In a cautionary tale for directors of companies, a Beverly Hills man held liable for the failure of an Israeli bank in the 1980s filed a $212-million personal bankruptcy petition Friday in Los Angeles.
Erwin Sussman, 70, owes that much to the Bank of Israel because Israeli courts have held that he and other foreign directors of a small bank are ultimately responsible for the embezzlement by bank managers that led to its failure.
The action against Sussman and the others was one of the largest ever brought for damages in an Israeli court and the first to hold foreign directors of an Israeli concern legally responsible for crimes committed by local employees, according to banking journals.
Baruch C. Cohen, Sussman’s Los Angeles attorney, said Sussman filed under Chapter 7 of the U.S. Bankruptcy Code as a strategic move to protect his assets from a “conspiracy of gangsters,” as he calls authorities in Israel.
The 11-year legal wrangle that prompted Sussman’s filing spotlights the dangers that can exist for corporate directors. In the United States--where litigation is a way of life and the savings and loan crisis in the 1980s began putting directors at risk--companies are increasingly finding it necessary to buy policies to cover directors and officers, known as D & O insurance.
“Almost universally, people won’t sit [on boards] without knowing there’s something to protect them,” said William W. Holden, senior vice president with Aon Risk Services, an insurance brokerage in Los Angeles.
Meanwhile, Israel and other countries are starting to hold directors more responsible for the “wrongful acts” of companies, Holden noted.
But back in 1977, Sussman, a Swedish national who resides permanently in the United States, and other wealthy foreign investors did not think about demanding D & O insurance when they were recruited to help fund North American Bank in Jerusalem. In addition to Sussman, the foreign investors included Joseph Nakash of the Jordache clothing empire.
Israeli financial authorities encouraged the foreign directors to leave management of the bank to Israelis, according to legal documents. Sussman said he agreed to serve as a bank director on the understanding that an Israeli resident would serve as his “substitute” and would assume the day-to-day responsibilities.
In 1985, criminal charges were brought against three of the bank’s managers, who were later shown to have looted the institution of more than $60 million. They were sent to prison.
By then, the Bank of Israel, the nation’s central bank, had taken control of North American Bank, which collapsed in 1988. The failed bank’s receiver sued Sussman and 23 other defendants, seeking to hold them personally liable for North American Bank’s losses. Sussman in turn sued the Bank of Israel, contending that banking authorities had known about the embezzlement but did nothing to stop it.
After an Israeli court found Sussman liable, the Israeli receiver sued in the United States. A hearing in that matter had been scheduled for Monday but was halted as a result of Friday’s bankruptcy filing, Cohen said. Lawyers for the Bank of Israel could not be reached Friday.
The filing lists Sussman’s assets at $1.1 million. But most of that, Cohen said, consists of money owed to him in a previous business deal that Sussman contends he cannot collect. Sussman lives on Social Security payments of $1,725 a month, Cohen said, adding, “this 11-year lawsuit has wiped him out.”
“Mr. Sussman certainly does not want to hurt the state of Israel,” Cohen said, noting that as a young man Sussman served in the Israeli Army. “But there was such a conspiracy of gangsters, he wants to set the record straight.”