What happens when a company’s management knows that the controlling owner of the company is withdrawing funds from the company, which is not for the benefit of the shareholders and chooses to ignore it and not report it to the investors, and finally reports it retrospectively and in a negligent and misleading manner? At the Edri El company, under the control of Gabi Edri, they thought it was perfectly fine not to tell the investors about it. The Securities Authority’s Administrative Enforcement Committee also thought that it was fine and that the responsibility was Adri’s.
What happened is that the CEO of the company Gabi Edri illegally withdrew advances from the company from the second quarter in 2017 until the first quarter in 2018, to the extent of 2 million shekels, and this while the company was in financial difficulties and its reports even noted a going concern note (meaning that the accountants believe that the company did not will survive 12 months) – and without reporting it to the investors.
The Securities Authority did not like the decision of the Administrative Enforcement Committee and it decided to petition against itself to the court. Badri Al argued that the “organ theory” – the possibility of attributing responsibility for the conduct of the office bearer (the CEO) to the other office bearers in the company – does not apply in this case.
Judge Jacob Sharvit of the District Court (Economic Department) decided that the petition of the Securities Authority is justified and that a distinction should be made between a case where the company’s management does not know about the manager’s misconduct – in which case it is exempt from liability – and between a case where the company’s management knows about it and nevertheless chooses not to Tell the investors about it. The judge ruled that the company’s management knew and should have reported to the public about the CEO’s withdrawal of funds and since it did not do so in time – it is also responsible for the reporting violations committed by the ‘organizers’ – the CEO.
The judge also determined that the mental element required in the violation is only negligence, which is examined objectively, therefore there is no need to examine the company’s motives and their thinking, nor the ‘good faith’ which is a subjective examination.
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Badri El also claimed that the Securities Authority cannot petition against itself, but Judge Sharvit rejected the claim and stated that there is no limitation in the language of the law and that recognition of the Securities Authority’s right to stand is consistent with the goals of the Securities Law: The committee will improve the protection of investors in the capital market and promote the ability of the Securities Authority to fulfill its role, which is known as “protecting the affairs of the public investing in securities”.
What will be the fine for the members of the company’s management? The judge decided that this will be determined later separately.
As I recall, the Administrative Enforcement Committee placed full responsibility on Edri himself and two other officials, absolved the rest of the management from responsibility, and imposed a NIS 300,000 fine on Edri. The authority also imposed a fine of NIS 75,000 on Issachar Hadad, the company’s accountant during the problematic period, as well as a ban on serving as a senior official in a supervised body for a period of six months on a conditional basis. On the company’s accountant at the time the withdrawals were discovered, Haim Roth, the Authority imposed a fine of NIS 50,000 and a conditional disqualification from serving as a senior official in a supervised body for a period of five months.
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