€4.1m Davy fine ‘potentially problematic’ for criminal investigation, enforcer warned

The Central Bank’s fine against stockbroking firm Davy over the 2014 bond-dealing controversy was “potentially problematic” in considering a criminal investigation into the matter, the State’s corporate enforcer has said.

In a previously unpublished March 2021 letter to Tánaiste Leo Varadkar, the Director of Corporate Enforcement, Ian Drennan, raised possible complications around initiating a criminal investigation over the bond-dealing given the €4.1 million fine against Davy in March 2021.

Last year, Davy was found to have breached market rules after an investigation by the Central Bank discovered that the firm acted as both broker and buyer in selling Anglo Irish Bank bonds owned by a client, Belfast businessman Paddy Kearney, in 2014 to a consortium of 16 staff, including top executives, without telling him or the firm's own compliance team they were the buyers.

The regulator concluded that Davy acted “in a reckless manner” by failing to identify and manage a potential conflict of interest between the firm’s employees and the client, adhere to personal account dealing arrangements and ensure transparency with its compliance officials.

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The fine, a record against a broker, led to the departure of senior managers and employees and the sale of the firm to Bank of Ireland in a three-part deal worth more than €600 million.

Criminal activity

The Garda National Economic Crime Bureau has recently upgraded a review of the circumstances around the bond deal into a formal criminal investigation.

A Garda spokesman said it did not comment on ongoing investigations. Davy has pointed out that the firm itself is “not the subject of a Garda investigation”.

Following the fine and political commentary around the controversy, Mr Drennan wrote to Mr Varadkar to set out whether the Office of the Director of Corporate Enforcement (ODCE) might have a role in investigating any potential company law breaches arising from the deal.

The Central Bank said it did not find any suspected criminal activity when investigating Davy that would have obliged it, by law, to make a report to the Garda or the ODCE.

In his March 11th, 2021, letter to Mr Varadkar, Mr Drennan wrote that “at this juncture” the issues “would appear principally to be issues of financial services law” rather than potential breaches of company law, the area his office is responsible for investigating.

In the letter – released by the Department of Enterprise, Trade and Employment under the Freedom of Information Act – Mr Drennan noted the bank had told an Oireachtas committee that week that it intended to have "a proactive discussion" with the Garda and the ODCE.

Supporting evidence

He told the Tánaiste that should any information come to his office suggesting breaches of company law, that information and any supporting evidence would be “careful considered”.

Mr Drennan raised possible difficulties with commencing a criminal investigation.

He pointed Mr Varadkar to the 1942 Central Bank Act noting that where the bank imposed a monetary penalty for an offence under a law of the State, “the financial service provider or other person concerned is not liable to be prosecuted or punished for the offence under that law”.

“The effect of this provision is potentially problematic,” he wrote.

"For that reason, in the event that this office or An Garda Síochána or another agency was, at some point in the future, to consider that it had grounds for initiating a criminal investigation on the same set of facts, the implications of a fine having previously been imposed on Davy would have to be carefully considered."

In a follow-up letter sent the next day, Mr Drennan told Mr Varadkar that his office received a letter from the bank the previous evening saying that the 1942 Act prevented it from disclosing any confidential information in relation to the enforcement action against Davy.

Asked by The Irish Times last week whether the ODCE was carrying out an investigation or review of the 2014 bond-dealing, a spokeswoman for the office said: “The ODCE is subject to strict confidentiality obligations and, accordingly, cannot comment on individual cases.”

A spokesman for Davy said that it “has not been contacted by the ODCE nor been asked to provide it with any information”.