Davy’s secret partnership leaves it fighting biggest crisis in decades

When the Central Bank of Ireland told the partners of Bloxham heading into the final weekend of May in 2012 that the game was up for the country's then oldest stockbroker as it cratered under the weight of an accounting scandal, Davy stepped in to clean up the mess.

Over the weekend, Davy, which had already agreed months earlier to buy Bloxham’s private clients business, hammered out a deal to complete the purchase and also take over its far smaller rival’s asset management arm, ensuring a seamless transition for customers.

Davy has since bought 10 other businesses, including what was once AIB Investment Managers, the Irish arm of UK asset manager Sarasin and Danske Bank's wealth unit in Northern Ireland, becoming a clear winner as the rising cost and burden of regulation drove a wave of deals across the industry.

For much of the time, however, Davy has been in the crosshairs of regulators over its own controls. On Tuesday, the Central Bank laid bare the outcome of its investigation, fining the country's largest stockbroking firm €4.1 million as it found that 16 staff, including top executives, had sought to make a profit by taking the other side of a bond deal involving a client – without telling him or the firm's compliance team.

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“In permitting the transaction to proceed, Davy acted in a reckless manner,” the Central Bank said, adding that the brokerage breached EU market rules by failing to identify and manage a potential conflict of interest with the client and by keeping its compliance team in the dark at the time.

To make matters worse, Davy “provided vague and misleading details and wilfully withheld information” when details of the transaction emerged in the public domain. It was only after the regulator started a formal investigation that the bank got a true picture and realised that Davy had “presented information in such a way as to make the involvement of certain individuals appear more central to the transaction than in fact was the case”.

“There was a clear strategy in Davy to push back against the investigation and really drag things on in the hope that it would run out of steam,” said a source familiar with the approach. “That has backfired spectacularly.”

Identities withheld

While Davy and the Central Bank have declined to identify the 16 individuals involved, The Irish Times reported on Wednesday that the list includes the group's chief executive Brian McKiernan, deputy chairman Kyran McLaughlin, head of bonds Barry Nangle, former chief executive Tony Garry and one-time head of institutional equities David Smith.

McLaughlin, Garry and Smith declined to comment, while McKiernan and Nangle have not responded to efforts to secure comment.

McKiernan, the firm’s main shareholder with an estimated 13 per cent stake, would tell staff in an email immediately after news of the severe regulatory reprimand broke that while there had been “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”.

He would be forced by the Central Bank later that evening to reissue the memo, retracting the reference to “no findings of actual conflict of interest or customer loss”.

Pressure has mounted in recent days, as the Minister for Finance and major clients, including the National Treasury Management Agency (NTMA) and companies on the Dublin stock market, expressed concern about the scandal and members of the Dáil called for answers.

In an effort to contain the growing crisis, Davy issued a statement just before 4pm on Wednesday saying that its board has commenced a detailed review of the regulator’s findings and will take “appropriate action”.

This has put the spotlight on Davy’s four non-executive directors who have been given the task of carrying out the review.

These are chairman and former NTMA chief executive John Corrigan; Ronan Murphy, a former senior partner of PwC Ireland; Ronan Molony, one-time chairman of solicitors McCann FitzGerald; and Patrice McDonald, a former executive with Barclays. Bernard Byrne, the former AIB chief executive who joined Davy as deputy chief executive and head of capital markets two years ago, is also expected to play a major role.

"It is unbelievable that Davy is still not holding its team, at the most senior level, accountable and that we have not seen any resignations," Pearse Doherty, Sinn Féin's finance spokesman said in the Dáil.

Anglo bond

The case at the centre of the debacle relates to the handling in 2014 of the sale of bonds in the defunct Anglo Irish Bank by Northern Ireland property developer Patrick Kearney. The transaction was the subject of a High Court action that was settled in 2016.

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.

Loans secured on the bonds were subsequently sold to an affiliate of US debt investment firm CarVal. Kearney engaged advisory firm LeBruin Private, co-founded by former Anglo Irish executive Tom Browne, in 2014 to help him deal with the debt.

Following discussions involving Kearney, LeBruin and Tony O’Connor, a Davy employee at the time, it was decided that Davy would sell the bonds to discharge Kearney’s €2.36 million debt to the CarVal unit and leave a profit to be divided between him, LeBruin and Davy.

The bonds were sold for 20.25 cent in the euro, realising €5.58 million. The consortium of 16 Davy staff would later emerge as the buyers of the bonds, unknown at the time to Kearney or to Davy’s own compliance function. Sources said that the 16 used a structure to carry out the deal that became known as the O’Connell Partnership.

Kearney claimed in his legal action that the price secured significantly undervalued the bonds. While his case was settled in early 2016 – for a figure understood to be between €2 million and €3 million – the Central Bank was only getting started.

Wall of silence

A spokesman for Davy declined to comment on the size of the settlement or whether it was borne by the firm or the consortium of 16. He also declined to say whether the €4.1 million fine in the firm would ultimately be recouped from individuals or if any of them have been – or will be – sanctioned.

The Central Bank said the consortium sold a "large tranche" of the bonds three weeks after acquiring the securities to "a fund manager". New York hedge funds Anchorage Capital and Elliott Management were among the most active buyers of the otherwise illiquid bonds at the time, betting – correctly, as it turns out – that they would make millions as Anglo's successor, Irish Bank Resolution Corporation (IBRC), went through liquidation.

While holders of junior bonds in Irish banks suffered €15 billion of losses during the financial crisis, a small group of investors, mainly hedge and distressed debt funds, refused to lie down in 2010 when Anglo sought to buy back some of its notes at 20 cent on the euro – even as the Government threatened to impose bigger losses on those that held out.

Remaining junior Anglo bondholders, including whoever ultimately owned the notes at the centre of the O’Connell Partnership trade, were made whole at the end of 2019 as IBRC’s liquidation generated higher proceeds than had been expected when the plug was pulled in early 2013.

Sources say that some of the 16 continued to hold the Anglo bonds for some years after the 2014 trade. A spokesman for Davy declined to say whether any still held bonds when IBRC’s liquidators effectively took them out at par value.

Asked by The Irish Times whether there have been other instances where Davy staff were on the other side to a trade without the knowledge of clients or compliance officials, a spokesman said: “There are no other known occurrences, but this is likely something the board would consider in the review now under way.”

Disclosure failures

The bond-deal debacle is the biggest crisis to engulf Davy since 1993 when the firm was reprimanded and fined £150,000 by the London Stock Exchange after its failure to disclose that it failed to sell a large portion of 25 million Greencore shares being disposed of by the Government.

Instead, McLaughlin and three fellow Davy partners bought 4.5 million of the unsold shares. The exchange’s disciplinary committee said at the time that: “Davy’s conduct was, in some respects, detrimental to the interests of the Stock Exchange.” Davy’s parent at the time, Bank of Ireland, had to step in and buy all the unsold Greencore shares. The bank later sold these shares into the market.

Founded in 1926 by brothers James and Eugene Davy, of a family originally associated with a chain of Dublin pubs, the firm would grow in the following decades by tapping into the emerging Catholic middle class in an industry that was typically run by – and catered towards – a Protestant business elite.

Davy would handle its first initial public offering (IPO) listing on the Dublin stock market in 1964. But at the time of the Irish Stock Exchange’s (ISE) €158 million sale to pan-European bourse operator Euronext, Davy was the biggest beneficiary. It had received a 37.5 per cent stake a few years earlier as the ISE abandoned an equally shared liability structure among a small group of brokers to carve up the company along the lines of how much business they were putting through it.

Bank of Ireland acquired a majority stake in Davy in 1988 and, while it would go on within four years to increase its equity holding to 90.4 per cent, the bank never secured most of the voting shares. It would sell its interest back to management and senior staff in 2006 for €316 million, at a time when the firm’s private clients division, then led by McKiernan, ruled the roost. McKiernan, who joined Davy in 1989, succeeded Garry as chief executive in 2015.

Clarification awaited

The scale of Davy influence across Ireland plc is reflected in the fact that it is a corporate broker to 13 of the Iseq-20 companies and is recognised by the NTMA as the only Irish-owned primary dealer in government bonds.

The NTMA, which regularly uses the State’s largest securities firm as part of a consortium of investment houses to market large bond sales, said on Wednesday that it noted the “very serious” Central Bank findings and was awaiting a response from the brokerage.

Bank of Ireland said that it has sought clarification from Davy, a corporate broker to the lender, on how the firm will address failures that led to the fine.

Other major clients Permanent TSB and housebuilder Glenveagh Properties have also expressed concern and said they were "monitoring" the situation, in statements issued in response to questions from The Irish Times.

However, a number of others, including Smurfit Kappa, Ryanair and Flutter Entertainment, who hired Davy to partly manage multimillion-euro share sales last year, are keeping schtum.

By contrast, Flutter's Betfair unit moved quickly this week to publicly drop horse trainer Gordon Elliott as a brand ambassador after a picture of him sitting on a dead horse went viral over the weekend.

Market sources say major international fund managers that use Davy, including Capital Group, Fidelity and BlackRock, will be seeking assurances. "These guys all have formal reviews with firms that they trade with at least on an annual basis, discussing how they're serviced, how both sides performed, and other issues," said an investment banking source. "Discussions around governance, probity and regulatory issues are all part of that."

Davy does not publicly disclose its financial affairs as an unlimited company. However, it is understood the group turned in a pretax profit of more than €40 million last year and it would have paid out about 40 per cent of this by way of bonuses. Industry sources put a conservative valuation on the business, which has about 700 staff, of between €350 million and €400 million.

Davy said that board, management and staff “renewal” in recent years – as well as investment in compliance, risk, governance and “people management” – mean that the directors are “satisfied that issues that occurred in 2014 could not recur”.

"Anybody who says that is naive," said Niamh Brennan, founder and academic director of the University College Dublin Centre for Corporate Governance. "The whole point of risk management is to always suspect that something could happen."