Securities Authority raids Psagot

Senior executives are accused of manipulating bond prices.

Psagot Investment House Ltd., Israel's largest investment house, is suspected of using its nostro portfolio to rake in illegal profits. The Israel Securities Authority last night raided the offices of the firm's portfolio management subsidiary Psagot Securities Ltd. Psagot, run by chairman Arik Steinberg and CEO Roy Vermus, has NIS 130 billion in assets under management.

Psagot Securities is suspected of using billions of shekels in its nostro portfolio to buy and sell corporate and government bonds, while manipulating their prices to rake in tens of millions of shekels. The Securities Authority suspects Psagot Securities of manipulating bonds of Yitzhak Tshuva-controlled Delek Real Estate Ltd. (TASE: DLKR).

Psagot declined to comment.

The Securities Authority is seeking the arrest of two of the prime suspects in the case, both of whom held senior positions at Psagot Securities: David Edery and Shay Ben-David. Neither man has held a position at Psagot since the end of 2009, as they had planned to set up their own investment firm.

Edery and Ben-David say that they are innocent.

Edery served as a manager and later as VP brokerage at Psagot Securities during the period under investigation - 2007-09. Ben-David served as manager of the brokerage's dealing room, during this period. Both men were responsible for investments by Psagot's nostro account.

The Securities Authority suspects that Edery and Ben-David "fraudulently and systematically colluded for a long period at Psagot's nostro account to manipulate and fraudulently affect the prices for a number of bonds, in the amount of billions of shekels. They did this by raising and lowering the prices of securities on the basis of their needs in order to maximize illegal profits for Psagot's nostro account, by exploiting this asset-rich account's immense power."

The Securities Authority claims that Edery and Ben-David made tens of millions of shekels in profits both for Psagot's nostro account and personally.

The Securities Authority suspects that Edery and Ben-David "manipulated through Psagot's nostro account the prices of corporate and government bonds ahead of tender issues of bonds as part of the expansion of government bond series as well as government bond prices ahead of 'revolving tenders' by the state carried out by the Ministry of Finance. In this way, the two men manipulated government tenders in their favor, and also fraudulently made huge personal profits."

A longstanding capital market trader said today, "What was apparently going on at Psagot was front running." Front running is when a trader knows in advance of a buy order for securities, giving him the chance to place his own order at a lower price, and selling the securities after the price rises.

The trader believes that the same traders worked at both Psagot's brokerage services and at Psagot Securities, which handles the company's nostro portfolio. (The nostro portfolio is the investment house's own funds, as opposed to clients' funds that it manages.) When these traders received buy orders from clients, they then placed their own orders for the securities in advance through Psagot Securities and subsequently sold them to the client at a profit.

The trader said, "The presence of the same traders at both the brokerage and nostro units opened the door to a lot of creating thinking. Psagot did not invent this gimmick, nor is it the only investment house to play this game."

A top banker told "Globes", "The Securities Authority must make a thorough house cleaning at all the investment houses. It's necessary to examine the activities at the dealing rooms between the nostro managers and the investment managers of clients' money. Psagot isn't the only investment house that influences the prices of securities, but as Israel's largest investment house, it has amassed immense power which it could exploit in the market in ways that aroused suspicion. Until now, the Securities Authority failed to demonstrate any impressive enforcement capability of the Securities Law on market activity."

Another banker said that the mood in the capital market was dire, since it has been known for a long time that most of the investment houses worked in this way. He nevertheless expressed confidence that the scandal would end on a whimper.

Published by Globes [online], Israel business news - - on February 2, 2010

© Copyright of Globes Publisher Itonut (1983) Ltd. 2010

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