Israeli Banks Face Lawsuit Over Investors' Losses in Real Estate Collapse

Trustees for the collapsed "Personel" real estate group are seeking to sue two Israeli banks, Mizrahi Tefahot and Discount, for over NIS 480 million ($128 million). The trustees allege the banks were negligent in supervising trust accounts, allowing fund transfers that did not align with the stated purposes for which the money was raised. The Personel group, controlled by Alon Moran and Elyashiv Lahav, collapsed approximately two years ago after raising about NIS 739 million ($197 million) from hundreds of private investors, promising annual interest rates of around 9%. The funds were intended for urban renewal projects, but the company ceased payments in 2024, leading to its downfall. Investigations by the trustees revealed that only about NIS 214 million ($57 million) has been returned to investors, leaving a remaining debt of approximately NIS 525 million ($140 million). Trustees Shlomi Filiba and Dorita Levy Tyler previously focused on recovering funds from the group's owners and related entities, but progress has been limited. The group is suspected of operating as a Ponzi scheme, using new investors' money to pay off earlier ones. A formal investigation by the Israel Securities Authority and Lahav 433 into fraud, theft, money laundering, and unlicensed fundraising is nearing completion.

The lawsuit against the banks, if approved, could set a significant precedent in Israel, where such cases are rare. Internationally, however, banks have faced substantial penalties for their involvement in investor fraud. For instance, following Bernie Madoff's massive Ponzi scheme, Bank Hapoalim settled for $9.5 million in the U.S. for its role in managing some of Madoff's investment funds. J.P. Morgan paid $1.7 billion to U.S. authorities in 2014 for failing to prevent money laundering and report suspicious activity related to Madoff's accounts. In the Stanford Financial Group fraud, five banks paid about $1.6 billion in settlements to victims. A particularly relevant case is the Singularis affair in the UK, where a court found an investment bank liable for negligence, ordering it to pay $153 million for allowing unauthorized fund transfers. The banks in the Personel case are expected to argue they acted on the instructions of authorized signatories and were not obligated to scrutinize every transfer against investment agreements. Key legal questions will revolve around the banks' knowledge of the accounts' purpose, the presence of warning signs, and whether intervention could have prevented the investors' losses.