■ Richard Curran
Analysis of bond deal ‘conflict’, Richard Curran, p2 and Dan White,
THIS weekend Davy, Ireland’s largest stockbroker, faces the most serious crisis of its 95-year history after being fined a record €4.13m by the Central Bank for serious breaches of personal account dealing regulations.
Although the broad outline of the events that led the fine was already widely known, last Tuesday’s Central Bank statement was still a shocker.
Not only did the Central Bank conclude that Davy “fell well below the standard required in meeting its regulatory obligations in relation to conflicts of interest and personal account dealing” and that its compliance arm had been “sidestepped” by a group of senior executives, it said that when, after four months, the brokerage did eventually notify the Central Bank it displayed a “lack of candour” by failing “to disclose the full extent of the wrongdoing”.
The Central Bank threw the book at Davy fining it €5.9m with a 30pc discount, a net €4.13m, in return for Davy agreeing to settle the matter rather than contesting it further. Reading between the lines it is clear that the Central Bank was as mad as hell and wasn’t going to take it any more.
The events that led to last week’s dramatic developments took place in October and November 2014 when property developer Patrick Kearney sought to sell a tranche of subordinated bonds issued by Anglo Irish Bank. Kearney had bought the bonds, which had a par value of about €27m, for about €18m in 2009 with Anglo lending him the purchase price.
Fast forward five years and, with Anglo long gone, Kearney’s loan had been sold to US debt management outfit CarVal. By then he owed CarVal €2.36m and he sought to sell the subordinated bonds to clear the debt.
Easier said than done. The bonds, of what was by then a defunct bank, weren’t traded on any recognised exchange and it was unclear how much they were actually worth. Kearney hired former Anglo executive Tom Browne to try and find a buyer. Browne in turn contacted Davy fixed income specialist Tony O’Connor to see what he could do.
In November 2014 the bonds were sold for 20.25 cent in the euro, a total price of €5.58m. It was at this point that things started to fall apart. Kearney and Browne, who had agreed to share any profits from the sale in excess of the €2.26m owed to CarVal, fell out over the division of the spoils and Browne sued Kearney.
Kearney in turn sued Davy claiming that the bonds were worth up to 32 cent in the euro, which if achieved would have translated into a total price of €8.81m. It quickly emerged that the buyers for the bonds weren’t third-party clients of the broker but a group of 16 Davy senior executives. The potential conflicts of interest inherent in such a transaction should have rung alarm bells with Davy’s compliance department but it was kept in the dark for four months.
So far so murky. Davy, which waited several months to notify the Central Bank and only did so as the affair became public when the legal writs started flying, didn’t do its cause any good by not making a clean breast of it at the very beginning. At the first meeting with the Central Bank, Davy provided it with “vague and misleading details and wilfully withheld information that would have disclosed the full extent of the wrongdoing that was known to Davy at the time”.
This failure to make full disclosure wasn’t a one-off. When the Central Bank wrote to Davy after their first meeting seeking further information Davy “once again failed to disclose the full extent of the wrongdoing as it was known to it at the time”.
According to the Central Bank, “it was only after the commencement of the investigation” that the full extent of the inaccurate information provided by Davy became apparent.
“The information provided by Davy was presented in such a way as to make the involvement of certain individuals appear more central to the transaction that in fact was the case. This has been treated as an aggravating factor in this case.”
Davy’s response to the Central Bank statement shows that it still doesn’t “get it”. It took 24 hours — and much prodding from both the Taoiseach and the Minister for Finance — before it issued a reply.
In a deeply uninformative statement Davy said that it “deeply regrets the shortcomings that emerged from the Central Bank of Ireland’s investigation and apologises unreservedly”. It then went on to speak of “a process of board, management and staff renewal over recent years”.
All well and good but the Sunday Independent drew a blank when it attempted to extract more specific information, specifically how many of the 16 executives involved in the transaction are still with Davy.
The Central Bank’s Davy announcement came on the same day that AIB announced that it was repurchasing Goodbody Stockbrokers for €138m. Davy too was once part a larger group, having been a majority-owned Bank of Ireland subsidiary from 1988 to 2006. Being part of a larger group would certainly help rein in the animal spirits that contributed to the 2014 debacle and allow the Central Bank to sleep easier in its bed at night.