Davy bowed on Wednesday to Government pressure to issue a statement on its €4.1 million Central Bank fine for "reckless" actions in relation to a bond deal in 2014, saying its board has commenced a detailed review of the regulator's findings and will take "appropriate action".
“Davy deeply regrets the shortcomings that emerged from the Central Bank of Ireland’s investigation and apologises unreservedly and unequivocally that these failures occurred, and that Davy failed to adhere to the high standards expected of the firm both internally and externally,” the firm said, adding that it is “satisfied” that the issues that occurred seven years ago “could not recur”.
Profit
The statement came after Minister for Finance Paschal Donohoe doubled down on Wednesday morning on his call the previous day that Davy publicly address the outcome of the investigation, saying the Central Bank fine and announcement earlier that day "does reflect the gravity of the situation".
The Central Bank fined Davy €4.1 million in relation to a bond deal in 2014 where a group of 16 staff sought to make a profit without telling the client or the firm’s compliance team that they were on the other side of the trade.
The case relates to the handling of the sale of bonds in the defunct Anglo Irish Bank by Northern Ireland property developer Patrick Kearney. The transaction was the subject of a High Court action that was settled in 2016.
Mr Kearney was loaned money by Anglo in 2009 to buy junior bonds in the bank that had a face value of €27 million, according to court documents. Loans secured on the bonds were subsequently sold to an affiliate of US debt investment firm CarVal. Mr Kearney engaged advisory firm LeBruin Private in 2014 to help him deal with the debt.
Following discussions involving Mr Kearney, LeBruin and Tony O’Connor, a Davy employee at the time, it was decided that Davy would sell the bonds to discharge Mr Kearney’s €2.36 million debt to the CarVal unit and leave a profit to be divided between him, LeBruin and Davy.
The bonds were sold for 20.25 cent in the euro, realising €5.58 million. The consortium of 16 Davy staff would later emerge as the buyers of the bonds, unknown at the time to Mr Kearney or to Davy’s own compliance function.
Bonds
Mr Kearney claimed in his legal action that the price secured significantly undervalued the bonds. While his case was settled in early 2016, the subsequent Central Bank investigation found that Davy breached European Union rules by failing to take all reasonable steps to see whether a conflict of interest arose in relation to the trade.
The consortium circumvented Davy’s personal account dealing framework, with its compliance function first becoming aware of the transaction months later as some details became public.
Former National Treasury Management Agency (NTMA) John Corrigan took over as Davy's chairman in 2015.
The NTMA, which recognises Davy as the only Irish-owned primary dealer in Irish Government bonds and regularly uses the State's largest securities firm as part of a consortium of investment houses to market large bond sales, said on Wednesday that it noted the "very serious" Central Bank findings and was awaiting a response from the brokerage.
Davy has refused to confirm the names of individuals involved. The Irish Times has established that list includes Davy chief executive Brian McKiernan, deputy chairman Kyran McLaughlin, head of bonds Barry Nangle, former CEO Tony Garry, and one-time head of institutional equities David Smith.
Fine
Mr McLoughlin, Mr Garry and Mr Smith declined to comment. Mr McKiernan and Mr Nangle have not responded to efforts to secure comment.
Mr McKiernan issued an email internally on Tuesday after the fine was announced, saying: “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.”
However, the firm was forced to reissue the statement after it was contacted by the Central Bank, according to sources, with the updated version removing the reference to “no findings of actual conflict of interest or customer loss”.
