How did Davy get here – and what’s next for the stockbroker?

YESTERDAY, Davy Group lost its privileged status as a primary dealer in Irish government bonds, cutting off a key source of revenue and prestige for the country’s largest stockbroker. No longer will the firm be able to sell State debt issuance – a major blow in a year when the Department of Finance has to fund a deficit of about €20bn.

The decision by the National Treasury Management Agency (NTMA) to withdraw Davy’s authority capped a bad week for the stockbroker.

After being fined €4.13m and reprimanded by the Central Bank for its role in a deal to sell Anglo Irish Bank bonds on behalf of a client in 2014, things began to fall apart at Davy.

Facing criticism from clients, politicians and regulators, three senior figures at Davy – CEO Brian McKiernan, deputy chairman Kyran McLaughlin, and head of bonds Barry Nangle – resigned on Saturday, hoping to heal the wounds quickly. But Davy looks like it is bleeding out, with bad news growing daily.

How did Davy get here?

In 2014, businessman Patrick Kearney, a property investor based in Belfast, approached Davy to sell Anglo Irish Bank bonds he held. Mr Kearney was liquidating the bonds to raise money to discharge a debt he owed to a third party.

Mr Kearney had bought the bonds, which had a face value of €27m, in 2009 with a loan from Anglo. Mr Kearney had earlier been a part of the Maple 10 consortium assembled to help the bank unwind Sean Quinn’s de facto stake in the bank, which he had acquired via transactions in contracts-for-difference.

At the time Mr Kearney approached Davy, the Anglo bonds had a deeply discounted value as the bank was in liquidation and it wasn’t clear whether bondholders would get paid or not. However, because the bonds were not widely traded, finding a transparent price wasn’t easy.

Davy offered Mr Kearney 20.25c in the euro, grossing €5.58m for the trade, which the client accepted. What Davy didn’t tell Mr Kearney was who was on the other side of the deal – a group of 16 Davy employees who had clubbed together, who later went on to sell the securities at a profit.

When Mr Kearney discovered this – along with the fact that Cantor Fitzgerald was pricing the same bonds as high as 32c – he sued Davy in the High Court. The case was settled in 2016 and the terms were not disclosed. The Central Bank began its investigation shortly thereafter.

Who was involved?

The names of the Davy staff who were on the trade have not been released. However, the resignations of Mr McKiernan, Mr McLaughlin and Mr Nangle indicate at least who the board holds responsible.

Attention has now shifted to chairman John Corrigan, the former NTMA CEO who joined Davy in 2015, and Bernard Byrne, the current interim CEO of Davy, who must steer the organisation out of crisis.

Mr Corrigan got the position because of his connections into Government and the world of institutional investors, not because he is a corporate firefighter. Market sources are already questioning whether he will last much longer in the role.

Mr Byrne came into the firm as deputy CEO after leaving the top job at AIB in 2019. The understanding among Dublin stockbrokers at the time was that Mr Byrne was being brought in not just to attract corporate broking business, but to present a more cleancut image at a time when Davy executives were being hauled before regulators to answer for their conduct on the Kearney bond deal.

Now both men have to see what comes out of an internal review by the independent board members at Davy to discover whether the rot goes any deeper than the 16 employees who were involved.

At least 20pc of firm’s shareholding left with resignations

What happens next?

Events are moving quickly. Not only does Davy have to complete its review, but the individuals in the case could face further investigation by the Central Bank, the Office of the Director of Corporate Enforcement or the Garda.

As for the firm, a significant shareholding of at least 20pc of the company walked out the door with the resignations. It is understood that the board will deal with this issue after it completes its review.

Potential buyers include private equity firms who could bankroll the current management to take out the approximately €100m in shares owned by Mr McKiernan, Mr McLaughlin and Mr Nangle.

Trade buyers potentially in the mix include Bank of Ireland – which owned Davy until 2006 and which had a close look at Goodbody last year – and Irish Life owner Great West, which also considered buying Goodbody.