Case Number
CrimA 99/14
Date Decided
12-25-2014
Decision Type
Appellate
Document Type
Full Opinion
Abstract
Appeals on judgments on the District Court in an affair of securities fraud, in which Golan Madar, Eliyahu Haelyon, Ofer Investments Ltd. and Ofer Development were convicted, and both Melisron, Ltd. and Avraham Levi was acquitted due to reasonable doubt. We are concerned with two primary issues: 1) Should a person be convicted of the offense of manipulation under section 54(a)(2) of the Securities Law if it was found that his actions were motivated by mixed intentions – a fraudulent intent and a legitimate business intent; and 2) Under what circumstances should a corporation be found criminally responsible for offenses committed by an officer who is considered to be an organ of the corporation.
The Supreme Court (by Justice Rubinstein, with Justices Vogelman and Barak-Erez concurring) rejected the appeals by Madar and the corporations, but granted the appeal by the State.
The offense of manipulation established in section 54(a)(2) concerns those who have fraudulently influenced fluctuating prices of securities. The question whether this is a result-based offense does not require determination in the current case, though Justice Rubinstein notes that in his opinion, even in the absence of direct influence on the fluctuations of the securities’ price, it is impossible to say that no harm was caused to the stock market and to the investing public by the very fraudulent activity designed to influence the price of the security in a manner that does not justify a conviction for the offense. Nonetheless, the language of section does not allow the law to omit the result altogether. Justices Vogelman and Justice Barak-Erez wished to leave this issue for further consideration.
Section 54(a)(2) does not explicitly state the mens rea required. However, there is unanimity in the case law and scholarship regarding the requirement for intent in this offense. In effect, intent is inherent to the element “by fraudulent means”– the intent to artificially influence the price is what constitutes the offense. When one’s activity was based on a fraudulent intent and the activity did in fact influence the price, an actual harm has been caused to the market, and that harm is what the law was designed to prevent. Indeed, this must be an actual intent and thus the expectation doctrine cannot be applied to the offense of manipulation. Further, when one acts in order to influence the price, then aside from the actual harm caused as a result of the influence to the price on the price of the specific security, a conceptual harm is caused to the value at the basis of the offense.
There is no real importance to the question of whether the activity also had a legitimate intent. The tainting of the act by the fraudulent purpose fulfills the dominant element of influence by fraudulent means. When one fraudulently influences the price, and does so in order to influence the price by fraudulent means, he compromises the proper operation of the stock market; he distorts the information it represents in order to produce an artificial profit while harming the protection of various types of investors. When there is such “intent to harm,” an additional harm is caused, and in the offense of manipulation, when the defendant acts in order to influence the price, he causes actual harm as a result of obstructing the pricing of a specific security, as well as harm to the values protected by the offense of manipulation. These harms are caused even when a legitimate economic intent accompanies the fraudulent intent (without necessarily finding that the fraudulent intent was primary and the legitimate intent secondary to it) and even where but for the legitimate economic intent the defendant would not have made the investment.
In the case at hand, the evidence reveals that when purchasing Series D bonds, Madar acted with mixed purposes. He had a legitimate economic purpose to invest in the security to benefit Ofer Development and a clear fraudulent purpose to influence the rate and raise the price of the bonds to 117 Agorot, as he successfully did. Hence, Madar acted in order to influence the price, by fraudulent means, and the District Court properly convicted him of the offense of manipulation.
As to the reporting offenses, the first reporting offense concerns a report intended to mislead, according to section 53(a)(4) of the Act. Even if Madar’s argument that he was not an officer of Melisron had been accepted, it was already found that even if one who is not an officer of a corporation caused a corporation to mislead in its reports, he may be criminally liable under this section. Madar, who was responsible for Melisron’s finances, chose not to include in its report the massive purchases of bonds by Ofer Development, which were also made in order to influence the price of Melisron’s bonds. This failure amounts to a report made in order to mislead, in violation of section 53(a)(4).
The second reporting offense concerns including a misleading item in the prospectus, according to section 53(a)(2) of the Law. This section concerns the prohibition of breaching the duty to report in the initial market, whereas section 53(a)(4) concerns the prohibition of breaching the duty to report in the secondary market. The rationale to expand the liability for reporting in the initial market to those who caused the inclusion of a misleading item in a report, and not only to those responsible for the report, is no less – if not more – important than that in the secondary market. Madar failed to disclose in the shelf report the purchases of bonds acquired several days earlier in order to influence the price. But even had he not been directly responsible for publishing the shelf report and had not signed it, it is sufficient that he was responsible for managing Melisron’s finances and that he played a dominant role in the issuance of the bonds in order to find him guilty of the offense of including a misleading item in a prospectus by way of failure to act.
The District Court sentenced Madar to a year of imprisonment and a fine of NIS 100,000. We will not intervene in the sentence, as it does not diverge from the trend of severe penalties for white collar crime offenses because of the unique characteristics of these crimes. Indeed, this is certainly not a light sentence, particularly considering that Madar did not act in his own self-interest and out of greed, and that in addition to his fraudulent intentions he did have a legitimate economic intent in the investment. On the one hand, there was room to give the latter consideration more weight in the sentencing phase. But on the other hand, the court did not give sufficient weight to the deterrence considerations in cases such as this, as it did not address considerations of general deterrence. This is true particularly in the case of a conglomerate of corporations, where the senior officers are the same in each of the corporations.
In regards to the corporations, the charges against the corporations were filed under the organ theory. At the heart of this doctrine stands, of course, the organ – that high-ranking long arm of the corporation. In the case law and the scholarship two tests are common for inquiring whether a person is to be considered an organ in a particular corporation: the organizational test and the functional test. These are alternative, rather than cumulative, tests. But this is insufficient. In order to find that a corporation is responsible under the organ theory for actions committed by a corporate organ, we must find that it is appropriate for the corporation to be responsible for the concrete actions of the organ. This is a matter of legal policy. The case law established the following sub-tests: first, did the legislation not intend to exclude the corporation’s responsibility from its scope; second, was the organ’s action taken in the course of fulfilling his duties; and third, was the action to the benefit of the corporation, or at the very least not aimed against it.
As for Ofer Investments and Ofer Development, each of the corporations had a separate and independent role in the offense. Ofer Investments decided on the investment, and Ofer Development actually made it. Therefore, there is actually direct and distinct culpability of each of the corporations for the offenses by Madar and there is no need to discuss their joint conviction and a conglomerate. Furthermore, though there is advance prohibition for a person to serve as a senior officer in two corporations related by ownership, where an officer acts as an officer of one corporation for the interests of the other and factors its benefit into his actions, this may be sufficient for finding that each of the corporations is directly responsible for his actions, even if these were seemingly made only within one of them.
There is no dispute that Madar was the financial manager in the Ofer Group, “number 2,” and this alone is sufficient to find that he served as an organ of the two corporations. In this context, it should be clarified that though Levi, who served in a higher office than Madar, was acquitted (due to reasonable doubt) from the charges against him, this does not reduce the responsibility of the corporations for actions taken by Madar, himself an organ in the corporations. Is it appropriate to convict the relevant corporations for Madar’s actions? This should be answered in the affirmative. First, it seems almost redundant to note that the Securities Law does not exclude the conviction of corporations; the opposite is true. Second, when Madar decided on the purchase of Series D bonds and on the manner in which the bonds were to be purchased, he clearly did so wearing his corporate hat and not as a private individual. Third, Madar did not seek personal gain or profit, and it was shown that the purpose of the investment was, among others, to benefit the Ofer Group, including Ofer Development and Ofer Investments.
Once we have found each of the corporations directly responsible for Madar’s actions under the organ theory, there is no need to rule on the possibility of convicting Ofer Group qua group. Yet, it should be noted that there may be instances where the conglomerate should be convicted as a group, since the law should focus on the nature of the activity rather than the formal structure of the corporation, so that wrongdoers are not absolved by using the corporate veil as an artificial shield. Justice Vogelmen and Justice Barak-Erez wished to leave this issue for future consideration.
As for the sentence of Ofer Investments and Ofer Development, each of the corporations was sentenced to a NIS 1,100,000 fine. We should not intervene in the fines. Section 40H of the Penal Law stipulates that while imposing a fine on the criminally convicted, the court should consider the defendant’s financial circumstances in order to set the proper range for the fine. This is even more apt in terms of convictions of corporations. Recall that a conviction under the organ theory is designed first and foremost to deter similar future actions, and therefore considerations of deterrence must be given real significance when determining the amount of a fine. In this case, imposing a fine that is lower than the maximum fine permitted is insufficient to deter the corporations, or corporations like it, from committing similar offenses in the future, and it is inconsistent with the trend of severely punishing this type of offenses.
As for the State’s appeal against Melisron’s acquittal, Madar managed the finances of Melisron alongside Levi. Additionally, Madar participated in the specific board of directors’ meeting in which it was decided to issue the bonds, and he took an active role in promoting the issuance, including reporting to the exchange. Therefore, the examination into the substance of his role in Melisron shows that he should be viewed as an organ of the corporation. As opposed to the finding of the lower court, he did commit the offense within his role in Melisron and not just within his role in Ofer, even if the funds were those of Ofer Development. Additionally, it cannot be said that Madar acted against Melisron’s interests. Quite the contrary. While his actions indirectly benefited Ofer (as a result of Ofer’s ownership of Melisron, and the rise in value of its bonds), Melisron was the primary beneficiary of this actions because the result of Madar’s support of the rates was the rise in Melisron’s bonds. The fact that one acts to benefit the corporation in which they serve as an organ is an individual example of the test regarding whether he acted in the course of his position. Therefore, the finding that Madar acted to benefit Melisron supports the holding that he executed the influence plan within the course of his role in Melisron – and the conviction of Melisron under the organ theory. Additionally, the maximum fine set in Law for the relevant period – NIS 1,100,000 – must be imposed upon it.
Keywords
Corporations, Criminal Law -- Securities fraud
Recommended Citation
Rubinstein, Elyakim; Barak-Erez, Daphne; and Vogelman, Uzi, "State v. Melisron, Ltd." (2014). Translated Opinions. 372.
https://larc.cardozo.yu.edu/iscp-opinions/372
