The Administrative Enforcement Committee, chaired by retired Judge Zeev Hamer, and members of the committee, Adv. Roni Talmore and Dr. Meir Sokoler, determined on December 17, 2020, the responsibility of former Dori CEO Ariel Wilensky, Doron’s former CEO Miller, as well as the company’s CFO Itamar Eldar, in the relevant period, to include misleading details in the reports of Dori Construction Ltd. in the years 2012-2014.
This decision is now published after the 60 days required by the Securities Law from the date of the decision until its publication. Upon its publication, it came to the conclusion of an enforcement procedure in a large-scale and complex administrative case managed by the Administrative Enforcement Department of the Securities Authority.
The Administrative Enforcement Committee determined that the Company’s CEO and VP of Execution committed six reported breaches of the inclusion of a misleading detail in Dori’s financial statements between the years 2012-2014. In addition, the committee determined that the CFO committed two reported violations of the inclusion of a misleading detail in Dori’s annual report for 2013 as well as in the report for the first quarter of 2014.
As part of the administrative enforcement procedure, the company’s CEO, Ariel Wilensky, was imposed a financial sanction of NIS 400,000 for the actual payment, in addition to an amount of NIS 400,000 on condition of preventing the holding of an actual office for three years. The Chief Executive Officer, Doron Miller, was fined NIS 250,000 for the actual payment, in addition to a sum of NIS 250,000 on condition and prevention of the tenure of the actual office holder for two years. The Chief Financial Officer, Itamar Eldar, was imposed a sanction A sum of NIS 75,000 for the actual payment and one year of preventing the term of office of a conditional officer.
The other parties involved in the case, which were included in the statement of claims against the officers, ended their interest in enforcement arrangements as follows: In December 2020, an enforcement arrangement was approved with the company, in which the company fully admitted including misleading details in the above six financial reports in 2012-2014. During 2014, it was forced to perform a “restatement” of the reports totaling hundreds of millions of shekels.
The company was imposed a financial sanction due to the actual NIS 1.5 million and a conditional financial sanction in the amount of NIS 1.5 million, taking measures to prevent the recurrence of violations, including the formulation of a reported procedure with emphasis on preparing financial statements, within three months of approval of the arrangement by the committee Administrative enforcement.
During 2019, the director of budget control, Boris Avrahamov, and the company’s external accountant, Ronen Kimhi, also reached enforcement agreements with the authority, which were approved by the administrative enforcement committee. As part of the arrangements approved by the committee, Avrahamov was actually fined NIS 200,000, and a similar amount was imposed on probation, and the prevention of the tenure of a senior official in an actual supervised body for two years. The external accountant, Ronen Kimchi, was charged with two of the six violations, a financial sanction of NIS 150,000 in practice and a similar conditional amount.
The administrative inquiry into this case was carried out by the Authority’s Intelligence, Investigations and Trade Control Department. The administrative file in this case, including the preparation of the arrangements, was managed by Dr. Ilana Lipsker-Modai, Head of the Administrative Enforcement Department at the Securities Authority.
The full decision is published on the website of the Securities Authority.
Summary of the facts underlying the committee’s decision
Between 2012 and 2014, Dori Banya was a public company and traded on the Tel Aviv Stock Exchange. The company was part of a chained group of companies and was considered one of the largest construction companies in the country. The company was engaged in the management and execution of construction work for residences, offices, industry, commerce and hotels and more. According to the statement of claims, the company worked during the relevant period on about 35 projects totaling more than NIS 40 million, each. In the years that have passed since the relevant period, control of the company was transferred from the Gazit Globe Group to the Luzon Group, and today the company is a private company, and not a reporting corporation. In July 2019, trustees were appointed under the Insolvency and Economic Rehabilitation Law, and a temporary stay of proceedings was issued against her.
Dori Construction encountered cash flow difficulties in early 2013, which led to the postponement of payments to suppliers and subcontractors. As a result, there have been delays in many projects and cost increases.
As a result of the cash flow difficulties and under the guidance of the Company’s CEO, the Company’s Chief Executive Officer and the Budget Control Manager who were subordinate to him, the three included misleading details in the Company’s budget control reports, which led to incorrect presentation of project profitability. The misleading details were included in the budget control reports that form the basis for the financial statements, and then in the financial statements themselves.
The misleading details in the financial statements resulted from the improper use of three practices:
Setting unrealistic and unfounded savings targets that were deducted from project costs before they were achieved; Prior recognition of income from “exceptions” made before the income in respect of them was approved by the customer, without a basis that allows a reliable estimate of the expected income rate from these exceptions; And exclusion of projects from the budget control process and from the budget control reports, after it was decided that 90% had been completed (and sometimes in practice even before that), which meant that various expenses regarding these projects were not taken into account until the actual project was completed.
These actions resulted in misleading details that led to an incorrect presentation of the project’s profitability, in six financial statements, starting with the annual report for 2012 (fourth quarter of 2012) and ending with the first quarter report for 2014.
Only during the review of the second quarter of 2014 were the full errors and scope revealed and this issue was reported to the investing public and the Securities Authority. The aforementioned financial statements included misleading details that required a restatement of the Company’s financial statements (Restatement) for the six reports in respect of errors in the amount of NIS 441 million. Of this amount, an amount of NIS 313 million is attributed to violations of the subject of the arrangement. As a result of the amendments in the reports, the balance of the company’s surplus was written off and a deficit of NIS 241 million was created for the company on December 31, 2013.
Decision of the Administrative Enforcement Committee
The Enforcement Committee found that the three committed all the violations attributed to them by the Securities Authority in the statement of claims, after conducting an administrative proceeding without making an arrangement, before the Committee. The committee further determined in its previous decisions that there is no doubt that these are misleading material details.
It was further determined that the case is one of the most serious in the reporting cases brought before the Administrative Enforcement Committee, both in terms of the scope of the misleading details financially, and in terms of the duration of the violation period, which was spread over six consecutive quarters. The committee determined that the main impact of the re-presentation was on capital and profit and far exceeded the 5% threshold set at the PA staff position. For example, the data correction of the reports indicate a material error that is repeated and even increases from quarter to quarter – this can be seen in the error rates from the equity and profit that increase from report to report.
In addition, the reports moved from a positive equity position of NIS 241 million to a deficit equity position of NIS 220 million. The net, minimal profit, it must be said, of NIS 9 million in the annual report for 2013 turned out to be a loss of NIS 128 million and this even worsened in subsequent reports. This is a very significant effect and a restitution of hundreds of millions of shekels and a huge amount of money over six reporting periods.
The evidence indicates that Wilensky and Miller resorted to improper tactics in which amounts and numbers were arbitrarily set in Dori’s financial statements in order to maintain profitability between one financial report and another. The evidence was based on the important testimony of Dori’s budget control department employee and was supported by numerous Projects in the company, area managers in the company, people in the finance department, people in the budget control department, officials in the company past and present as well as in the testimonies of the respondents themselves.
Regarding the CEO, It was determined that it was proven that Wilenski instructed and instructed his subordinates to adjust the periodic reports of the budget control so as to preserve profitability between quarters. As a result, misleading details were included in the financial statements. Wilenski knew the importance of budgetary control and his responsibility is at least negligence, if not full awareness of the inclusion of the details in the six financial statements subject to the administrative portfolio.
Regarding the VP of Execution, It was determined that the evidence clearly indicates his involvement and knowledge in including incorrect and distorted data in the budget control reports, which served as the basis for the preparation of the financial statements, with Miller’s cooperation in carrying out the improper tactics. The VP of Execution instructed Avrahamov, the director of budget control, to make arbitrary changes in the budget control reports and was even involved in making these changes and distorting the data.
The committee broadly interpreted the administrative violation of including misleading details in the reports and determined that even though Miller did not sign the financial statements, as part of his job, he still committed the behavior in distorting the budget control reports that serve as the basis for the financial statements and signed them, similar to Avrahamov. Miller was aware that the financial statements of the contractor company Dori were built on the budget control reports. He knew that the numbers in the budget control reports distorted through the invalid ‘practices’ would pass as they were and be assimilated into the financial statements. The committee determined that this was sufficient to determine that he should have known that this was to mislead a reasonable investor.
As for the CFO, He was charged in the statement of claim with two violations in relation to the last two reports during the period of the violations. As for him, it was alleged that he negligently included misleading details in the reports, while being aware of improper accounting practices that had taken root in the company while ignoring the red lights he faced. Elder did detect a deviation in the numbers that led to a relatively small statement in the reports for the first quarter of 2014 (which were later corrected again in the overall statement for the six reports).
The evidence in his case is based on his clear administrative confession, on an economic testimony in the company, to which he explicitly stated that the data of the budget control reports should not be relied upon because they play with the numbers in these reports and they do not reflect reality, thanks to his knowledge that a budget control department Intentional action and his testimony that ‘there was a problem’ with the budget control reports. It was determined that even if he did not know exactly the extent of the distorted numbers, he did not take actions to check the budget control work, the data of which is included in the financial statements. Elder relied on Wilensky and Miller’s remarks without checking the data himself.
When he signed the reports the subject of the statement of claim realized that most likely he was signing reports with incorrect data.
The Committee referred to the determination of the Honorable Ruth Ronen in the Africa petition, according to which the officer in charge of the reports may rely on the information provided to him by senior officials or other relevant parties for the purpose of fulfilling his duties, but in circumstances where there is reason to suspect the information. Further inquiries can be made in a simple manner without undue heaviness, the officer is required to take appropriate precautions.