Experts Opinions

Dr. A. Blass

1. Abstract

•1.1   The framework of this analysis

I, the undersigned Dr. Asher Blass, hereby present this expert opinion at the request of attorneys Michael Kirsch, Dror Erez Ayalon and Dana Stier, the legal representatives of the defendants. I am giving this expert opinion in lieu of testimony in court, and I hereby declare throughout I fully understand that for the purposes of the criminal law directives concerning perjury, the laws that apply to this expert opinion, signed by me, are the same as for sworn testimony in court.

Details of my professional experience are attached as Appendix A.

On August 12, 2001, the State of Israel filed indictment 40258/01 against Israel Perry and the Organization for the Implementation of the Social Security Treaty Israel-West Germany (hereinafter - the organization). In the court ruling handed down on October 24, 2007, Mr. Israel Perry and the organization (hereinafter - the defendants) were convicted on a various offenses, including the theft of insurance premiums (paid up-front as single premia) grossed up in advance that were (at least in part)  not transferred to an independent insurance company, i.e. one  not controlled by the defendants.

The following expert opinion is presented in accordance with the timetable set by the court in the framework of the sentencing arguments phase in this trial, and specifically concerning the conviction regarding the theft of insurance premia. In this expert opinion, I have concentrated mainly on clarifying the question of whether any financial harm was caused to clients of the organization, or if the defendants derived any benefit to the detriment of the clients as a result of the premia not being paid, (to the extent that they were not paid), to an independent insurance company, not controlled by the defendants.

•1.2   Data and background material

In order to prepare this expert opinion I extracted from the company's computerized database all the data I required, to the best of my professional judgment, and examined documents that, to the best of my professional understanding, were required for the purpose of this expert opinion and its conclusions.

This expert opinion does not presume to examine legal aspects related to the indictment.

1.3       Brief description of the organization's activity

The organization was founded in 1983 in order to assist residents of Israel to realize their rights to register for a pension plan from the Deutsche Rentenversicherung Bund based on a 1973 treaty. Under the terms of the treaty, Israeli citizens could, under certain conditions, become entitled to receive a monthly pension contingent upon the remittance of retroactive payments for the years 1956-1980.

The organization assisted its clients in registering for the plan in Germany, advised them or determined for them the optimum way to remit the retroactive contributions, helped clients meet the terms of the program, and handled the problems that arose during the submission of various documents to the authorities in Germany. In addition, in order to assist some if its clients[1] to finance the payment of the abovementioned retroactive contributions and other expenses, the organization arranged for loans using the services of two affiliated companies - "BGA" and "BGF". In addition, since there was a very substantial risk that some of those joining the plan would die before the end of the loan period the organization provided the clients (and their estates) with an exemption from repaying the loans in the event of their death, and to this end collected predetermined insurance premiums based on calculations made by actuary Yitzhak Blass, who was hired for this purpose by the defendants.[2]2 Some of these insurance premiums were not transferred to unaffiliated insurance companies; instead the organization and its affiliates "self insured," i.e. assumed the risks directly or purchased insurance through an affiliated company. According to the court ruling, the defendants were convicted of stealing some of these monies, because they were not transferred to an external, unaffiliated insurance company.

•1.4   Main findings

According to the material I studied and the financial data I examined, I conclude that no economic damage was caused to the organization's clients and that they were not harmed by the defendants' actions. Indeed, the opposite is true. This conclusion is based on the following main findings: 

• A. The clients did not suffer any losses, as their financial wealth improved significantly and no financial loss was caused as a result of the fulfillment of the agreement via the organization. Furthermore, the clients chose to use the organization's services, particularly the credit plans, and not the services of other entities that they could have used to become eligible for the pension from Germany, a fact that indicates a preference for the organization's methods of operation, and for its credit plans in particular;

• B. An additional source of benefit for the clients stems from the fact that they were not exposed to the many risks that were involved in the initiative, and those risks were borne by the defendants alone. The risks related to varying interest rate differentials, which could have caused the defendants heavy losses. There was likewise a risk with respect to the continued development of the pension arrangement in Germany. In retrospect, the entrepreneurs were effectively "betting" (without this endangering the clients) that the pensions would grow, that interest rates would decline, and that the mortality rates would be moderate - the bet paid off, but we know this only in retrospect. If the bet had not succeeded, the defendants could have suffered substantial harm; but the clients would not have been affected.

• C. The defendants were found guilty of stealing monies that were actually used for "self-insurance," while, as noted in the court's decision, those monies should have been transferred for insurance via a third party insurance company.[3] Still, the financial findings show that not only was the pension recipients' situation improved, relative to a situation in which they had not registered for the plan at all - their situation was not worse than it would have been had the entrepreneurs purchased insurance policies for the clients via a third party insurance company, instead of the self-insurance, and for the following reasons:

• 1. While insurance to ensure the repayment of the loan could have indeed been arranged via a one-time premium to an independent insurance company, the relevant actuarial formulas presented in the clients' agreements indicate that the cost of such insurance would have been higher than the cost of self-insurance. Indeed it is often the case that it is more reasonable from an economic point of view to undertake self-insurance, and in many cases this reduces the cost to the insured. Since third party insurance would have cost more from the outset (ex ante), from an economic perspective the clients suffered no financial loss.[4]

• 2. If the clients had received an inferior service, they (or some of them) could theoretically have been harmed (ex ante) by the exemption via non-recourse loans, even if they had paid less for it (i.e. for the cost of self-insurance, through which the exemption was effected(. This would have been possible if the exemption was less valuable (to customers) than third party insurance. However, from an economic perspective, an exemption (via non-recourse loans) is better for clients than insurance, such that they suffered no economic damage.

• D. From an economic perspective, the value of BGA's theft does not exceed zero. The court ruling noted that according to an ex post[5] calculation, as of December 31, 2004, BGA had collected the net cash sum of NIS 270 million deutsche marks[6] for the premia, calculated as follows: A total of DM 514 million was collected and the court reduced this sum by approximately 38 million DM (for transfer to special clients); by approximately 42 million DM (for balance payments to BGF); by approximately 38 million DM (for investments transferred to BFA); and by approximately 125 million DM (for legal fees).[7] However, that calculated differential of 270 million DM cannot be an estimate of profits derived from the self-insurance mechanism, as it does not take into account either the timing differences related to when receipts and disbursals were made so that the calculation presumes that timing does not matter, i.e. means that relevant discount rates is assumed to be zero. Moreover the calculation ignores the cost that would have been recorded had BGA purchased complementary insurance for BGF's loans from an independent insurance company. After taking both these factors into account, it turns out that the differential in terms of current value is negative. In other words, from a cash flow perspective, BGA did not profit from the self-insurance for BGA's debt. Therefore, from an economic perspective, the value of the sum stolen, according to the court ruling, does not exceed zero.

The structure of the expert opinion is as follows:

A.  In section 2 I will describe the background to the establishment of the organization, the development and nature of its activities and sample statistics.

B.   In section 3 I will demonstrate how the clients benefited, and will explain why the fact that the clients had other ways of obtaining eligibility for a pension, whether via the organization or via other means yet chose the loan program, shows that the loan program in the framework of the organization was preferred.

C.  In section 4 I will explain how the clients benefited from the initiative, on the background of the many risks the plan involved, which were borne by the defendants and not by the clients.

D.  In section 5 I will explain why, from the outset, the purchase of an insurance policy from a third party could have cost much more and would certainly not have benefited the clients. I will also show why the exemption should be more valuable than insurance from third party, from an economic perspective under the circumstances of the case;

E.   In section 6 I will show why, ex-post, the cash flow to BGA is less than zero, in light of the timing differences and the need to cover the costs of supplementary insurance for BGF. 

[1] Some 9,000 of the clients realized their eligibility for a pension via a loan, and approximately 3,700 financed the retroactive contributions independently, and in general did not need loans.

[2] The author of this expert opinion has no familial or other prior relationship with Mr. Yitzhak Blass.

[3] From an economic standpoint, in everything concerning the venture that is the subject of the indictment, it is impossible to clearly differentiate between the insurance action and the financing and other activities because they were executed as a "package" whose components cannot be separated, and the attempt to make any such separation is arbitrary, from an economic perspective. Even so, for the sake of caution, this expert opinion will relates to the separation as presented in the court's decision.

[4]  In this context, the fact that the sum of the insurance was greater than the loan is not a deviation from an economic perspective and similar phenomenon exists in other cases.

[5] From an economic perspective, it would have been fitting to measure the anticipated profits from the outset, as an ex post calculation attributes the effect of unexpected developments to decisions and moves decided in advance.

[6] Hereinafter - DM.

[7] Cf. the court ruling, pp. 10,326-10,335