'Israeli public companies must take action on misconduct'

Stock options probes scandals this year gave Israeli companies a headache and brought business news to newspapers' front pages.

November 1, 2006 07:18
3 minute read.


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In stark contrast to US corporations, which have begun to take upon themselves the task of internal investigations when apparent irregularities are expected, many Israeli public companies, whether listed on the US Nasdaq system or the Tel Aviv Stock Exchange, remain hesitant to do so, experts charged Tuesday. "Board members in Israeli publicly traded companies are often acting in the belief that when improper conduct in the company is reported to them, it is not in the interest of the company to launch an internal investigation," said Gene Kleinhendler, Adv. and senior partner at GKH law offices at a Tel Aviv conference the firm sponsored on "Internal Investigations in Public Companies." "This is not the right approach considering that such an occurrence and the following potential opening up of an inquiry could be the end of the company. It is the board of directors' responsibility to act immediately as a preventive measure and to be ahead of the prosecutor, while the need to cooperate with regulators and agencies is absolute," he said. Kleinhendler added that in the law firm's experience in representing many Israeli publicly traded corporations there were many investigation cases, including those involving stock options, revenue recognition and proper control of the company regarding finances and sales. "Over the past two years we saw six Israeli traded companies on Nasdaq under investigation and what we noticed was that they were struggling to take affirmative action in what is common practice in the US." Stock options probes scandals this year gave Israeli companies a headache and brought business news to newspapers' front pages. Topping the scandal list, Comverse Technology's former chief executive officer and chairman Koby Alexander was charged in August by the US Securities and Exchange Commission for having engaged in a decade-long fraudulent scheme to grant undisclosed backdating options to himself and others. The Comverse options backdating story was first broken by the Wall Street Journal. "It is of utmost importance that a public company will, out of their own initiative, conduct an internal investigation and report the discovery of misconduct, before prosecutors happen to read it in the newspaper or knock on their doors," said Leslie Caldwell Esq., former head of the investigation and prosecution team in the Enron case and currently partner at Morgan Lewis. M-Systems attempted to shake off an options backdating investigation that delayed a stock offering planned for this past May. Earlier, Mercury Interactive became embroiled in regulatory probes over its grants of options to top executives. As a result, three of Mercury's top executives left and the company has had to restate its financial statements as far back as 1998. "Israeli publicly traded companies need to understand that there is a presumption of ethical behavior reflected in the stock price of a company, which includes the expectations of the investors and securities agencies for proper management of the company," said Kleinhendler. "Israeli companies don't have it in their culture to make an effort to find out and sanction accordingly, while the Israel Securities Agency has a limited enforcement ability to come after you." Therefore, Kleinhendler said he would like to see the US model adopted by Israeli companies. This would mean companies would have an obligation to set up a special committee - not just a report of misconduct - and undergo a formal process of an internal investigation in support and full cooperation with the ISA or any other bodies. "If you want to do business in the US, you have to play by our rules," said Ira Sorkin Esq., former head of the Securities and Exchange Commission's office in New York and currently a partner at Dickstein Shapiro, which represents Comverse in the options backdating case.

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