In a detailed, 140-page indictment, the State Attorney's Office lays out for Tel Aviv District Court 54 counts against those involved in the La Nationale affair, considered the largest fraud in financial terms ever carried out in the history of the state.
Moshe Pereg, La Nationale general manager during the relevant years (1992-1995), Michael Rosenblatt, deputy general manager and manager of the life insurance division, and the company itself, which has since changed its name to Noga Insurance, are all indicted.
The defendants in the case, which blew up at the end of 1995 with La Nationale financial reports that showed a sudden transition from high profitability to huge losses, are accused of the offenses of fraudulent corporate accounting, fraudulent receiving under aggravating circumstances, and securities offenses for the publication of misleading details in a prospectus and securities fraud.
Most of the case, in which Pereg and Meir Shamir, controlling shareholder in the Mivtach-Shamir group, were arrested for questioning, is founded on deals between La Naitonale and 26 kibbutzim. The transactions were fraudulently entered in La Nationale's books and financial reports. The indictment claims the fraudulent entries concerning the deals with the kibbutzim in La Nationale's books created inflated premium volumes in 1992-94 of about NIS 713 million.
In addition, the indictment claims the defendants defrauded foreign re-insurers who based their relationships with La Nationale on the transactions with the kibbutzim, therefore paying La Nationale moneys amounting to NIS 144 million. The indictment claims that even when negotiations with re-insurers did not end well and no agreement was reached, La Nationale sometimes listed revenues from those re-insurers in the books, as if an agreement had been reached. Total revenues from such transactions, which never took place, amount to NIS 127 million.
Bonus: 15% of Nothing is NIS 29 Million
La Nationale presented the fraudulent financial reports to the stock exchange's investing public, and, based on those fraudulent reports, raised NIS 114 million in three offerings. Pereg, as general manager, was entitled to an annual bonus of 15% of annual pre-tax profits, and those fraudulent reports helped him, according to the indictment, to pocket NIS 29 million.
The defendants had relatively regular patterns of behavior, using similar methods to make the deals with the kibbutzim and to defraud the re-insurers. In the deals with the kibbutzim, the company promised compensation in the event of the death of a kibbutz member.
The compensation for each death was about NIS 500,000, and La Nationale made a commitment to pay the sum also for an elderly population characterized by high medical risk and a short lifespan. The indictment maintains that that population was insured by La Nationale without any medical exam and without the insured signing any medical affidavit, as is accepted practice when arranging life insurance policies.
Insurance Without Premiums
Most of the insurance deals with the kibbutzim were "short term group risk" policies. In other words, La Nationale made a commitment to pay compensation for members' deaths, and the policies did not include a savings component, usually paid out to insured clients upon reaching a specified age.
According to the indictment, it was agreed that in exchange for the insurance, the kibbutzim would pay La Nationale extremely low premiums and, in some cases, it was agreed that they would not pay any premium at all. In a large portion of the cases, it was agreed with the insured kibbutz, that 92.5% of the premium payments included in the price of the deal would be returned to the kibbutz every year, after deduction of any compensation paid for the deaths of kibbutz members during the relevant year.
In addition, an agreement was signed with the insured kibbutz that La Nationale would grant it loans amounting to 92.5% of the annual premium, and another agreement under which the kibbutz would pay the premiums using the loans. A fourth agreement with the kibbutzim determined that repayment of the fraudulent loans would be set-off against compensation for the deaths of kibbutz members or against the premium returns the kibbutz was entitled to receive at the end of each year.
In other words, the kibbutzim hardly paid any money to La Nationale, as most of the premium payments were circulated back to the kibbutzim in the form of the loans the life insurance company granted them.
The Mivtach Shamir Angle
Representatives of the kibbutzim signed the agreements with La Nationale because they estimated that the moneys their kibbutzim would receive in the form of compensation for members' deaths would be greater than the premiums they would be required to pay, if they were required to pay any premium at all.
The Mivtach Shamir group, along with a group of underwriters, was involved in some of the deals with the kibbutzim.
The group examined the age statistics of the kibbutzim, looking for kibbutzim in which a relatively large number of people could be expected to pass away. The group then approached those kibbutzim and offered them life insurance deals with La Nationale.
According to the offer, accepted by many of the kibbutzim mentioned in the indictment, the group promised to pay compensation of NIS 25,000 in cash for each instance of the death of a member, in exchange for the assignment to Mivtach Shamir of the rights to receive the compensation from La Nationale for members' deaths. As stated, this compensation was about NIS 500,000 per instance, but was tied into the complicated repayment mechanism between La Nationale and the kibbutzim. The group's "gamble" paid off, and the group raked in NIS 18.5 million in profits from these deals.
The transactions with the kibbutzim, despite the fact that they were short-term risk transactions, were listed in La Nationale's books, under instructions from Pereg and Rosenblatt, as insurance transactions with a long-term savings component at much higher sums of money than those the kibbutzim had committed to pay the insurance company.
Life Insurance for the Dead
In addition, it became clear that the numbers included insurance policies in the name of kibbutz members who died even before any agreements were signed between La Nationale and the kibbutzim, and fictitious premiums were listed in the cases of kibbutzim who had canceled or ceased the relationship.
The purpose of the fictitious bookkeeping entries was to mislead the investing public in order to raise capital, and to mislead the foreign re-insurers to whom La Nationale and Pereg were interested in selling re-insurance.
Fraudulent presentation of the kibbutz policies enabled the defendants to market a significant portion of the policies to well-known foreign re-insurers in the form of modified re-insurance. It should be noted that of NIS 652 million in "mod-re" insurance, the fraudulent policies made up NIS 436 million.
The re-insurers, who were presented the deals with the kibbutzim as if they included a long-term savings component, didn't know the actual make-up of the deals, and did not know that the insured kibbutz members had not signed any medical affidavit.
The indictment also claims that the defendants exploite dthe fact that some of the foreign re-insurers didn't know anything about Israeli lifestyle in general or specifically kibbutz lifestyle, and from the data presented to them, understood that the financial capability of the kibbutzim was not less than that of employees in an urban environment. The re-insurers were sold kibbutz policies at a volume of NIS 144 million, and La Nationale also entered NIS 127 million into its books in fictitious deals with re-insurers that were never signed at all.
The fraudulent books were presented in La Nationale's financial reports in the years '92-'94, on the basis of which the company conducted three public offerings. The prospectuses didn't describe the real nature of the deals with the kibbutzim and the fraudulent details produced additional fictitious profits from life insurance of NIS 69.2 million in 1992, NIS 110.4 million in 1993 and NIS 74.3 million in 1994.
The defendants are also accused of another count of security fraud as the result of a series of meetings Pereg and Rosenblatt conducted with representatives of Bank Leumi prior to La Nationale's three public offerings. According to the indictment, the defendants presented the fraudulent details to the representatives of the banks provident and mutual funds, as well as representatives of the bank's consulting firm, National Consultants. Using the erroneous information, the bank's institutional investors were convinced to acquire NIS 76 million in La Nationale shares.