An Israeli citizen sued the French BNP Bank at the Economic Department in Tel Aviv – She claimed that when she was recycling a mortgage in order to purchase properties in Paris and Saint Tropez, she received, without her knowledge, a loan of €35.5 million to her bank account in Singapore, and the bank speculatively played with this money

10.09.19 | Efrat Neuman

In which instances can one sue a foreign financial institution according to the Israeli Regulation of Investment Advice?  The Court recently clarified which situations will be examined in Israel regarding legal suits that were filed pertaining to advice received by Israeli citizens for services they were provided outside the country. 

This case involves Ruth Agam, an Israeli resident who two years ago filed a suit against the French bank – BNP Pariva - at the Economic Department of the Tel Aviv District Court.  According to Agam, she signed documents with the bank pertaining to a financial transaction and recycling of a mortgage for properties in Saint Tropez and Saint Pierre in Paris.  However, in actuality, she later discovered that the transaction included additional credit totaling €35.5 million, which were invested for her and for her brother in speculative investments.  Agam also claimed that the Bank falsified various documents in order to cover up the fraudulent acts that it executed.

Last month, Judge Ruth Ronen ruled that in cases in which a customer received service overseas for a transaction that has no affiliation to Israel and the inquiry was made by the customer and not vice versa – then the Regulation of Investment Advice will not apply.  This interpretation is in keeping with the position of the Israel Securities Authority.

By law, foreign banks are prohibited from contacting potential Israeli investors for the purpose of managing their money or to advise them regarding financial investments overseas – unless the foreign bank is registered in the ISA’s Register of Foreign Dealers and upholds a set of rules set down by the law.  Registering in the Register subjugates the foreign bank to the (partial) supervision of the Authority.  The French bank was not registered in Israel; and consequently, Agam claimed that the Bank was in violation of the law.  Additionally, she claimed a breach of obligation of trust set down in the Regulation of Investment Advice, the obligation to adapt the service to the customer and the obligation to report to the customer regarding a transaction that entails special risks and to receive authorization to execute such a transaction.    

The parties agreed that the deliberation of this suit would be split; and in the first stage, a decision would be made as to whether the Investment Advice Regulation (to which most of the plaintiff’s case is directed) applied to this case. Only if the answer was positive would the claims be discussed in their own right.  Judge Ronen ruled that the Regulation of Investment Advice does not apply to this case.

 The Bank’s Version of the Events was Accepted

The case’s complexity stemmed from the fact that this is a French bank that provided service to an Israeli regarding investments in Singapore, where the Israeli investor’s French brother was also involved in this matter.

The Judge noted in her decision that the Investment Advice Regulation is designated to regulate the field of advice, marketing and management of portfolios granted in Israel – while protecting Israeli investors.  On the other hand, there is also no doubt that the provisions of the law shall not apply when all of components of the transaction are executed outside of Israel, there was no connection between the parties within the borders of Israel with regard to the transaction and the bank did not contact the customer in order to recruit her.

The relevant question is who initiated contact.  When contact is made to recruit a customer in Israel, then the provisions of the law apply – even if management of the portfolio or the advice is conducted outside of Israel at the end of the day.  Alternately, in a case in which the customer was the one who made contact with the foreign service provider and asked him for service, and the services were conducted outside of Israel – then the Investment Advice Regulation does not apply.

The Judge added that this interpretation is also in keeping with the interpretation of the ISA, as it was expressed in the position issued in 2011, whereby an attempt to recruit Israeli customers to make investments outside of Israel is likely to lead to the application of the provisions of the Investment Advice Regulation.

In this case, she determined that the Bank cannot be viewed as the party who initiated contact with the Plaintiff, and the Bank’s version of events should be preferred, whereby the Plaintiff’s brother acted as a messenger of his sister, in the relations with the Bank.  Consequently, she summarily rejected the claim with regard to cause that refers to the Investment Advice Regulation.  Now, Agam will be asked to give notice whether she is interested in continuing the suit using other causes.

Adv. Achai Gomeh, Director of the Capital Markets, Securities and Venture Capital Department at Hamburger Evron & Co. law firm (that was not involved in the case) explains that although this is was not a precedential ruling, it is important for this very reason.  “If the Court would have accepted the investor’s claim, this would have deterred international financial institutions, who are not registered in the Foreign Traders Register, from maintaining business relations with Israelis, just because they are Israelis, for fear that this may entail a violation of Israeli law.  The Court has maintained a gentle balance in a way that allows Israelis to invest in diversified financial institutions overseas; but on the other hand, it does not allow the financial institutions to offer their wares in Israel, unless they are under the supervision of the Israel Securities Authority.”