Bombshell that spelled end for Bloxham

BACKGROUND:THE OTHER partners at Bloxham Stockbrokers knew that the firm's financial partner Tadhg Gunnell (36) had been dealing with the Central Bank's concerns about the firm's capital position since early 2012.

Gunnell himself had acknowledged that the capital position was “tight” but the other six individual partners claim that at no stage were they aware that the country’s oldest and third largest stockbroker was undercapitalised.

These were the views of Patrick Dempsey, a partner and Bloxham’s head of institutional equities, as outlined in an affidavit to the High Court in the firm’s successful application to appoint a provisional liquidator yesterday.

The appointment of Kieran Wallace of KPMG as liquidator marks the end of a stockbroker that can trace its history back to the 1840s.

Dempsey’s affidavit sets out how matters came to a head last week when the Central Bank was forced to act on accounting irregularities uncovered at the firm and to direct the broker to cease operations ahead of the sale of two of the firm’s four businesses – the private clients and asset management divisions – to rival firm Davy.

Dempsey, one of three partners not moving to Davy with the sale of the two businesses, is one of seven unlimited partners at Bloxham who face personal liability for any shortfall at the firm.

Only the partners’ account of events has emerged. Calls to Gunnell have not been returned. Contact with The Irish Times by someone close to him suggests that he won’t be commenting.

Late on the afternoon of Wednesday, May 23rd, Gunnell – an accountant and Bloxham’s finance and compliance partner since 2005 – dropped a bombshell on the firm’s other partners.

Until then they believed that the firm had adequate capital to meet the Central Bank’s threshold of €5.6 million needed to ensure that they met the regulatory conditions of their stockbroking licence.

Gunnell’s disclosure would reveal a capital hole of €5.3 million in the firm’s balance sheet. For a firm that made a profit for its partners of €2.4 million in 2010 on revenues of €25.8 million after expenses of €23.4 million, this is far from an insignificant sum.

It is even more significant considering that the firm is facing claims for damages of €20.5 million from investors arising from litigation next month in London involving US investment bank Morgan Stanley over the sale of the controversial Saturn bonds to about 155 retail investors in 2005.

According to Dempsey’s affidavit, Gunnell outlined the capital shortfall to the partners, saying there had been an accounting misrepresentation of trading losses of €2.6 million that had been incorrectly recorded as an asset.

He also told them that although in April 2011 Bloxham had pre-paid €1 million in income tax obligations for the partners and that a payment had been made to each partner’s unlimited liability company (through which they owned their interest in Bloxham) totalling €1.7 million to reduce their debts to National Irish Bank, these payments were incorrectly recorded as assets on Bloxham’s books.

But Dempsey’s affidavit doesn’t just point a finger at Gunnell.

“The partners relied on internal reports provided to them by Mr Gunnell, together with audited accounts provided by Bloxham’s external auditors Deloitte, none of which indicated any inaccuracy in the firm’s stated capital position. The realisation of the true state of affairs has come as a total shock to me and to the other partners of Bloxham,” said Dempsey.

The other partners then informed the Central Bank of the “accounting discrepancies”, engaged KPMG to investigate and actively engaged with NIB.

Following Gunnell’s disclosures, Bloxham managing partner Pramit Ghose met the Central Bank on Thursday, May 24th, and again on Friday, May 25th.

Ghose told the regulator he believed the firm could meet its capital requirement as in March it had agreed to sell its private client division to Davy for €2.2 million plus future earnings over three years forecast to be worth between €3 million and €5 million.

At 5pm on the Friday the Central Bank directed Bloxham to cease operations immediately.

On Sunday last, in an attempt to fill the capital hole left by the accounting irregularities and to vary or discharge the regulator’s direction to allow Bloxham’s remaining business to operate, the firm completed the sale of the private clients division to Davy.

Bloxham dropped the future earn-out clause, foregoing up to €5 million, to accelerate the deal.

In addition, Dempsey said the firm agreed to sell the asset management business to Davy for €3.6 million subject to withholding tax of 15 per cent being applied.

On Wednesday more than 75 per cent of Bloxham’s partners consented in writing to a general meeting and yesterday morning at 8.30am the partners agreed, on the basis that Bloxham couldn’t pay its debts as they fell due and it had ceased to carry on a substantial part of its business, that the firm should be put into liquidation.

Dempsey told the court that the net liability of Bloxham stands at €13.99 million. “It is clear that Bloxham is insolvent,” he said.

Bloxham The Figures

Bloxham has said that it has a net liability of €13.9 million and capital shortfall of €5.3 million arising from the accounting irregularities discovered last week.

The firm has liabilities of €24.8 million, including an overdraft with National Irish Bank of almost €8.5 million. The firm owes the bank about €20 million in total.

A further €2.3 million is owed to the Revenue Commissioners.

The firm says Bloxham’s financial assets would realise €2.3 million, its current assets €5.8 million and its debtors €2.7 million.

Bloxham partner Patrick Dempsey said the firm anticipates a “significant financial return” if its litigation against Morgan Stanley over the Saturn investment bonds is successful. This expected return is not included in the assets.

Bloxham sold about €30 million of the Saturn bonds created by German bank Dresdner to 155 retail investors in 2005. The termination of the bond in 2009 led to losses of 97 per cent on the bonds.

Mr Dempsey said the firm had paid out about €14 million in compensation and legal fees to investors arising from the bonds.

The investors’ case against Morgan Stanley and Bloxham is due to begin in the High Court in London on June 18th, he said.

Bloxham’s accounts as submitted for previous years show that it made a profit of €7.7 million for its partners in 2007, falling to €7.3 million in 2008, €5 million in 2009 and €2.4 million in 2010.

Revenues fell from €31.1 million in 2007 to €22.6 million in 2011, according to the accounts, which do not take account of the irregularities.

The firm’s accounts show it made a loss of €362,600 last year.

Mr Dempsey said that Bloxham, one of seven owners of the Irish Stock Exchange, valued the firm’s investment in the bourse at €6.25 million in its 2011 accounts.

The cost of operating Bloxham, which had 75 staff, averaged €1.845 million a month between January and April of this year, and the firm said that projected monthly costs have reduced to €484,000 following staff lay-offs.

Financial partner Tadhg Gunnell holds his share in Bloxham through an unlimited liability company, TFG Securities. SIMON CARSWELL