The Israel Securities Authority (ISA) has recently begun to take a clearly more aggressive approach toward administrative enforcement. Originally, pecuniary sanctions were intended to provide a swift, proportional, and efficient solution for handling relatively minor law violations in the capital market. Lately, however, the ISA has begun using them as an enforcement tool also in instances of companies including a misleading detail in their financial statements, in lieu of conducting a full administrative enforcement proceeding.
In other words, instead of holding an in-depth investigation, which entitles the alleged offender to plead its case before the ISA’s administrative enforcement committee (which has very broad discretion regarding the imposition of fines or reducing their sums), the ISA is imposing heavy fines through a summary pecuniary sanctions track. Through this track, the alleged offender’s rights are far more limited than during a full administrative enforcement proceeding. The implications of this for supervised entities, directors, officers, and managers may be far-reaching.
Kalkan Capital Ltd. Case – Pecuniary Sanction of ILS 2.5 Million in a Summary Proceeding
In this case, the ISA imposed an unprecedented pecuniary sanction of ILS 2.5 million on Kalkan Capital Limited for material errors in its reports to the public. The significance of this example is not the sum imposed, but how it was imposed. The ISA handed down the sanction not through its administrative enforcement committee, but through an administrative Pecuniary sanction proceeding.
This proceeding does not include an oral hearing or a statutory right to receive all materials collected by the ISA during its investigation prior to filing a response. In addition, the statutory time frame for filing a response is significantly shorter. Finally, the burden of proof imposed on the ISA is very low—it must only prove the factual grounds (i.e., strict liability) and not also mens rea. Furthermore, the law prescribes the sums of the sanctions to be imposed, and the ISA may reduce the sums only in very narrow exceptional circumstances, and only in a very limited manner.
In contrast, the administrative enforcement committee, a quasi-judicial body of the ISA, has far broader discretion—both to decide the height of the fine and to reduce it. Moreover, there is no restriction on its power to decide the extent of the reduction.
Judicial Imbalance: Higher Sanctions, Fewer Procedural Rights
This practice has created a rather disturbing judicial imbalance. On the one hand, pecuniary sanctions are being imposed during summary proceedings, which require limited inquiry, since they are intended for relatively minor violations. On the other hand, the pecuniary sanctions imposed during these summary proceedings are more severe than those imposed during full administrative enforcement proceedings conducted before the administrative enforcement committee.
The outcome is that the alleged offender is entitled to fewer procedural rights and the enforcement body has less discretion, while the pecuniary sanctions are far higher. Thus, instead of maintaining balance between efficiency and fairness, the offender must pay a heavy fine without being given a fair opportunity to defend itself.
The Importance of Deterrence Versus the Need for Fair Proceedings
Everyone agrees that effective and decisive law enforcement in the capital market is essential to protect investors from harm and deter potential offenders. However, it is likewise important to ensure fair proceedings and regulatory certainty about the ISA’s imposition of sanctions.
Imposing pecuniary sanctions totaling millions of shekels for relatively minor violations using a summary sanctions track, which significantly limits defendants’ right to plead their cases, could be counterproductive. Companies and supervised entities may refrain from reporting information as comprehensively as possible, since the message the ISA seems to be conveying is that any reporting error could be extremely costly, and without any real differentiation between minor and material errors.
Conclusion: Rebalancing of Law Enforcement and Due Process Is Needed
The ISA’s recent harsher approach toward administrative enforcement warrants re-examining the bounds of its administrative authority to impose pecuniary sanctions. This re-examination should consider, inter alia, a broader anchoring of defendants’ rights to plead their cases and oversight, as well as granting the ISA wider discretion to reduce sanctions or limit the sums it may impose for a single factual offense to a maximum significantly lower than that currently allowed. This way, it will be possible to maintain a proper balance between the effectiveness of law enforcement and deterrence and the principles of due process, legal certainty, and defendants’ rights.
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Adv. Hadar Israeli, Partner, Adv. Shir Rozenzweig and Adv. Ophir Hammer specialize in regulatory enforcement and White Collar Practices in the firm.
The Firm’s White-Collar Department represents clients from all business sectors during various types of white-collar proceedings.
We provide comprehensive counsel from the initial stage of preparing for an investigation through to representation before all relevant authorities and courts, in matters including securities fraud, tax issues, suspected bribery and corruption, money laundering, economic offenses, and more. Our team is available to assist with any questions or matters in this field.