On Alchemy (turning steel into gold), Cousins and Prime Ministers
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On Alchemy (turning steel into gold), Cousins and Prime Ministers

April 5, 2019
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A person (e.g., Israeli Prime Minister Benjamin Netanyahu) invests a significant amount of Dollars in a "failed" American private company, with a significant discount on the share price, and after a few years sells his shares at a huge profit. In the same example, the Prime Minister (in an attempt to fight off public criticism) declares to the public in several interviews that this investment was made after receiving tips from his cousin, the company's controlling shareholder. Such tips provided by an interested party in the company, an officer of the company, and even by a third party that provides services to the Company, may be considered a prohibited insider information. Did the Prime Minister or his cousin made prohibited use of insider information, as a result of which the Prime Minister earned dozens of millions?

The Israeli Securities Law defines insider information as any information indicating a development in the company, a change in its status, or any other information that is not known to the public and which, if the public becomes aware of, may have caused a significant change in the price of the securities of the company. The offense of using insider information apply to both senior executives in the company such as directors, the general manager, a major shareholders or any other person whose position in, or his relations with, the company gives him access to insider information see this site. A person who discloses insider information and a person who uses such information are subject to heavy punishment, which may reach up to 5 years of imprisonment and fines of up to ILS100,000 per person. Israeli case law teaches that use of insider information would entail a punishment that will constitute a clear message that this is a prohibited use that may not be ignored and is to be abolished.

And what about Netanyahu? The law forbidding the use of insider information applies only to public companies, and not to private companies that are not traded on the stock exchange and which shares are not offered to the public. If the media publications are correct, it seems that Netanyahu would not have entered the transaction that placed a significant portion of his private fortune in jeopardy had he not received insider information from his cousin, Natan Milkovsky. However, as noted, there is no prohibition against a shareholder in a private company persuading others to invest in the company. Moreover, there is no prohibition against offering shares at a significant discount and when we are dealing with a distressed company, it is only natural that the share price would be lower than their prima-facie value. It is possible that the offer to the Prime Minister to purchaser shares at a great discount was actually for promotion of the company’s affair, wishing to use the fact that he is a shareholder to promote its business, and this too is not illegal - many celebrities, including politicians and senior businessmen, invest in companies at very low prices (or even receive shares for free) just so that the company would be able to note that they are shareholders and thus promote its interests. Thus, despite the atmosphere in the media, raising suspicions of illegality of the transaction, it appears that at least with regards to insider information, this is not the case.

It is important to note, certainly during this period when public companies prepare their financial statements, that a large number of senior or other employees and service providers are exposed to material insider information - information that until the publication of the financial statements is not known to the public. The obligation of officers to prevent disclosure of insider information is one that creates personal liability and in order to avoid the risk, it is important to be escorted by a lawyer knowledgeable in the field, who will assist the company's management to guide all employees and service providers regarding the prohibition of disclosure, or use, of insider information. Such lawyer will also assist in the formulating of an internal enforcement plan to prevent the prohibited use of insider information.

In the spirit of the upcoming holidays, we recommend that all will renew the contact with distant family members who can help form a good investment portfolio or, if they are also well known in the public, give their names to the company we are invested in, because, as it turns out, even cheap steel can turn into gold.