Swiss Bank Scandal Gets Hearing in Israeli Court

By Marc Perelman

Published October 24, 2003, issue of October 24, 2003.
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Israel’s Supreme Court is expected to hold a hearing November 6 on a complaint filed against several of Israel’s top financial authorities that accuses them of failing to investigate a multimillion-dollar scam by the Swiss subsidiary of Bank Leumi, Israel’s second-largest bank.

Two foundations representing Israeli and French citizens are citing the supervisor of banks, the finance minister and the governor of the central bank for their refusal to look into an embezzlement scheme that defrauded dozens of clients of the Zurich branch of Bank Leumi during the 1990s.

“Leumi stresses its role as a link between Israel and the Diaspora to attract foreign Jewish money, and the Swiss operations are its crown jewel,” said Assaf Helkin, a lawyer representing the two clients in the complaint, which was filed last November with the Supreme Court. “To see that they behave in such a bad way with their Jewish clients is just amazing.”

Yona Fogel, first executive vice president of Bank Leumi in Israel, said the legal actions were motivated by greed.

“They are trying to pressure us by damaging the image of the bank, but we won’t surrender,” he told the Forward in a telephone interview. “We did all we could to compensate the victims when we discovered the embezzlement.”

Bank Leumi has acknowledged the irregularities, has fired the main culprit and is cooperating with an ongoing Swiss criminal investigation into his actions led by Zurich District Attorney Nathan Landshut. It has also proposed to compensate its abused clients.

But while most have agreed to settle out of court, several have decided to take legal action, both in Israel and in Switzerland.

In addition to the Israeli Supreme Court motion, they filed two civil lawsuits against Leumi in Switzerland.

Landshut has stated publicly that the embezzlement amounted to some $300 million, but he has not issued any indictments.

Leumi calculates the missing total at $100 million.

Helkin and Swiss lawyers involved in the case said the bank has used the fact that the money was invested in Switzerland, presumably for tax reasons, to intimidate the plaintiffs, threatening to identify them if they were to take legal action. He said most clients had decided against filing because they did not want to reveal their identities.

Fogel forcefully denied that the bank had pressured its clients.

According to the complaint, the scandal began in early 2001, when two clients from the Zurich branch asked for their account reports. Since their usual handler, private fund manager Ernst Imfeld, was on holiday, another bank official handled the request.

When the clients saw the reports, they realized that nearly all their money had evaporated. The bank investigated and found that Imfeld had been using clients’ money in high-risk foreign exchange operations without their knowledge.

This prompted Swiss prosecutor Landshut to open a criminal investigation. Imfeld confessed his wrongdoings, according to Swiss press reports.

An audit by PricewaterhouseCoopers found that more than $100 million were missing from the accounts of the known clients. The bank wrote off $110 million in 2001 and filed an insurance claim, from which it received $60 million.

Bank Leumi then offered to compensate its clients. Fogel, the Leumi official, said more than 70% of them had accepted but that two clients had opted to sue.

In April 2002, the Meseg and Westmar foundations, family trusts owned by bank clients in France and Israel, lodged a joint complaint with Israeli banking supervisor Itzhak Tal. The foundations are registered in Liechtenstein and Panama — both tax havens — but most of the families’ money is invested in Israel, the complaint states.

Helkin said his clients had taken the necessary steps to ensure that their names would not be revealed.

According to the complaint filed with the Supreme Court, Tal dismissed in June and again in September 2002 the initial complaint sent to him on grounds that the banking supervisor is only entitled to investigate complaints of clients of banking corporations in Israel and not abroad. After the second dismissal, the foundations appealed to Israel’s Supreme Court, arguing that the subsidiary was 100% controlled by the Israeli parent company.

The complaint argues that Tal’s dismissal “raises a heavy suspicion that the supervisor is giving excessive protection to an Israeli banking institution.”

Tal could not be reached for comment.

The supervisor of banks is appointed by the finance minister and is under the authority of the governor of the central bank.

The complaint claims that senior managers officiating in Switzerland at the time of the fraud have since been promoted within the bank

Galia Maor, the current CEO of Bank Leumi Israel, was general director of Leumi Group, the Israel-based parent corporation, as well as chairwoman of the board of directors in Switzerland.

Meir Gross, the director general of Bank Leumi in Switzerland during those years, is today the private banking manager at the branch in affluent Herzliya Pituach, despite having had his license allegedly revoked by the Swiss Federal Banking Commission because of irregularities.

Fogel, the Leumi vice president and company spokesman, said Maor had been in Israel at the time and had nothing to do with Imfeld’s hiring and activities. He also stressed that Gross’ new position meant he had, in fact, been demoted rather than promoted.

According to the complaint, Imfeld was hired in 1985, despite having been forced to leave his previous position with Credit Suisse Group because of wrongdoings.

In 1992, he was appointed director of private banking at Leumi in Zurich, dealing with half of the private clients in Switzerland. During nearly a decade, he engaged in high-risk operations, using his clients’ worth without their knowledge but with the bank’s approval because they were generating lots of money, the complaint says.

“They knew what Imfeld was doing. Any basic banker would know something very wrong was going on,” said Helkin, who is with the Tel Aviv law firm of Moritz-Weissglass-Almagor. “So to say this is pure negligence is an understatement.”

While Fogel admitted that fraudulent operations had indeed taken place, estimating their total cost at some $100 million, he rejected the charges that the bank tolerated them because they were profitable.

“When we discovered the embezzlement, we fired Imfeld, and we asked the Swiss to investigate him,” Fogel said.

While the Israeli component of the case focuses on the issue of supervision, two civil suits filed by the same plaintiffs in Switzerland deal with the substance of the accusations. In Switzerland the plaintiffs are asking the bank to reimburse $50 million.

Martin Burckhardt, a lawyer representing the plaintiffs in the Swiss case, explained that reconstructing the financial scheme had entailed a “huge cost” for which the parties would demand compensation.

“It was a hell of a mess,” he said. “The bank lost all the documents from critical years, so we had to research through other means.”

He argued that while Leumi had offered to repay 70% of the sum invested by his clients, it had received insurance payments and therefore had no reason to refuse a full reimbursement.

Fogel said the bank had done its utmost to compensate its clients as expeditiously and as thoroughly as possible.

Several lawyers and victims said that broader issues of Swiss-Jewish relations, including Holocaust restitution, had played a role in what they described as a tepid response from the Swiss authorities.

“There is a great sensitivity towards Israeli and Jewish banking issues,” Helkin said. “Some experts told us that if it was, say, a Scottish bank, it [the bank] would have been shut.”

Other investors are still negotiating compensation and considering litigation. They put their money into a portfolio-management company called Allfinanz, which placed their money in Leumi accounts. After realizing that Imfeld had used the money in high-risk operations without their consent, despite having been told for years that their revenues were steadily improving, the clients suddenly found themselves with empty accounts, according to accounts by a victim, Philippe Gugliemetti, and a financial consultant who advises victims, Bjorn Rump.

While some have accepted compensation a compensation offer, others have asked the Swiss Federal Banking Commission to appoint an investigator.

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