"It will be like Game of Thrones in there," one long-time observer of the financial scene in Dublin put it last week as the fallout developed from the €4.1 million fine imposed on Davy Group stockbrokers by the Central Bank.
A Davy insider characterises the fallout from the scandal internally more bluntly as “a sh*tshow”. The controversy has put at risk years of hard graft building up a strong franchise, according to that source.
“We have managed to create a phenomenal private client business over the past 10 to 15 years. To see that built up and now put in jeopardy is soul-destroying,” said the source.
“We are incredibly angry with the individuals who let this happen ... It was a mixture of stupidity, naiveté and arrogance, and for nothing: these were significant shareholders with significant wealth and to do this for something as grubby as this.”
A former Davy employee recalls one executive explaining the Davy ethos to new client managers arriving at the firm as: “You first, Davy second, client third. Fellas wore those phrases as a badge of honour.”
Another phrase regularly heard at a senior level within Davy was that of one former senior executive: “There is no such thing as black and white; there are only shades of grey.”
The powerful owner-manager team that ran Davy was known as “The G5” – Brian McKiernan, Kyran McLaughlin, Tony Garry, Barry Nangle and David Smith.
The ownership structure was a closely guarded thing. One former shareholder recalls only being given access to the Davy shareholder agreement by reading it in a room in the presence of an observer.
A former Davy broker remembers the firm instructing traders in the past not to advise clients to sell shares or to short stocks in companies to which the firm acts as a corporate broker. It was another instance of Davy not putting the customer first, he says.
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Not much happened in the immediate wake of the announcement beyond pressure on the broker from Finance Minster Paschal Donohoe to respond to the findings.
And then the dam broke. It quickly became clear that, despite the hopes of some senior Davy figures, this was not just going to blow over.
The pace of events since last weekend has been astonishing. There quickly followed a string of resignations, the withdrawal of the State’s business, the closure of the bond desk, a political storm and plans to sell the firm, which were formally confirmed late on Thursday.
The kings of finance in Dublin for so many years suddenly realised they were fighting for the future of the firm – and then that this would involve giving up control. “It doesn’t take long these days to destroy a reputation,” said one source.
It quickly became clear that the broker is a house divided, with different interests among varying groups of shareholders, staff and the board. A sale quickly appeared as the only way out of the mess. But this will take months and be severely complicated by what has emerged and by the need for any buyer to be satisfied that there is not more to come.
And as it will lead to big payouts for many of the 16 executives at the centre of the story – albeit a good deal less than they might have hoped for – it will create more political noise.
The most amazing thing is that the senior people in Davy don’t appear to have seen this coming.
This may have been due to lengthy legal rows with the Central Bank over what rules were breached. The legal complexities are one thing. What happens when – as Derville Rowland the director general of financial conduct at the Central Bank put it – the disinfectant of sunlight and public exposure hits is another.
It is a lesson in how a string of mistakes and misjudgments can cumulate to threaten the very future of a highly profitable business.
Consider all the errors – after the original one which was the deal in which Davy sold Anglo Irish bonds for a Northern Ireland businessman Patrick Kearney, but set up a group of its staff to buy them for their own profit.
There followed: the initial obfuscation and lack of co-operation with the Central Bank about what had happened; the decision to allow the disagreement with Kearney to drag on and go to court; the tactic of minimal co-operation meaning the Central Bank inquiry dragged on; and the lack of any significant responsive action by the organisation before the announcement of the record €4.1 million fine.
A board statement talked of significant renewal and cultural change within the organisation in recent years. It said there had been a review of what had happened and action taken. But there was no detail. What had the non-executive directors, most in place since 2016 under chairman John Corrigan, actually done about this?
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And the mistakes continued. There was initial silence when the news came from the Central Bank , a botched email to staff, and no sign of any internal consequences.
That changed on Saturday, March 6th, with news that chief executive Brian McKiernan, deputy chairman Kyran McLaughlin, and head of bonds Barry Nangle had resigned. But by then Davy had lost control.
It is hard to overstate the scale of this for Dublin’s financial sector. Davy was for many years the central player in stocks and shares and in corporate finance. Its competitors did not like it – and it did not care.
Davy frequently sought to squeeze out other players in big deals, and was cosy with the NTMA, which raises debt for the State. It didn’t quite have the market tied up – but not far off.
The key question now is whether there is more to emerge from other deals. Did Davy abuse its position as the big beast of the Dublin market on other occasions?
The Anglo deal was enabled by the fact that it was “off-market” and thus hidden – but plenty of other broking activity is too, conducted in grey markets for non-quoted shares and deals where shares are privately bought and sold.
The Davy culture was aggressive. “Particularly in the dealing room,” one former employee said. “You start at half-eight every morning with a blank sheet and a need to make money.”
The question now is: did it cross the line on other occasions that we don’t yet know about? It certainly did in the Anglo bonds deal.
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We know a lot about the original deal – but there is a lot we don’t know too. We know property developer Kearney approached Davy to sell Anglo Irish Bank subordinated bonds that he owned. He wanted to repay a debt – Anglo had loaned him money to buy shares in the bank, and this debt was subsequently sold on by the liquidator of the bank.
In an unusual arrangement the senior Davy figures involved agreed to advance a loan to Kearney to pay off his debt. He agreed that once the debt – and thus the loan – was repaid, the rest of the proceeds of the bond sale would be divided between himself, his financial adviser and Davy.
However, the senior Davy figures decided to buy the bond themselves and set up the consortium of 16 Davy staff to do so.
According to the Central Bank report: “Davy took no steps to ensure that the client was aware that the consortium was comprised of Davy employees.”
Kearney was later told by an employee of another firm that the bonds were worth more than the price Davy had offered him. He went to court, and the brokers settled before a hearing.
The key job of brokers is to find the best price for clients. And the involvement of Davy staff on the far side of the transaction, in a way that circumvented Davy’s own internal compliance function, raised a red flag for the Central Bank. Regulations in relating to managing conflicts of interest and personal dealings by staff were breached, it found.
To make matters worse Davy then presented what is called a “house view” to various potential buyers of the bonds – ostensibly independent research on what they were worth. A significant amount of the bonds were sold on to a fund manager shortly afterwards, presumably at a significant profit.
How could this happen? The Anglo bonds were not quoted on the market and seldom traded. There was no clear way to value them – it would all depend on how the liquidation of Anglo’s assets proceeded. We know a significant amount of the shares were sold, but we don’t know how long others were held, what the final profit was or who got what.
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The Davy business looks set too be sold because there is no other way out of this. The big shareholders who were members of the 16 – the old guard including Kyran McLaughlin, one of the big name of Irish broking for many years – have to leave not only their executive role but also as shareholders.
Their shareholding is held through a complicated structure of overseas companies. There will no doubt be political comment about the amount the shareholders receive if a sale does go through.
From the shareholders’ point of view, the price now – given the damage – may well be less than the €400 million it might have been a few weeks ago. But if a sale does not go ahead there is a risk of the business gradually dwindling as many corporate and personal clients follow the NTMA and take their business away.
Bernard Byrne, the interim chief executive, will hope that the announcement of the sale will allow some space to sort things out, including an independent review of the company.
Those with knowledge of the business say that its wealth management arm “runs like a well-oiled machine”. According to one client, “they charge big fees, but it is a very well run business”.
It would be of value to Irish or international buyers. And it is unlikely to be caught up in any future controversy.
The Government would be keen to see Davy sold as one unit rather than broken up. This is to maintain the other side of its business – equity trading, corporate finance and research – which are seen as key services, vital to keep in Dublin. The only other significant provider of these services is Goodbody, recently bought by AIB.
“We need two big players,” according to one official source, “otherwise we really don’t have a market.”
Bank of Ireland, a former owner of Davy, is one potential buyer. Irish Life would probably be interested in the wealth management business. International players will also take a look.
In the meantime the fight to shore up the reputation of the company will go on. Any buyer will want to engage in extensive due diligence and have some arrangements protecting itself in case more comes out.
Bernard Byrne will be well aware that he is walking a tightrope. Above all else he will hope that further revelations do not emerge, potentially turning a difficult job into an impossible one.
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And will the firm’s corporate culture change? As stock markets turned at the end of the economic boom and share prices came under pressure in 2007, McLaughlin, then head of capital markets, reminded traders of their responsibility to the firm’s big corporate clients, not just to Davy’s individual clients.
He told traders in an email that it was “important to remember where our responsibilities lie and also what action we should be taking in Davy’s best interests”.
“We also have a responsibility to our corporate clients not to unnecessarily damage their market capitalisations and make them vulnerable to hostile bids,” he said.
“If our corporates ever believe that we have damaged them unfairly in difficult markets, they will remember it in better times and we will lose one of Davy’s great strengths which has been its corporate franchise which has been built up with a lot of work over a long number of years.”
A former broker says the email captured the ethos of the firm when there should have been a clear division, a Chinese wall, between the corporate and individual clients within Davy. “It was never about the customer in Davy. It was always about themselves,” he says.
