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Preventing Price Fixing by Israeli Banks: Antitrust Rules in Settlement of a Criminal Case

  • Lionel Kestenbaum

Extract

Israel's Restrictive Trade Practices Law, 1959, after a period of relative quiescence, appears to have become the subject of significant enforcement efforts. A major event reflecting this development was the filing of criminal charges against the country's four leading banks (and a top executive of each) in mid-1984 for illegally combining to fix interest rates paid on negotiable certificates of deposit. The prosecution was eventually resolved early in 1986 by a plea bargain which included another major event – the first negotiation of remedial rules of conduct to prevent future violations (hereinafter the “Bank Rules” or “Rules”), which were hailed by the chief enforcement official, the Controller of Restrictive Practices, as adding an efficient and highly important tool to enforcement of the Law.

The Bank Rules are similar to the consent decrees familiar to United States antitrust law. Indeed, the parties and the Chairman of the Restrictive Trade Practices Board, retired Supreme Court Justice D. Bechor, explicitly recognized and discussed the relevance of United States precedents in the proceedings which produced the Bank Rules. Just as the bank case has heightened awareness of the Law, so adoption of the Rules is probably a harbinger of remedies to come. The Bank Rules are thus of considerable practical relevance to counsel concerned with commercial contracts and practices as well as of general interest to those following the international diffusion of antitrust ideas.

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1 Restrictive Trade Practices Law, 1959, 13 L.S.I. 159, as amended by 15 L.S.I. 27, 17 L.S.I. 169, 26 L.S.I. 21, 27 L.S.I. 164, hereinafter “RTP Law”. A substantial revision of the RTP Law is pending before the Knesset, see Restrictive Trade Practices Bill 1983 (1983/84), H.H. No. 1647, p. 39, discussed in the author's article, Notes and Reflections on the Restrictive Trade Practices Bill 1983” (1986) 15 Mishpatim 266.

2 Compare the State Comptroller's Annual Report (1985) No. 35, p. 716 with his Annual Report (1968) No. 18, p. 339. The early years of enforcement of the RTP Law are discussed in the author's article, Israel's Restrictive Trade Practices Law: Antitrust Misadventures in a Small Developing Country” (1973) 8 Is.L.R. 411.

3 State of Israel v. Bank Leumi Le-Israel Ltd., Bank HaPoalim Ltd., Israel Discount Bank Ltd., United Mizrachi Bank Ltd. et al., Crim. No. 7873/84, Magistrates' Court, Tel Aviv – Jaffa.

4 The plea bargain accepted by the Magistrate, Judge Saltoon, in a decision recorded in the proceedings of the criminal case on January 12, 1986, pp. 23–25 (hereinafter “Magistrate's Decision”), included the Rules arrived at in proceedings before the Chairman of the Restrictive Trade Practices Board (text at n.19, infra). The Bank Rules are available in the criminal docket and in the public files of the Controller of Restrictive Trade Practices.

5 Magistrate's Decision, p. 25.

6 See the decision of the Chairman of the Restrictive Trade Practices Board resolving a dispute about the Rules (n. 19 infra), pp. 1, 3; Magistrate's Decision, p. 25.

7 See the author's article, supra n. 2, at 417–421, 452–465.

8 RTP Law, secs. 40, 42. An additional remedy against violations of the Law is a civil suit for damages by injured parties, under sec. 45. Such suit was filed against the banks, see n. 21 infra.

9 Id., secs. 18, 25, 28. Parties to a cartel are under an obligation to register it with the Controller of Restrictive Practices within 15 days and to apply to the Board for approval, sec. 18. The Board is to approve if it determines that the cartel is in the public interest, sec. 25, taking into account public interest objectives set forth in sec. 28 of the Law.

10 Id., secs. 5–10A. In addition to sec. 5, discussed in the text, the other exemptions are for restraints related to the use of patents, trademarks or copyrights; restraints related to agricultural commodities; labour agreements; agreements between parent and subsidiary companies; exclusivity arrangements between a supplier and dealer; and agreements relating to international air or sea transportation.

11 This feature of sec. 5 avoids a problem which has often arisen in U.S. law, i.e., to determine whether a particular regulatory system is of such scope and character as to lead to the conclusion that the antitrust laws were superseded by implication, because inconsistent with the regulatory system. See, e.g., Gordon v. New York Stock Exchange, 422 U.S. 659 (1975); Carnation Co. v. Pacific Westbound Conference, 383 U.S. 213 (1966); Pan American World Airways Inc. v. U.S., 371 U.S. 296 (1963); U.S. v. Radio Corp. of America, 358 U.S. 334 (1959). In Israel, that question is foreclosed by sec. 5; if the restrictive arrangement is “prescribed” by legal authority, it is exempt regardless of the nature of such authority. This benefit is received at the possible cost that an exemption will come into effect even if the regulatory body did not give due weight to competitive factors or otherwise assure the public interest.

12 E.g., Carnation Co. v. Pacific Westbound Conference, supra n. 11.

13 Board Chairman Decision, infra n.19 at 2. See Banking Ordinance of 1941; Bank of Israel Law, 1954, 8 L.S.I. 163; Banking (Licensing) Law, 1981, 35 L.S.I. 277; Banking (Service to Customer) Law, 1981, 35 L.S.I. 312.

14 U.S. v. Philadelphia National Bank, 374 U.S. 321, 372 (1963). At the same time, the U.S. courts have recognized that the regulatory framework affects the likelihood of competition, e.g., U.S. v. Marine Bancorporation, 418 U.S. 602 (1974) (restrictions on branching preclude potential entry by means other than acquisition of existing bank).

15 Sec. 56 of the Bank of Israel Law, 1954, 8 L.S.I. 163 at 171, as amended 35 L.S.I. 293. The Bank of Israel's exercise of this authority is subject to the approval of the Government and of the Knesset Finance Committee.

16 Cf. Israel Consumer Council v. Chairman of Restrictive Trade Practices Board (1985) 39 (iii) P.D. 265 (Board may not delegate its authority).

17 Banking (Service to Customer) Law, 1981, sec. 3, 35 L.S.I. 312 at 313. Another provision of the Law does present the possibility of overlap with the remedies of the Restrictive Trade Practices Law. Sec. 7 prohibits a bank from tying the availability of a service to the purchase of another service or commodity unless there is a reasonable business link between them, and provides that such link can be found by the Examiner of Banks; the penalty for violation is fine and/or imprisonment (secs. 10, 11). But the same purported “tying” agreement can also be found to constitute a violation of the Restrictive Trade Practices Law if the customer is a person carrying on business. Presumably the bank would have the alternative of applying to the Examiner or to the Board for authorization. Here an antitrust prosecution for acting without approval could be seen as complementing the regulatory system by imposing an alternative or additional sanction.

18 Supra n. 3. According to the criminal charges, the banks reduced the interest paid on the certificates of deposit from 115–120% to a maximum of 85% beginning June 20, 1983. The maximum rate was raised to 93% on August 14, 1983, and to 103%. on November 6, 1983. (These nominal interest rates included a substantial inflation factor). The cited maximum rates were those set for so-called “jumbo” certificates (over NIS 10,000), with the highest yield. See district court decision cited in n. 21, infra.

19 Decision of Justice D. Bechor, December 8, 1985, resolving the scope of the record-keeping provision (hereinafter “Board Chairman Decision”). On the same day, Justice Bechor issued a second decision to which he appended the Rules which, he declared, had been arrived at in part by agreement of the parties and in part by his decision as Board Chairman or as arbiter.

20 Magistrate's Decision, pp. 23–25. The fines imposed were at the maximum level now applicable for the offense of carrying out a restrictive arrangement without approval of the Restrictive Trade Practices Board (or a temporary permit), under RTP Order (Change in Level of Fines) 1985, (1985/86) K.T., No. 4864, p. 66, effective November 1985, modifying RTP Law, sec. 42. The level of fines applicable to the banks' 1983 violation was much lower. However, the court relied upon an alternative provided by sec. 63(a) of the Penal Law, 1977, (L.S.I. Special Volume, p. 25, as amended, 34 L.S.I. 62, 63) authorizing fines in the amount of four times the gain to the defendant or injury to the public, and accepted the parties' agreement as to amount.

21 Magistrate's Decision, pp. 24–25. After the settlement of the criminal case as described above, a damage suit was filed against the four banks by plaintiffs purporting to represent the purchasers of negotiable certificates of deposit during the period involved. In a recent decision, the district court rejected the class action for damages on the ground that Israel's Civil Procedure Rules required a joint interest in the claim to support a representative action, a narrow interpretation following U.K. practice (in contrast to the U.S. approach to class actions based upon common questions), and because of difficulties with the plaintiffs as class representatives. Hoffer Foundation et al. v. Bank Leumi Le-Israel, Civil Action No. 245/86, District Court, Jerusalem, Decision November 12, 1986; see Frankische Pelzindustrie Markle & Co. v. Rabinowitz, (1969) 23(i) P.D. 645.

22 See supra n. 4.

23 ABA Antitrust Section, Antitrust Law Developments (2nd ed., 1984), p. 301, (about 70% of government civil antitrust cases terminated by consent judgments). Under U.S. law, antitrust violations may be the subject of criminal or civil proceedings. 15 U.S.C. secs. 1–3 (criminal offences) 4, 25, 26 (injunctions), 15, 15a, 15c (damages). Price-fixing is typically prosecuted criminally, as were the banks here; such criminal cases are normally accompanied by civil suits for injunctive relief in the course of which consent judgments may be negotiated. U.S. procedures provide for publication of proposed consent decrees in government antitrust cases along with an explanation called a “competitive impact statement”, opportunity for public comment and hearing and the court's acceptance upon its determination that “the entry of the judgement is in the public interest” 15 U.S.C. sec. 16(b)–(h). If the court decides that the public interest requires changes in the proposal, it is up to the parties to decide whether to consent or to proceed with the litigation. See, e.g., U.S. v. American Tel. & Tel. Co., 552 F. Supp. 131, 224–226 (D.D.C. 1982).

24 ABA Antitrust Section, supra n. 23, at 361. In the U.S., antitrust defendants have an additional important incentive to enter into consent judgments, which is to avoid the prima facie effect given in subsequent private suits to adverse litigated judgments in government antitrust cases, under 15 U.S.C. sec. 16(a). This is not relevant to any government case in which defendants were convicted on their guilty plea, as the banks were here, to the extent that such judgment or the parties' admission can be used in other cases. See Evidence Ordinance (New Version) 1971, sec. 42(a), 2 L.S.I. [N.V.] 198, as amended 27 L.S.I. 265, 266; Arbiv v. State of Israel (1973) 27 (ii) P.D. 513.

25 National Society of Professional Engineers v. U.S., 435 U.S. 679, 697–698 (1978); see also, e.g., U.S. v. Loew's, Inc., 371 U.S. 38, 52–53 (1962); FTC v. National Lead Co., 352 U.S. 419, 430–431 (1957); U.S. v. U.S. Gypsum Co., 340 U.S. 76, 88–90 (1950); International Salt Co. v. U.S., 332 U.S. 392, 400 (1947); U.S. v. American Tel. & Tel. Co., supra n. 23, at 150, 153.

26 U.S. v. U.S. Gypsum Co., supra n. 25, at 89; International Salt Co. v. U.S., supra n. 25 at 400; FTC v. National Lead Co.,supra n. 25, at 431; National Society of Professional Engineers v. U.S., supra n. 25, at 697–698.

27 U.S. v. American Tel. & Tel.Co., supra n. 23, at 153. Consent judgments are customarily justified by the U.S. Department of Justice on the ground that they provide as much relief as the government would have achieved after a successful trial. See, e.g., competitive impact statements accompanying the proposed consent judgments, in U.S. v. Philadelphia Savings Fund Society and U.S. v. Continental Group, Inc. (see infra n. 30), published at 44 Fed. Reg. 23387, 23389 and 77278, 77281 (1979).

28 See, e.g., the undertaking of IBM to the Commission of the European Communities in The Community v. IBM, (1984) 3 C.M.L.R. 147, which provided that the undertaking was not itself enforceable and that in the event of violation, the Commission's remedy was to reactivate the suspended proceeding and to rely on Arts. 85 and 86 of the Rome Treaty (id., at 151, 155). Compare the “undertakings” given in the U.K. to the Restrictive Practices Court, breach of which is punishable as contempt of court, e.g., Mileage Conference Group of the Tyre Manufacturers' Conference Ltd.'s Agreement, 6 R.P. 49, 92, 105–108, 114 (1966).

29 Since the Rules constitute agreements between the Controller and the four banks, the Controller could sue for specific enforcement. Contracts (Remedies for Breach of Contract) Law, 1970, sec. 3, 25 L.S.I. 11 at 12. In addition, enforcement may be available through the provision of the Rules (sec. 7(a)) that disputes regarding interpretation are to be resolved by the Board Chairman; his decisions would appear enforceable under the Arbitration Law, 1968, secs. 1 (definition of arbitration agreement), 23 (court confirmation of arbitral award), 22 L.S.I. 210, 215. To the extent violation of the Rules would also violate the law, the government could prosecute or could proceed against the bond required by the Magistrate. Furthermore, for one year the Attorney General has authority to reopen the discontinued criminal proceedings against the individual bank officials. Criminal Procedure Law (Consolidated Version), 1982, secs. 231–232, 36 L.S.I. 35 at 75.

30 Board Chairman Decision, pp. 1, 3–4. The U.S. consent judgments before Justice Bechor were: U.S. v. Continental Group Inc., 1980–1 Trade Cases Para. 63, 270 (E.D. Pa) (“Continental”); U.S. v. Philadelphia Savings Fund Society, 1979–2 Trade Cases Para. 62, 917 (E.D. Pa.) (“Phila. Savings”); U.S. v. The Duluth Clearing House Assn., 1964 Trade Cases Para. 71,022 (D.Minn.) (“Duluth Clearing”); U.S. v. The First National Bank of St. Paul, 1964 Trade Cases Para. 71,021 (D. Minn.) (“First National”); U.S. v. Northwestern National Bank of Minneapolis, 1964 Trade Cases Para. 71,020 (D. Minn.) (“Northwestern National”); U.S. v. American Airlines, Inc., 1985–2 Trade Cases, Para. 66,866 (N.D. Tex.) (“American Airlines”); U.S. v. Niagara Frontier Tariff Bureau, 1984–2 Trade Cases Para. 66,167 (W.D. N.Y.) (“Niagara Frontier”). In addition, a number of antitrust treatises were cited in the proceeding and excerpts presented for the record.

31 See, e.g., decisions of the Restrictive Trade Practices Board reviewed in the author's article, supra n. 2, at 440–441; U.S. v. Socony-Vacuum Oil Co., 310 U.S. 150, 218–224 (1940); Wilberforce, , Campbell, & Elles, , The Law of Restrictive Trade Practices and Monopolies (2nd ed. 1966), 172–173, 724; Smit, & Herzog, , The Law of the European Economic Community, Vol. 2, pp. 3–198–199.

32 Continental judgment, supra n. 30, secs. II (A), IV. Northwestern National judgment, supra n. 30, sec. IV (E). See also Duluth Clearing, supra n. 30, sec. IV (B). In addition, several bank decrees contain explicit requirements that the banks must institute new schedules of service charges or interest rates that are independently arrived at on the basis of their individual judgment and data, and must retain the underlying work sheets used for such determination for a specified period. Duluth Clearing, sec. V(C), (D); First National, supra n. 30, sec. V(C), (D).

33 Section 1 of the Rules, p. 183 supra. The broad description of concerted action is similar to the statutory approach, RTP Law, secs. 3, 11, 12.

34 An additional reason, applicable to U.S. consent judgments, is that a prohibition of concerted action makes future violations punishable as contempt of court, swifter than a new criminal proceeding. This reason is not applicable to the Bank Rules, but additional remedies may be available, supra n. 29.

35 Board Chairman Decision, pp. 2–3. See ABA Antitrust Section, Antitrust Law Developments, (2nd ed., 1984) pp. 5–6; Mileage Conference Group, supra n. 28, at 94–95, 101–102. However, parallel business behavior in reaction to economic conditions or to publicly-available information is not enough to prove a violation. Thus a U.S. court found no violation in the adoption of virtually identical prime interest rates by regional banks following public announcements by leading national banks, in the absence of direct communication or of conduct inconsistent with individual business interest. Wilcox Development Co. v. First Interstate Hank, 605 F.Supp. 592 (D. Ore. 1985).

36 U.S. v. Container Corp. of America, 393 U.S. 33 (1969).

37 E.g., Continental judgment, supra n. 30, sec. V (E); see Neale, & Goyder, , The Antitrust Laws of the United States of America (3rd ed., 1980) p. 53, n. 1.

38 Phila. Savings judgment, supra n. 30, secs. II(D), IV(A); Duluth Clearing, supra n. 30, sec. V; Northwestern National, supra n. 30, sec. V; First National, supra n. 30, secs. IV(B) (2), V. Several of the bank judgments also restrict the banks' activities in trade organizations. Duluth Clearing, secs. V(B), VI(A); Northwestern National, sec. V(B); First National, sec. V(B).

39 Sec. 4 of the Rules, supra p. 184.

40 See the Controller's written testimony in the proceeding before the Board Chairman supra at n. 19.

41 See supra at nn. 13–17.

42 Phila. Savings judgment, supra n. 30, sec. V(3); Duluth Clearing, supra n. 30, sec. VII; First National, supra n. 30, sec. VI; Northwestern National, supra n. 30, sec. VI. The exception for action in compliance with law is consistent with the U.S. approach to implied exceptions for government regulatory action, see n 11 supra. The exception for joint action to obtain or to modify legislation or regulation relates to decisions on the scope of political rights. See United Mine Workers v. Pennington, 381 U.S. 657 (1965); Eastern Railroad Presidents Conference v. Noerr Motor Freight Inc., 365 U.S. 17 (1961).

43 Secs. 3(a), (d), 6(g),(i) of the Rules, supra pp. 184, 185.

44 Secs. 2, 3(a)–(c) of the Rules, supra p. 184 .

45 Sec. 3(d) of the Rules, supra p. 184. This provision expresses a distinction familiar to U.S. antitrust policy regarding state action – between direct government action, e.g., state regulation of prices, which is exempt from antitrust, and purported state authorization of private concerted price-fixing, which is not. Compare, e.g., California Retail Dealers Assn. v. Mideal Aluminium, Inc., 445 U.S. 97 (1980); Schwegmann Bros. v. Calvert Distillers Corp., 341 U.S. 384 (1951); Parker v. Brown, 317 U.S. 341 (1943).

46 RTP Law, sec. 5.

47 Phila. Savings judgment, supra n. 30, sec. V(I),(2), (4)–(8); Duluth Clearing, supra n. 30, secs. V(A), VI(A); First National, supra n. 30, sec. V(A); Northwestern National, supra n. 30, secs. IV(E), V(A).

48 Sec. 6(a)–(f),(h) of the Rules, supra p. 185. With respect to the territorial limitation of Israeli statutes, see Amsterdam v. Minister of Finance (1952) 6 (ii) P.D. 945.

49 Continental judgment, supra n. 30, secs. VIII(A)(5), VI.

50 Board Chairman Decision, p. 3.

51 E.g., Niagara Frontier judgment, supra n. 30, sec. XIII.

52 American Airlines judgment, supra n. 30, sec. XI. The airline president is also barred for two years from discussing or mentioning airline fares or fare structures with a director or management employee of another airline (sec. IX); and he is barred for two years from engaging in any scheduled communication with such officials of other airlines unless he first consults his company counsel to review the proposed communication and the advisability of having counsel present (sec. X). Also, like all employees of American Airlines, he is barred for five years from discussing or mentioning airline fares or fare structures with any employee of another airline except when necessary for certain specified purposes (setting international fares under IATA, joint fares, etc.) (sec. VII).

53 Sec. 5 of the Rules, p. 184.

54 Id.

55 Supra p. 185.

56 Board Chairman Decision, supra n. 19.

57 Id. Justice Bechor recognized that the high concentration in Israeli banking increased the risk of cartel conduct (id. at 2–3). At the same time, the small size of the industry, the interrelationship of banking and government and other factors aggravated the practical problems of imposing limits on contacts among the banks, and of requiring record-keeping.

58 The notification to bank officials, provided in sec. 8 of the Rules, supra p. 185 is a familiar device for promoting compliance in U.S. decrees. See Continental judgment, supra n. 30, secs. VII, VIII; Phila. Savings, supra n. 30, sec. VI; Duluth clearing, supra n. 30, sec. VI(B).

59 Board Chairman Decision, p. 4.

60 Note that the executives who were the individual defendants in the criminal case resigned their positions in their respective banks some months after the adoption of the Bank Rules as a result of an unrelated event, the recommendations of a Judicial Commission of Inquiry into the banks' practices in manipulating the prices of bank shares over a period of years. Jerusalem Post, April 21, 1986.

* Member of the bar of Israel, District of Columbia and New York. Visiting Professor, Faculty of Law, The Hebrew University, 1978, 1984. The author was a consultant and expert witness for the Controller of Restrictive Trade Practices in the proceedings which led to the adoption of the Bank Rules of Conduct discussed in this article.

Preventing Price Fixing by Israeli Banks: Antitrust Rules in Settlement of a Criminal Case

  • Lionel Kestenbaum

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