CPA Shaporan and CPA Milner (hereinafter: the CPAs) filed separate pleadings, but most of their claims were similar, and therefore I will present them below in consolidation.
The accountants claimed that they prepared the company's financial statements in accordance with the rules of the profession and as required of a reasonable accountant. It was further argued that the original statement of claim was filed only against the directors, and that even in the Bilu report that was attached to the amended statement of claim, it was noted that the accountants presented warning signs regarding the financial situation of the subsidiary in their reports, but the directors ignored them. According to the accountants, the plaintiffs did not prove the existence of the elements of the tort of negligence, and mainly did not prove the existence of a causal connection between the alleged negligence and the company's damages. In this context, the accountants emphasized that the testimonies show that the directors did not read the financial statements at all, and therefore the manner in which the data was presented would not have changed the way they operated.
As to the allegations of negligence on the part of the accountants, it was argued that the financial statements were the sole responsibility of the company, and that it should have prepared consolidated financial statements with its subsidiary, in accordance with Statement 57 of the Institute of Certified Public Accountants in Israel. Since it did not do so, this was stated in explicit reservations that were included in the reports prepared by the accountants. It was further argued that in accordance with the relevant financial statements, and to the best of the understanding and judgment of the accountants, the company was not in danger of insolvency at that time, and therefore no "going concern warning" was required in the auditor's report for this year. The accountants added that in the course of fulfilling their duties as auditors, they were never summoned to a meeting of the company's shareholders, and were never required to give the shareholders explanations or information.
- The Trial Judgment
- The trial court opened its judgment with a ruling that the plaintiffs, who were harmed by Pinkowitz's actions, were trying in their claim to receive compensation from innocent parties who had acted for the benefit of the company for decades. It was noted that the plaintiffs are trying to attribute to the directors, the founders of the company, whose average age is 85, injustices and violations of the law, only in order to reach the "deep pocket" - the insurer - in order to cover the aforementioned damages. It seems that this "values" approach of the court influenced to some extent the result it reached, which I found it difficult to accept. Later on, the trial court discussed the plaintiffs' arguments, and I will present its main conclusions below.
C.1. The Trial Judgment - Pinkowitz
- After examining the evidence and the arguments of the parties, the District Court ruled that the person who brought the company to its status as it was on the eve of the filing of the lawsuit was Pinkowitz alone, who acted fraudulently and in breach of his fiduciary duty to the company and to the subsidiary. It was clarified that both in the initial proceeding filed by some of the parents of the inmates in October 2010 and in the Dremman Report and the Bilu Report, responsibility for the company's situation was attributed to Pinkovich himself, and almost no mention was made of the omissions attributed to the directors in this lawsuit.
The court emphasized that the main action for which a breach of fiduciary duty should be attributed to Pinkowitz is the massive transfer of funds from the company to the subsidiary. It was determined that from 2000 onwards there was no justification for the continuation of the operation of the subsidiary factory, which employed less than 10 percent of the village's residents, and there was certainly no justification at this stage for continuing to inject funds into the subsidiary.