Sussman v. Bank of Israel

• Decision Date: 17 July 1992
• Docket Number: No. 91 Civ. 4091 (CSH).,91 Civ. 4091 (CSH).
• Parties: Erwin SUSSMAN and Ira Guilden, deceased, By and Through Paul Guilden, His Personal Representative, Plaintiffs, v. BANK OF ISRAEL, Ministry of Finance of the Government of Israel, Bank Hapoalim, Ltd., Moses Mandelbaum, Galia Maor, Zeev Eveles, and John Does 1-5, Defendants.
• Court: U.S. District Court — Southern District of New York

801 F. Supp. 1068

Erwin SUSSMAN and Ira Guilden, deceased, By and Through Paul Guilden, His Personal Representative, Plaintiffs, v. BANK OF ISRAEL, Ministry of Finance of the Government of Israel, Bank Hapoalim, Ltd., Moses Mandelbaum, Galia Maor, Zeev Eveles, and John Does 1-5, Defendants.

No. 91 Civ. 4091 (CSH).

United States District Court, S.D. New York.

July 17, 1992.

Miller, Cassidy, Larroca & Lewin, Washington, D.C. (Nathan Lewin, Seth P. Waxman, Michael J. Barta, of counsel), Schlam, Stone & Dolan, New York City (Richard H. Dolan, of counsel), for plaintiffs.

Skadden Arps Slate Meagher & Flom, New York City (Jonathan J. Lerner, Marco E. Schnabl, John M. Horan, Craig S. Hilliard, Joan K. Martin, Angela G. Garcia, of counsel), for defendants.

MEMORANDUM OPINION AND ORDER

HAIGHT, District Judge:

Plaintiff Erwin Sussman is a citizen of Sweden and a legal permanent resident of the State of California. Plaintiff Ira Guilden, deceased, was a citizen of the United States and a resident of the State of New York. Upon his death in November 1984 Paul Guilden, a United States citizen and a resident of New York, became the personal representative of Ira Guilden.

At the pertinent times plaintiffs were two of the principal investors in North American Bank ("NAB"), a financial institution incorporated in Israel in 1977 and liquidated in 1988 by Israeli authorities after the discovery of fraud perpetrated by its Israeli managers. Plaintiffs allege that the demise of NAB caused them to lose the full amount of their investments, $10 million in the case of plaintiff Sussman and $7 million in the case of plaintiff Guilden.

By this action plaintiffs seek to recover those amounts in compensatory damages together with $20 million in punitive damages. The named defendants are the Bank of Israel ("BOI") and the Ministry of Finance of the Government of Israel (the "Ministry"), both agencies of the Government of Israel; Bank Hapoalim, Ltd. ("Hapoalim"), a large Israeli private financial institution which maintains a branch in New York City; Moses Mandelbaum, an Israeli citizen and resident and at the pertinent times Governor of BOI; Galia Maor, an Israeli citizen and resident and at the pertinent times Supervisor of Banks at BOI; Zeev Abeles, an Israeli citizen and resident who is currently Deputy Supervisor of Banks at BOI and at the pertinent times held other offices in that agency¹ The "John Doe" defendants 1-5 are included because plaintiffs allege, upon information and belief, that additional unknown individuals took part in the fraudulent conspiracy alleged in the complaint.

All defendants now move to dismiss the action on the ground of forum non conveniens. In the alternative, defendants move to dismiss the complaint or for summary judgment on various substantive grounds.

Background

The complaint alleges that plaintiffs Sussman and Guilden were in a group of three non-Israeli investors who provided substantial funds in 1977 for the creation of NAB. They did so, they allege, on the basis of representations that BOI would oversee the affairs of NAB and detect and prevent fraud.

The complaint alleges that in October 1983, the Israeli banking industry suffered a nation-wide crisis which came to be known as the "Bank Share Crisis." The crisis involved the precipitous decline in the price of the publicly held shares of Israeli banks, which were traded on the Tel Aviv stock market. The complaint alleges that BOI "among others" ascribed the falling bank share prices to a downward adjustment reflecting the true economic value of bank stock, after prices had been artificially inflated by years of manipulative transactions. Specifically, the manipulative transactions consisted of substantial purchases by a bank, or an individual acting for a bank, of the bank's own stock. Such purchases inflated the trading value of the bank's stock, thereby preserving or increasing the value of existing shares. They also had the effect of disguising the price at which the bank's stock would trade in honest arm's length transactions. Such manipulative transactions in bank stocks are known in Israel as "visut". Complaint ¶ 25.

The Bank Share Crisis in October 1983 necessitated intervention by the Government of Israel. Trading in bank stocks was temporarily suspended. BOI encouraged banks to enter into an arrangement under which most public holders of bank stock would agree to hold their stock for a stated period, generally six years. In consideration of that forbearance, the stockholders covered by the arrangement were guaranteed the right to redeem their shares, at the conclusion of the prescribed period, for a fixed price equal to its trading value as of the date of the guarantee, which was October 6, 1983. The Government designed this arrangement as a device "to buy time to enable the economic value of the bank shares to catch up with their artificially inflated trading prices." Id. at ¶ 25.

The complaint goes on to allege that for unstated reasons, that arrangement, which was applied to "almost all other Israeli banks," was not applied to NAB. Instead, in order to keep the price of NAB's stock artificially inflated without assuming the obligations of a guarantee, the Ministry, BOI, and NAB's Israeli management agreed on a plan whereby U.S. $10 million would be provided by the Ministry through the New York branch of defendant Hapoalim to NAB Holding Corporation, a Luxembourg company owned by the principal shareholders of NAB (including plaintiffs), and controlled in fact by the Israeli managers of NAB. The complaint alleges that when this secret loan was arranged, defendants knew that the proceeds of the loan would be used by the Israeli managers of NAB, thereby circumventing the prohibition of Israeli law against a bank's purchase of its own shares. Plaintiff Sussman, the complaint alleges, had traveled to Israel in October for the purpose of spending the Jewish holidays in that country. Defendants Mandelbaum and Maor are alleged to have falsely reassured Sussman at a meeting on October 18, 1983 concerning NAB's condition and the integrity of its Israeli management. Sussman told unidentified officials of BOI and the Ministry that in view of those reassurances, he did not intend to sell his shares.

The secret $10 million loan was agreed upon during meetings between representatives of the Ministry, BOI, and NAB's Israeli management on October 19 and 20, 1983. Sussman was not told that the loan was provided to enable stock manipulation to continue. On October 24, 1983 the loan, funded by the Ministry with the knowledge, approval and assistance of BOI, was processed through the New York City branch of Bank Hapoalim to NAB Holding Corp., and thence back to the NAB managers in Israel. Ultimately the Israeli managers of NAB used some of the proceeds to purchase shares of NAB in order to maintain the inflated price of the stock. Complaint at ¶¶ 27-34. The complaint further alleges that BOI officials including Maor were warned by BOI regulators that NAB was carrying out a prohibited visut practice, but disregarded that advice. Id. at ¶ 37.

Broadening its scope, the complaint goes on to allege a series of acts of fraud and mismanagement by NAB's Israeli managers, Moshe Stern, Josusha Halperin, and Hadassah Monsah. Episodes are alleged beginning in 1979 and extending through April 1985, at which time NAB had become "hopelessly insolvent." Id. at ¶ 51. Unnamed BOI employees, as well as defendant Maor, are charged with failure to respond to warning signals, "and deliberately or recklessly allowing the fraudulent scheme to flourish." Id. at 43. BOI took over NAB on August 13, 1985. The official receiver was appointed as liquidator of a court-ordered liquidation of NAB on January 5, 1988. In consequence, plaintiffs have lost the full value of their investments. Criminal prosecutions were begun against Stern, Halperin, and Monsah, together with Samuel Barzel, an attorney for NAB. In addition, on May 1, 1989 the liquidator initiated civil proceedings against NAB's foreign shareholders, including plaintiffs Sussman and Guilden. Sussman and Guilden have filed answers and third-party claims in that civil action, asserting at least some of the claims contained in the complaint at bar.²

The complaint at bar asserts five claims against all defendants. The first is for fraud and misrepresentation. The "defendants" (unspecified) are charged with having made false statements of facts to plaintiffs "on October 18, 1983, in Jerusalem, and thereafter," including assurances by "the defendants" that NAB was financially sound and well managed; plaintiff had no cause for concern about their investments; and BOI was exercising diligent oversight over NAB's affairs and had not uncovered any irregularities in the bank's management. These false statements were allegedly made to cover up the secret $10 million loan provided to continue stock manipulation by NAB's managers, and for the purpose of inducing plaintiffs to maintain their NAB investments. Plaintiffs allege that the "defendants" concealed the true facts from plaintiffs until those facts were revealed during Halperin's criminal trial in 1990. Plaintiffs allege they did not know the true facts until they conducted an investigation based upon (the) evidence elicited during Halperin's trial. Complaint at ¶¶ 60-64.

The four other claims, also against all defendants, proceed from this same nexus of alleged facts. Those claims are for negligent misrepresentation, concealment, breach of a duty to disclose and restitution.

As noted, all defendants move to dismiss the complaint on the ground of forum non conveniens. They say that the civil courts of Israel furnish the appropriate forum for plaintiff's claims. In the alternative, defendants or some of them assert that the complaint should be dismissed on the grounds of the statute of limitations, sovereign immunity, the act of state doctrine, lack of personal...