“It’s not just business. It’s personal.” So goes the corporate slogan on the home page of stockbroking firm Davy’s website, advertising that its “purpose is to deliver world-class outcomes” for clients.
The Central Bank would beg to differ, after fining the State's largest stockbroking firm €4.1 million on Tuesday in relation to a bond trade where a group of 16 of its staff, including top executives, sought to profit personally by taking the opposite side of a trade with a client in 2014 – and failing to tell either the client or its own compliance officials.
The case has a long back story, much of which was aired in a court case that was settled in early 2016. But it centres on the sale by Davy of bonds in the defunct Anglo Irish Bank for Northern Ireland property developer Patrick Kearney in 2014 for 20.25 cent on the euro, raising €5.58 million.
Part of the proceeds were to be used to pay off a debt to US investment firm CarVal.
Undervalued
Kearney would claim in his action that the price significantly undervalued the bonds, after meeting an investment banker on the day the deal went through in November 2014 who offered to buy the bonds at 32 cent each.
He claimed he was told by Davy that the original deal for 20.25 cent had already been agreed.
While the Central Bank did not identify the case in question in its statement on Tuesday, it was immediately clear to what it was referring. It found that Davy breached rules by failing to take all reasonable steps to identify whether a conflict of interest arose in relation to the trade.
It also concluded that the firm’s controls weren’t up to scratch, as the group of 16 easily sidestepped rules relating to personal account dealing and kept Davy’s compliance function in the dark.
To make matters worse, 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.
A follow-up didn’t elicit much more. It was only during a formal investigation that a clearer picture emerged.
Davy has declined to comment publicly on the case. But an internal email from chief executive Brian McKiernan to staff said 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”.
The Irish Times has established that McKiernan is one of the 16. And while the Central Bank said that the investigation is now closed, the questions are really only beginning for Davy.
Primary dealer
This is a firm that is a primary dealer of Irish Government bonds and a regular on the ticket when the National Treasury Management Agency goes to the capital markets to raise debt.
Davy is also a corporate broker to most of the biggest firms on the Iseq, and it manages stock trades for some of the world’s leading investment houses.
These clients must now satisfy themselves that Davy can live up to its corporate catchphrase. That will require a bit more than the firm has offered by way of public comment on the Central Bank investigation: which, so far, has amounted to nothing.
Hardworking staff at the brokerage, who face the burden of being associated with a firm that has been reprimanded severely by the Central Bank and refuses to name the few who benefitted from the ill-conceived bond trade, deserve better too.
News of the €4.1 million fine – a record for the Irish stockbroking industry – came on the same day that AIB confirmed that it was repurchasing Goodbody Stockbrokers.
Davy types have scoffed privately in recent months at the thoughts of AIB taking over its smaller rival, after abortive sales of Goodbody to two separate Chinese groups in a little over two years. Ireland Inc should be relieved, however, that the AIB deal will ensure there’ll be a strong local competitor in the market.
