenberg wasn't the only company owner to pee in the public pool, so to speak, nor was he the only one brazenly doing it from the diving board, as it were. But yesterday he became the first to get slammed with hard time for his audacity. He'll be serving a year and a half for his attempt to gouge the minority shareholders.

Why? Why him when so many managed to milk their companies dry and get away with it?

First of all, Eisenberg managed to annoy the managers of the Analyst mutual funds, which held shares in Arad. They decided not to capitulate, as is the wont of institutional investors, but to go to war. Analyst snarled, hired the services of star attorney Ram Caspi, and urged the Israel Securities Authority (ISA) to commence a criminal investigation. Which it did.

A rare alliance

The teaming up of Caspi and Analyst was highly unusual. Most institutional investors avoid suing controlling shareholders of publicly traded companies. They don't want strife with the prosperous and powerful; they prefer to be rewarded for their obedient silence with plush jobs, deals, issues and portfolios. And lawyers of Caspi's ilk, and there are many of them, also prefer to steer clear of cases involving the exploitation of minority shareholders by a heavy-duty businessman.

Secondly, Analyst found a sympathetic ear at the ISA and at the prosecution, too. The authorities had long been looking for a test case to deter controlling shareholders from castrating the institution of the shareholders' assembly.

Thirdly, Eisenberg was determined to push the deal through over the dead bodies of the institutionals. Eschewing any attempt to persuade them of the deal's merits, he instead elected to make a series of convoluted moves that ultimately sent him behind bars.

But there's another reason "why him," possibly the main one: his arrogance, his hubris, his stubbornness.

Controlling shareholders often encounter institutionals' resistance to shareholders deals. But Eisenberg wouldn't back down, compromise, or even appear to find a middle ground. His message to the investors and ISA: I couldn't care less about the minority shareholders; it's my company and I will find a way to pass the decision I want passed.

Missed opportunities

Yesterday Eisenberg discovered the price of his actions. While most defendants of his economic status suffer no more than humiliation, that passes quickly, getting at most a fine or suspended sentence, in his case Judge Rina Meshel-Shaham went the whole hog. She cracked down and sentenced him to a year and a half inside.

Eisenberg says he'll appeal. The judge ruled that his actions should be treated with severity, partly because of "the complex, sophisticated planning of the fraud, the scope of business involved, the concealment, the false presentations, his behavior at the assembly toward the shareholders of the general public, and his behavior toward the ISA."

Eisenberg claims he fell victim to a technicality, namely a difference of opinion over interpreting the Israel Companies Law. But the truth is that he has already paid a horrible price, and no Supreme Court justice can return that spilled milk to the jug.

Let's revisit the background to the shareholders deal Eisenberg sought to promote. In 1997, he wanted to turn Arad into an investments company in order to take advantage of some great deals lying around as the great concerns divested surplus holdings.

Eisenberg shoved his deal through the assembly, but the illegal means he used required tremendous managerial resources, and consigned the Arad-Isras group to paralysis in one of the most exciting periods Israel's capital market has ever known.

Looking back, Eisenberg sees the tremendous breakthroughs achieved by other people, people who have become household names and who had been just like him seven years ago.

Back in 1997, Yitzhak Tshuva had been just another medium-sized developer. Today he's one of the 10 richest people in Israel, by virtue of having daringly taken over the Delek group. That was just the kind of deal that would have suited Eisenberg.

He sees Nathan Hetz, who in 1997 was a bit player on the stock market and today controls a real estate empire worth $120 million. In the time Eisenberg's been fighting in the courts, his company has paid $50 million dividends.

He sees Chaim Katzman, who back in 1997 had been, just like Eisenberg, up to his neck in little shareholders deals, but who managed to pass them with the help of minority shareholders and today controls a real estate group worth $350 million.

Eisenberg also knew his real estate and finances. He could have been another Tshuva, another Hetz, another Katzman. His talents in identifying opportunities, financial maneuvering and raising capital could have taken him far.

But he chose to mulishly prove to the institutional investors, to the ISA and to the entire capital market that he was his own man, nobody could tell him what to do. And even if the Supreme Court rules in his favor, nobody can restore the faith of the investment community, the adulation of the capital market or the seven years he lost, during which his peers became some of the most powerful people in the land.