The Supreme Court’s decision to increase the sentence of former business tycoon Nochi Dankner by a year to three years in prison for securities fraud on Wednesday sends a clear message that white-collar crime will no longer be tolerated and no one “is too big to fail,” economists and capital market players said.
On Wednesday, the Supreme Court ruled that former IDB Holding Corp. controlling shareholder Dankner will begin serving his prison term on October 2 for his role in carrying out millions of dollars’ worth of fraudulent transactions in an attempt to influence the share price of the company, which was facing financial difficulties.
The court also increased the sentence of Itay Strum, who worked with Dankner on the transactions, from one year to two. Dankner had been given a two-year prison sentence in 2016.
In the ruling, Justice David Mintz said Dankner and Strum’s actions had harmed public confidence in the stock market, adding that it increased suspicion that trading prices for securities do not accurately reflect the economic activity of the economy or the market. The justices said that they felt the initial sentence was not commensurate with the severity of the crimes.
Dankner, who for a decade reigned over Israel’s business and financial scene as one of its most powerful and popular players, blazed his way to the limelight of Israel’s financial markets when he bought control of IDB, a publicly traded company that had holdings in a variety of powerful companies including Cellcom Israel Ltd., the nation’s largest cellular provider, the leading supermarket network Shufersal Ltd., and Clal Insurance, one of Israel’s largest insurance firms.
Heir to a fortune amassed by his father Yitzhak, and one of six brothers who created the Dankner Investments empire, Nochi, the somewhat dashing wunderkind, hobnobbed with ministers, rabbis, lawyers and bankers. He reportedly used his businesses and their clout in the economy to strong-arm his way into getting what he and his businesses needed by pressuring regulators, journalists and ministers.
The public was outraged in 2010 when then-finance minister Yuval Steinitz visited the offices of Dankner in Tel Aviv, rather than Dankner visiting the minister on his turf. And a photograph of the friendly diet cola Dankner shared with the CEO of Bank Leumi Le-Israel Ltd., Rakefet Russak-Aminoach — both his friend and a lender to his business — at an expensive restaurant in the north of Tel Aviv raised a public outcry about the blurred lines between business and friendship, capital and rulers.
“Dankner is the symbol of Israeli tycoons that ruled the Israeli capital markets for over a decade. He was the king of tycoons,” Yaniv Pagot, an economist and head of strategy at the Ayalon Group, an institutional investor, said in a phone interview on Wednesday.
These Israeli tycoons — including Danker; real estate and natural gas mogul Isaac Tshuva; Shaul Elovitch, the now disgraced controlling shareholder of Bezeq Israel Telecom; Motti Zisser, the late real estate mogul; and Eliezer Fishman, a former real estate and media magnate — used their business connections to acquire assets, taking huge loans to finance their ventures and wielding their clout to stave off competition. This helped preserve existing monopolies, causing prices in Israel to be higher than those of other developed nations.
One study has estimated that the 20 largest family business holdings totaled 30 percent of the market value of Israeli company shares, “a relatively high figure compared with equivalent calculations for other countries,” a 2011 OECD report on the Israeli economy said.
However, amid public furor over the high cost of living in 2011, regulators started clamping down on monopolies and increasing competition, leading the companies to struggle to maintain profitability and undermining the reign of Israel’s tycoons.
“All these guys overleveraged in a bull market and borrowed a lot of money,” said one player in the financial markets. “But to repay the debt they needed all of their businesses to perform perfectly, so when these businesses encountered difficulties, whether from increased competition in the cellular market or in real estate or in the supermarket business — these companies suffered.”
Because Dankner had so many influential companies under his umbrella, “he managed to negotiate lower prices, get regulatory leeway, get loans on comfortable terms, get one firm to sell at lower prices to another firm in its units,” said Niron Hashai, associate professor of Strategy and International Business at the Arison School of Business at the Herzliya Interdisciplinary Center (IDC), a private university in Israel.
“But when things started to fall apart — with the financial crisis in 2007, the start of competition in the cellular market and increased public scrutiny about his activities because of the social protests of 2011 — these companies suffered,” he said.
Israeli banks also clamped down on loans to large corporations, both due to the regulator but also because they perceived them to be too risky. “So, when he needed liquidity, he did what he did, and broke the law.”
Dankner inherited a large business from his father, and was successful in his own right in part because he was daring, said Eyal Winter, a professor of behavioral economics and game theory at the Hebrew University and a professor of economics at the Andrew and Elizabeth Bruner Chair of Economics at the University of Lancaster. “Like all other tycoons he dared to take risks, and sometimes this risk-loving behavior makes them cross the border, and this is what happened here.”
The verdict the Supreme Court doled out to Dankner is a “very harsh punishment” compared to those reached for similar crimes in the past, said Winter in a phone interview.
“The message of the judges is ‘beware.‘ It is a message of deterrence. This is what you will get if you do this,” Winter said. “Such a harsh verdict is justified. It is in the interest of the country to be harsh on crime.”
If you look at the legal culture in Israel in the 1950s, it was normal to put people in jail for homosexuality but there were hardly any sentences meted out for white collar crime or sexual harassment at the workplace, Winter explained. But that culture has changed, and the Dankner case is key evidence that such financial improprieties will not be tolerated in Israel.
“The idea is that white collar crime affects many people,” Winter said. “Dankner’s victims were an amorphous bunch — you cannot see them. But they were there, and many suffered. They were mainly the stockholders that were manipulated.”
“But not only the stockholders were hurt. All of the citizens of the country were victims as well, as the stock market is a very important instrument of growth and development for the economy. It serves companies to raise money from investors. But once you lose trust in the stock market — because of fraud and cheating — people are then reluctant to get engaged in economic activity which is essential for economic growth,” Winter said. “The judges wanted to highlight that.”
The fact that Dankner is a “celebrity” also played some part in the decision of the justices, Winter said. “They knew any decision about him would make a lot of headlines, and they used this case as an opportunity to send a message that will resonate and hopefully deter others.”
“Many claim that we are a corrupt and criminal country, and that all of this is a mark of shame on Israel,” Winter said. But this is a moment of which Israel can be proud, he said. “Our courts have shown that even if you are very strong, both financially and politically, when you face the court you are treated as an equal to all. As our late prime minister Menachem Begin said: ‘There are judges in Jerusalem.'”
“Our Israeli and Jewish culture forbids us to influence the judiciary. And even if you are extremely connected, if you need to be punished it won’t help who you are,” he added.
This same image of an uncompromising and independent judiciary has also been evident in the case of former prime minister Ehud Olmert, who served 16 months for bribery, and former president Moshe Katzav, who served five years for rape. Prime Minister Benjamin Netanyahu is also currently under investigation in several cases, and in two of the probes the police have recommended he be indicted for bribery.
And now the courts’ tough stance appears to have made its way into the business world.
“We put people in prison regardless of who and how high they are. I’m not sure in France or in Germany, for example, they would have put a president in prison, as we did. In this respect we are a country with more rule of law than many other Western countries. And hopefully that won’t change,” Winter said.
“It is not the first time and not the last time that people will overleverage themselves. But the Israeli legal system, the Ministry of Justice and the Israel Security Authority are cracking down on crime,” said Saar Golan, a trader at Meitav DS, an Israeli investment management company, by phone. “They have excellent and sophisticated systems in place to spot fraud, front running, and stock manipulation, and the message is nobody is immune.
“I think it is positive. It does not mean there is more fraud or criminal activity happening; it is just that the criminals are being caught more. We are cleaning up the swamp. There has always been corruption in business and politics. But a determined and activist press and the courts are focusing more on exposing wrongdoing.”
A business lesson as well
Another message that can be learned from the Dankner downfall is that there needs to be a rationale underlying the companies you hold in your assets, explained IDC’s Hashai.
“When you have a holding company with many diversified companies within it, you need something that connects between the businesses, a core connecting competence,” he said. But in the IDB firms “there was no common thread.”
“In a free economy like ours, there is no such thing as too big to fail,” he said. “If you are a strong strategic businessman the mix can work without synergies, but not for very long. In our classes at the university we always talk about the concept of related diversification — you can have diversified businesses, but there must be some common factor between them. If this common factor is just a very strong and influential businessman, with many ties and clout, it is something that could work in a non-competitive market, but not in an open economy.”