Minnesota Break the Bonds Campaign (MN BBC) and the US Campaign to End the Israeli Occupation, along with the US Palestine Community Network and Jewish Voice for Peace, delivered a petition with more than 6,400 signatures to the Securities and Exchange Commission (SEC) on Tuesday, January 19, 2016. The petition demands that the SEC enforce its disclosure rules by taking action against the Development Corporation for Israel (DCI), the corporation which sells Israel Bonds in the United States, for failing to disclose in its sales materials that proceeds from the sale of Israel Bonds are used by Israel to violate international law.
Israel Bonds have been sold since 1951 when Israel was searching for a way to finance the new state. Since then, state and municipal retirement funds have replaced individual investors as a leading source of revenue generated from sales. Money from the sale of Israel Bonds is deposited directly into Israel’s general treasury which is then dispersed to various government ministries for different purposes, including advancing and supporting Israel’s settlement activities. We have estimated that at least twenty percent of the fungible proceeds from Israel Bond sales are used by Israel to fund West Bank projects like the Apartheid Wall and colonial infrastructure, projects which violate international law.
The State of Minnesota has purchased a $10 million Israel Bond as part of its $80 billion employee pension fund portfolio managed by the State Board of Investment (SBI). The SBI is comprised of the four top state officers (the Governor, Secretary of State, Attorney General, and State Auditor). For several years MN BBC has rallied community support to pressure the SBI to divest. In defiance of this pressure, in March 2015, the Board voted to grant the Executive Director of the SBI the authority to continue to reinvest in Israel Bonds in the sole exercise of his discretion, while also recommending that he exercise that discretion by reinvesting. It came as no surprise that the Executive Director would follow the Board’s recommendation when he renewed Minnesota’s investment in the Israel Bond for another ten-year term.
The renewal of the Bond was not the Board’s most egregious politically motivated act. We have been pointing out for several years that the Board’s investment in Israel Bonds was a breach of the SBI’s own administrative investment guidelines. The guidelines, adopted by the Board more than 20 years ago, delineated socially responsible investment criteria in the Board’s purchase of international securities. These guidelines required the SBI to group countries into three categories according to their respect for human rights, labor rights and environmental protection. Group I countries had the best protections. There were no restrictions placed from investing in them. Group II countries had some issues, but as long as the fund manager made a written statement that it would be a breach of the fund manager’s fiduciary responsibility not to make the investment, the investment could be made. Group III countries were the most problematic and required the most justification before any investment could be made.
The Board staff was required to review all countries annually. When several review periods passed without the required review having been completed, the SBI simply elected to change the interval between the required reviews to two years, and then five years. The SBI performed its last review in 2005. By the time we brought it to the Board’s attention in 2012, no country review had been conducted for more than seven years.
Additionally, although the SBI had always categorized Israel as a Group II country, no fund manager had ever made a statement that it would be a breach of fiduciary duty not to invest in Israel Bonds. We also repeatedly advised the Board that Israel’s Group II categorization was a whitewash of Israel’s actual human rights record. We requested that the Board use more recent reports from the US State Department and human rights organizations. We even submitted a Shadow Report (PDF) to the Board detailing Israel’s human rights abuses that supported a more accurate categorization of Israel as a Group III country.
At the March 2015 SBI meeting, the SBI’s Executive Director argued that since the Board had never used those human rights guidelines in its international investment decisions anyway, the Board should simply do away with the guidelines altogether. The Board agreed and its quick vote then ended the charade of caring about human rights. We pointed out to the Board that having relieved itself of the onerous and pesky human rights guidelines, the SBI was now free to make investments in the projects of any international human rights offender, from manufacturing plants in the North Korean gulag to African blood diamond trade.
The members of Minnesota’s State Board of Investment assumed that they had cleverly outmaneuvered us, freeing themselves of the persistence of our organization and our continual presence at the Board’s quarterly meetings. Immediate divestment was now off the table. Because Israel Bonds are illiquid and cannot be redeemed until maturity, in addition to being high risk and offering low returns, the Board was stuck with its investment for a full ten years. Any demand to divest could be ignored for the next decade. And now that all requirements to consider human rights, labor rights or environmental protection in making any investment decisions had been discarded, the SBI calculated that we would no longer spend our time disturbing the Board members’ politically serene conscience.
We then discovered that the prospectus that advertises Israel Bonds for sale in the US is misleading. Federal securities law (17 CFR §240.10b-5(b)) requires all material facts about a security to be included in the prospectus. The law is violated if material information is omitted. The Israel Bonds prospectus advertises that the money Israel receives from the sale of its Bonds is used for “general purposes of the state,” but omits the fact that a sizeable portion of the money is used for illegal purposes. This is at best an incomplete characterization of the use of the money, and at worst a fabrication. A prudent investor would want to know if the invested funds will be used for illegal purposes. A public pension fund fiduciary has an especially keen obligation to know as many details about the use of invested monies before putting beneficiaries’ finances at risk.
We contend that the DCI, the seller of the securities, has failed to disclose facts which would cause a prudent investor to make a different investment decision. Over 6,400 people who saw the petition agreed. The petition was delivered Tuesday.
If the SEC enforces this law and the DCI is forced to disclose that it uses the money it receives from state and municipal retirement funds for projects that violate international law, it is likely that investment fund fiduciaries and managers would not want to risk their pensioners’ money this way. The approximately eighty states and municipalities in the US which have invested billions in Israel Bonds would be wise to reconsider their investment decisions.
The DCI has already touted its sales of Israel Bonds as a repudiation of BDS. Minnesota Break the Bonds Campaign is encouraging and assisting community and human rights groups in other states to take on Israel Bonds as a BDS target. If the SEC enforces the disclosure laws, it could give those BDS groups another argument in favor of divestment.