Compliance ‘kept in the dark’ on deal by Davy staff

THE country’s biggest stockbroker, Davy, has been reprimanded and fined €4.13m by the Central Bank of Ireland for four breaches of the European Communities (Markets in Financial Instruments) Regulations 2007 (MiFID).

The fine is the biggest ever for an Irish stockbroker and the biggest here under MiFID regulations. Regulators are understood to have been particularly alarmed by the ease with which staff bypassed the Davy compliance function, and by the firm’s failure to engage properly with regulators once the case was under investigation.

The Central Bank said it could not comment on the individual incident involved in the case.

However, it is understood to relate to a 2014 incident when businessman Patrick Kearney and his Kilmona Holdings Ltd sold Anglo Irish Bank bonds via Davy at a steep discount in order to settle a debt – without knowing the buyers were Davy employees who went on to sell the assets at a profit.

A subsequent legal action taken by Mr Kearney against Davy was settled a number of years ago, after the details of the case were laid out in front of the High Court.

The Central Bank said its investigation arose from a transaction that a group of 16 Davy employees – including senior executives – undertook in a personal capacity with a Davy client in November 2014.

“In permitting the transaction, Davy prioritised facilitating an opportunity for the [buyers’] consortium to make a personal financial gain over ensuring that it was complying with its regulatory obligations,” regulators said.

“The transaction highlighted a weak internal control framework within Davy in relation to conflicts of interest management and personal account dealing.”

Central Bank Director of Enforcement and Anti-Money Laundering Seána Cunningham

said Davy fell well below the standard required in meeting its regulatory obligations in relation to conflicts of interest and personal account dealing.

“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,” she said.

“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.”

She said Davy’s “lack of candour” when first reporting the matter to the Central Bank was as an aggravating factor in determining the size of the fine.

Davy has declined to comment on the fine, however, in a memo to staff CEO Brian McKiernan said: “We deeply regret and are sorry for the shortcomings that gave rise to the findings which could not recur today.”

He pointed to large-scale changes in the firm, which brought in outsiders like the ex-NTMA chief as chairman in 2015 and former AIB CEO Bernard Byrne in 2018.

“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,” Mr McKiernan said.

In his separate legal action against Davy, property developer Patrick Kearney – one of the so-called ‘Maple 10’ Anglo borrowers who were given loans by the bank to buy Sean Quinn’s controversial stake in the lender – had claimed stockbrokers were negligent to advise him to sell bonds at a price he said was a significant undervalue.

The bonds were sold for 20.25 cent in the euro, or €5.58m (£4.13m).