The Minister for Finance Paschal Donohoe has called on Davy to issue a public statement after the brokerage was hit by a €4.1 million Central Bank fine in relation to a bond deal where a group of 16 staff, including senior executives, sought to make a profit without telling the client or the firm's own compliance officers.
The fine, announced on Tuesday, is a record for an Irish stockbroking firm. Davy has refused to confirm the names of individuals involved, believed to include current and former employees.
The brokerage and the Central Bank declined to comment on whether the regulator plans to pursue any action against individuals.
“The behaviour that has been detailed by the Central Bank of Ireland in relation to Davy falls gravely short of the standards of behaviour that are expected of leaders in position of financial responsibility,” Mr Donohoe said in response to questions at a press briefing about AIB’s planned takeover of Davy’s smaller rival Goodbody Stockbrokers.
Mr Donohoe said that he is “particularly concerned” that the incident occurred in the wake of the financial crisis. “I believe it is appropriate that Davy publicly comment on the statement that was made by the Central Bank today,” he said.
The case is known to relate to the handling of the sale in 2014 of subordinated bonds in the then-defunct Anglo Irish Bank by Northern Ireland property developer Patrick Kearney, which had been the subject of a High Court action that was settled in early 2016.
Documents
Mr Kearney, who was part of the so-called Maple 10 investors who bought shares in Anglo in 2008 with loans from the bank, was separately lent money by the lender the following year to buy junior bonds in the company that had a par value of €27 million, according to court documents for the previous legal case.
Loans secured on the bonds were subsequently sold to an affiliate of US debt investment firm CarVal, called Stapleford Finance. Mr Kearney engaged advisory firm LeBruin Private, co-founded by former Anglo Irish executive Tom Browne, in 2014 to help him deal with his debt to Stapleford.
Following discussions involving Mr Kearney, LeBruin and Tony O’Connor, an employee of Davy at the time, it was decided Davy would sell the bonds for a price which would discharge the €2.36 million debt to Stapleford and leave a profit to be divided between him, LeBruin and Davy.
The bonds were sold for 20.25 cent in the euro, realising a total price of around €5.58 million. The consortium of 16 Davy staff would emerge on the other side of the trade as the buyers of the bonds, which was unknown at the time to Mr Kearney or Davy’s own compliance function.
Mr Kearney claimed in his action that the €5.58 million price significantly undervalued the bonds, as he met with an investment banker on the day the deal went through in November 2014 who offered to buy the bonds at 32 cent each. He said that Davy persuaded him that the original deal for 20.25 cent had already been agreed. The developer had an execution-only account with Davy.
Investigation
The legal case was settled in early 2016. The subsequent Central Bank investigation has found that Davy breached EU rules – known as the Markets in Financial Instruments Directive (Mifid) – by failing to take all reasonable steps to identify whether a conflict of interest arose in relation to the trade.
It also found that Davy “did not have a robust control framework in place to prevent employees from entering into personal transactions that could give rise to a conflict of interest”.
The consortium circumvented the firm’s personal account dealing framework completely, such that Davy’s compliance function first became aware of the transaction four months later, when certain information about it became public.
Davy provided “vague and misleading details and wilfully withheld information that would have disclosed the full extent of the wrongdoing” when it engaged initially with the Central Bank on the case, the regulator said.
“In permitting a group of employees to pursue a personal investment opportunity, conflicts of interest were not properly considered, the rules in place in relation to personal account dealing were easily sidestepped and Davy’s compliance function was kept in the dark,” said Seána Cunningham, the Central Bank’s director of enforcement and anti-money laundering.
“This case serves as an important reminder that conflicts of interest are an inherent risk to all regulated entities. When not properly managed, they pose a risk to investors and diminish market integrity. Where investment firms permit employees to engage in personal account dealing - to trade for themselves rather than for a client - the risk of conflicts of interest arising is heightened.”
Davy chief executive Brian McKiernan told staff in an internal email on Tuesday that “while there are no findings of actual conflict of interest or customer loss, there were significant shortcomings in how the transaction was conducted, particularly in the context of the policies and controls relating to the management of potential conflicts of interest”.
“We deeply regret and are sorry for the shortcomings that gave rise to the findings which could not recur today,” he said in the email, seen by The Irish Times. “Davy is an organisation that consistently looks to evolve and improve. Since 2014, Davy has gone through a process of board and management renewal with a significant investment in people, risk management, structures, policies and processes.”
The board of Davy oversaw two independent reviews of the issues arising from the transaction, the Central Bank said.
Following on from this, Davy introduced a revised conflicts of interest policy and revised personal account dealing rules in May 2016.
