Twenty years have passed between the collapse of Trade Bank and the fraud committed by bank employee Etti Alon, which shocked Israel, and last year's collapse of non-banking finance company Gibui Holdings (TASE: GIBUI), which garnered little public interest. A report submitted to the court this week by the trustees appointed by Gibui reveals that not only the same amount of money went down the drain in both scandals - NIS 250 million but the way in which irregularities were concealed from the shareholders, bondholders, board of directors and controlling shareholders were very similar.
The detailed report by the trustees about Gibui Holdings, which unexpectedly collapsed in June 2022, is chilling for those who invest their money on the Tel Aviv Stock Exchange (TASE). The report details a long series of puzzling events, failures, concealments and a lack of clear procedures in the non-bank financing company, which raised hundreds of millions of shekels from the public.
The report reveals that the alleged embezzlement that was discovered in the northern branch of the company and led to its collapse, as well as conduct that continued over the years and was hidden from the board of directors, the auditors, the shareholders and bondholders.
"The company was managed in a haphazard, impulsive and negligent way"
The trustees Adv. Raanan Klir and Yitzhak Idan CPA wrote, "Gibui Group's reports describe, consistent, meticulous, structured, orderly and careful conduct, through the group's procedures, in everything related to both the way credit is extended and the way the management and supervision of the credit portfolio, including treatment of defaults. The reports also describe, consistently, that its situation was excellent and that its credit portfolio was a portfolio of supreme quality, almost risk-free, with minimal arrears, and that it had no difficulty collecting the credit it granted. Gibui Group said that its collapse was due to an embezzlement affair that was revealed in June 2022. However, this presentation of things is not true."
The trustees added, "The company was managed in a completely haphazard, impulsive and negligent way, long before June 2022. This messy situation is expressed every step, and especially when it comes to the core of Gibui's business regarding the way credit is extended and defaults handled." According to the trustees, there were no procedures at all, and conduct "was carried out in a completely puzzling manner, mainly through WhatsApp groups, where the authorized signatories were asked to make bank transfers."
The trustees believe that the manner in which the credit was extended was completely irregular, and that a real underwriting process did not exist, with credit extended without basic checks, as if Gibui was telling anyone who wanted to take a loan to "come and take it", without giving weight to the question of whether the borrower intends or can repay it. "This is how Gibui Group became easy prey for those who took credit but never dreamed of paying it back," they point out.
The trustees believe that the situation could have been avoided if control mechanisms had not failed, and point out in this context the directors ("who did not bother to try and get to know the group"), and the accountants from the firm of Brigtman Almagor (Deloitte) ("who demonstrably ignored the failures").
"The office holders in the group, who are not the directors, are the ones who actually managed it. The directors were not aware of the poor conduct and many failures, because they did not bother to try to get to know, even a basic acquaintance, the group and its conduct," the report states.
"If they had sought to do so, they would have discovered the serious failures at once," the report states. It is also stated that Gibui's directorsm approved the removal of the personal guarantee of the previous controlling owner Ariel Pardo for the company's debts to the banks, without receiving legal approvals.
Regarding the accountants, The report says Deloitte firm "never bothered to check, and did not sample, customer records, or request basic analyses... Even when, without asking, Deloitte was confronted with clear failures regarding the way the group was conducted, it chose to ignore them completely."
According to the trustees, Deloitte did not try to get to know Gibui's underwriting process, which in practice did not exist, as well as the method of internal approval for extending credit: "Deloitte gave a rubber stamp and unfortunately did not notice that the group disguises and hides bad credit through the improper practice of credit rollover," the report states.
Loose supervision by the board
The loose supervision by Gibui's board of directors of what was going on in the company is also reminiscent of the embezzlement case at Trade, where between 1997 and 2002, the bank's employee, Etti Alon, embezzled an amount similar to Gibui - NIS 250 million. Trade Bank provided commercial banking services to customers with business volumes of NIS 150,000 or more.
Alon, who served as a clerk at the bank, opened fictitious bank accounts in which she placed loans against customer deposits in the bank. The customers did not know that they were actually "taking out" fictitious credit, and the funds were transferred to Alon's brother, Ofer Maximov, and were used to cover gambling debts. The bank's management later claimed that it knew nothing of the affair.
Providing new credit and artificially erasing defaults
Gibui's trustees say that the Group, which operated mainly in check discounting transactions, granted bad credit on a huge scale, which led to defaults that were not reflected in the group's reports: "Instead of dealing with defaults, the group chose to suppress and mask them through a repeated practice of rolling over credit," the report says.
When a customer said that the check given for discounting would not be repaid, he was granted a postponement of the payment date or received the original check, for which credit was given, in exchange for other checks for later payment dates, without approval for new credit and ignoring the problematic, and artificial deletion of the default.
The report found that in 2020, checks worth over NIS 170 million were not paid and returned to the customer and there were over NIS 60 million of cashed checks (there is an overlap between the two groups). In 2021, the amounts rose to over NIS 280 million and over NIS 80 million, respectively, and in the first half of 2022 there were already over NIS 250 million of checks that were not paid and returned, and NIS 80 million of checks were not honored.
The trustees also note a recurring practice that was common in the group, of transferring right balances between clients without basic conditions being met, without appropriate documentation and ignoring the need for instruction or express consent of the client, for substantial amounts worth millions and even tens of millions of shekels.
In June 2022, when the company reported the suspicion of embezzlement, the banks no longer agreed to continue providing additional credit and "were put to the test of the true quality of credit," the trustees write, "but then the eye contact came to an end. The group could not recover the bad credit it had provided."
From a NIS 300 million credit portfolio received by the trustees, they collected NIS 50 million, and the balance (NIS 250 million) constitutes, according to them, bad credit that is difficult to collect.
Published by Globes, Israel business news - en.globes.co.il - on July 5, 2023.
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