■ Shane Ross
We don’t know if the shenanigans at the stockbrokers have been repeated multiple times, but the Government needs to find out now, writes
DAVY Stockbrokers are, sadly, too big to fail. This weekend, the firm’s solid edifice in Dublin’s Dawson street is all that remains upright. Inside, the staff are staggering but still standing. Customers are bewildered, worried that their pensions, shares and savings are at the mercy of a rogue outfit. The Government is shaken by the antics of its favourite stockbroker.
Last week’s fine of €4.1m, imposed on Davy by the Central Bank, has revealed a tale of intrigue, deceit and greed. Yet Davy will survive. In Ireland’s financial jungle, Davy is the uncrowned king.
Powerful people are at the top of this greasy pole.
Yesterday, at long last, three of the powerful people slipped off that pole. Some of Davy’s biggest names reluctantly resigned. Deputy chairman Kyran McLaughlin, chief executive Brian McKiernan and head of bonds Barry Nangle fell on their swords.
Three down, 13 to go. There will need to be more, but all last week Davy dragged its feet, resisting remedies. First, it refused to make any comment, hoping to tough it out. Then, after a warning from Paschal Donohoe, it issued a grudging statement of waffle, promising a review.
The board pledged it would do whatever was necessary to restore confidence. Unfortunately, the board itself has questions to answer. The Davy board is now about to investigate itself. The farce will continue. Other bodies will be thrown to the wolves from time to time, but the core problem, the Davy culture, needs cleansing.
What is all the fuss about? What did Davy do wrong?
The story could not be much worse. In 2014, Davy bagged a big order from Northern Ireland property developer Paddy Kearney to sell an Anglo Irish Bank bond. Paddy is a colourful character, a member of the infamous “Maple 10”, the golden circle that had borrowed money from Anglo to buy its own stock to prevent a share price collapse. Davy decided the sale of his bond provided an opportunity and bought it.
Led from the firm’s top echelons, 16 of Davy’s staff quietly formed a consortium to buy Paddy’s bond.
The consortium included a committee of senior Davy executives to direct the clandestine operation. They hid key features of the deal from their own compliance people, thus skilfully avoiding the mandatory scrutiny required for staff personal trades. They set up a special account, enabling the transaction to bypass normal procedures.
They never told Paddy they were buying his bond for themselves. They broke European regulations. Personal gain trumped the interests of the client. Unfortunately for Davy, details of the deal leaked. At that point, the brokers headed hotfoot for the regulator with their hands, supposedly, raised high above their heads. Confession time had come.
However, according to the Central Bank, it was a partial confession only. In a typical piece of understatement, the Central Bank outlines a “lack of candour” from Davy.
The conflict of interest in this transaction was blindingly obvious. Yet it was organised so that the decision about whether there was a conflict was not made by the compliance section, but by the very guys participating in the deal.
They had a cursory chat with themselves and solemnly resolved that — although they were selling the stock for Paddy and buying the stock for themselves — there was no conflict.
The consortium approved its own deal. There is no written record of this unorthodox procedure. No minutes were kept of any discussions among the lucky 16. Worse still, the Central Bank claims that one of Davy’s own compliance team was “misled” by a member of the buying consortium, who never told an inquisitive compliance staffer the bond was being bought by a group of Davy insiders.
In even stronger language, the regulator asserts that Davy “provided vague and misleading information and wilfully withheld information that would have disclosed the full extent of the wrongdoing as it was known to it at the time”.
In the meantime, developer Paddy Kearney smelled a rat. He received enough information to suggest his eye had been wiped by Davy. He sued, insisting he would have received a far better price on the open market. His bonds had a face value of €27m and were sold for under €6m. The case was settled. It is understood Davy got a bloody nose, taking a hit of more than €2m.
Davy’s original sin was the bond transaction. However, the firm compounded this wrongdoing by its unwise behaviour after being rumbled. It tried to hide the scale of the escapade and the deep cultural malaise in the firm. Yesterday and all last week, it acted only when it was dragged kicking and screaming toward the inevitable.
As a former stockbroker, I have become hardened to observing crazy gamblers wrecking investment firms. Overseas investment houses such as Nick Leeson’s Barings Bank — and others more locally — have been torpedoed by rogue traders. Davy’s case is different. In the latest episode, there are 16 individuals, not just one, involved. They were not gambling, but combining to profit from a client under pressure. A large number of the top brass put personal profit before clients’ interests.
The Davy disease is not the normal solo run, where a trader gets into trouble, tries to cover it up and endangers the firm. In Davy’s, the disease is endemic. Davy’s instinctive response to being unmasked was to provide misleading information and hope to escape with a mild rebuke. Instead, it was fined €4.1m, an eye-watering amount, but a sum that will cause the plutocrats in Davy hardly a moment’s loss of sleep. Davy is rumoured to earn €50m a year. The fine is a drop in the ocean.
Responsibility for such a deeply embedded problem lies with the board. Where was the Davy board in recent years? It was ‘refreshed’ in 2016 with an injection of independent non-executive directors. Apart from chairman since 2015 John Corrigan, formerly boss of the NTMA, these included Ronan Molony from McCann FitzGerald solicitors and Ronan Murphy from PWC accountants. They should be asked why Davy employees in the consortium were not suspended during the probe.
After the humiliating settlement with Paddy Kearney, why did they not ascertain whether the Anglo bond transaction was a once-off? It is only now that they are awaking from their slumbers in deciding to “review” the Central Bank’s findings.
Their lack of openness last week was nothing short of insulting to all stakeholders in Davy. For several years, they should have been privy to the embarrassing knowledge that Corrigan’s deputy chair Kyran McLaughlin and chief executive Brian McKiernan were also members of the consortium, the guys who plotted the sorry exploit. They hung in there, indulged by Corrigan and company.
The tame “review” announced by the board should be replaced by an inquiry with an independent chair, flanked by other non-Davy members. It should include representatives of smaller investors to hold Corrigan and his co-directors to account. Corrigan has been chairman of Davy for nearly six years. He and his current crew should consider their positions.
The Davy disease will not be cured by a few high-profile resignations. Did the bond transaction repeat itself elsewhere? Are we sure similar shenanigans did not go on with Davy’s highly lucrative Government deals? We are not.
Are staff members still holding profits from the dirty deal? Are smaller clients protected from Davy dealers lurking behind screens hoovering up their shares at preferential prices?
Davy may be too big to fail because of its pivotal position in Ireland’s financial markets, but the Central Bank should consider withdrawing its licence to trade. All members of the consortium should stand aside. The Government should suspend all dealings with Davy pending a clear picture of the extent of these activities and the consequences for those responsible.
‘A fine won’t cost the firm any sleep given it earns €50m a year’