Fexco under siege as three investigations near completion

Three ongoing investigations, two by statutory authorities, following allegations made at an Employment Appeals Tribunal hearing, have made life difficult for the Kerry-based financial services group, Fexco.

Managing director, Mr Brian McCarthy, is adamant that the company has nothing to hide and that it will be fully vindicated when the investigations by the Central Bank, the Revenue Commissioners and Enterprise Ireland are completed. Mr McCarthy categorically denied all the allegations. "We stand by a certain probity here. We have to."

He disclosed that an internal company investigation before the allegations became public showed one instance of an "excessive" claim for a grant. When this was discovered by the company a repayment was immediately made to Enterprise Ireland, he said, adding that the company made 16 or 17 grant applications over a 15- to 20-year period. He declined to disclose the amount involved but insisted that the repayment was volunteered by the company before any of the allegations became public knowledge.

The issues which led to the dismissal of a senior employee, Mr Conor O'Mahony, which in turn led to an unfair dismissal claim and the Employment Appeals Tribunal hearing at which allegations against the company were aired publicly, were discovered by the company through "the usual checks and balances", he said. They were subsequently investigated through the internal audit system.

Asked why the company paid a settlement to the former employee if the allegations were not valid, Mr McCarthy said it was "a pragmatic decision". "This was very distressing for the staff and for the community and it was taking up an enormous amount of management time and running up big legal fees. We felt it would not have ended at the EAT and that we could be looking at years of litigation. So we took a decision to put it behind us and get on with running the business."

Refusing to disclose the amount of the settlement because of confidentiality agreements, he commented that "it has cost us much more than any cash payment because it has damaged us in the eyes of the regulatory authorities".

There has been widespread speculation that the settlement involved a payment of more than £500,000 to Mr O'Mahony to end his unfair dismissal and High Court actions.

Any allegations of impropriety, particularly for a company involved in financial services, even if they are subsequently judged unfounded, will be damaging. And any such allegations must always be taken seriously by the regulators.

The Central Bank is examining Fexco's stockbroking operations following allegations that the company had made false returns to the stockbroker regulator. The Revenue Commissioners investigation concerns allegations that seniors executives at the firm received income payments in cash. Enterprise Ireland is investigating allegations that the company issued bogus invoices in order to claim grants.

A number of resignations and new appointments at its stockbroking operation together with a strengthening of group accounting and internal controls and a new senior appointment to the internal audit function may go some way towards reassuring the statutory authorities. But the allegations have already damaged the name and reputation of the group Mr McCarthy set up in 1981 and which now employs 600 people between Killorglin and Caherciveen, another 100 in other Irish locations and about 150 abroad.

Mr McCarthy declined to comment on the issues which lead to the investigations as did Mr O'Mahony the former employee and director of group company, Fexco Financial Services, who made the allegations which lead to the investigations.

Both men insisted they were bound by the confidentiality clauses included in the settlement agreed last month between Fexco and Mr O'Mahony.

With both parties adamant that they cannot discuss the issues and with none of the inquiries into the allegations yet completed, it is almost impossible to reach a definitive conclusion on their validity or otherwise.

The only information in the public arena comes from the serious allegations made at sittings of the Employment Appeals Tribunal in Tralee last September. With the case then settled between the parties - O'Mahony and Fexco - before it was due to resume early last month, these allegations have been left unanswered.

The Central Bank said its investigation is ongoing while the Revenue Commissioners declined to comment on its investigation. Enterprise Ireland, which paid £2.25 million for preference shares in Fexco Holdings at the end of 1997 and has given Fexco grants of £1.7 million, said its investigation was not fully completed. It appointed accountants KPMG to "carry out an audit of all interactions between ourselves and the company". But its spokesman recently told the Kerryman newspaper that preliminary indications did not look as if anything untoward had happened.

All of the investigations are rooted in a Fexco board decision on January 20th, 1999 to dismiss Mr O'Mahony who was head of the group international payment division.

The company alleged he had set up a fictitious share dealing account and had used company funds in an unauthorised manner on a number of occasions to buy shares and to buy Spanish property. He was suspended in December 1998 and dismissed on January 20th, 1999. Mr O'Mahony took his case to the Employment Appeals Tribunal claiming unfair dismissal and initiated High Court proceedings.

Negotiations to reach a settlement and Fexco's attempt to have the EAT case heard in camera were unsuccessful. At the initial hearing in Tralee in September 1999 lawyers for Mr O'Mahony made the allegations about the way Fexco was run. It was alleged that the group had made false returns to the Central Bank, that senior figures received income payments in cash and that the company had issued false invoices in order to claim grants from Enterprise Ireland.

Fexco's senior counsel Mr Ercus Stewart described the allegations as "wild" and "unfounded and denied", but warned that they would cause irreparable harm to Fexco.

At the tribunal Fexco alleged that Mr O'Mahony breached his duty of trust to the company and abused his position by setting up a share dealing account under a fictitious name - the account was in the name of James Peabody with an address in New York - and using company funds without authorisation. Mr Stewart said that Mr O'Mahony did not deny the company's complaints.

Mr O'Mahony's counsel, Dr John O'Mahony, maintained that the use of company funds reflected "part of the culture" at Fexco and that the company "was not out one penny" as a result. He alleged that a number of senior Fexco staff, including the head of stockbroking at the group Mr Brian Murphy, were involved in the fictitious share account. But he argued that no law or regulations had been broken and no money laundering or insider trading was carried out.

Mr Murphy stepped down from his role as head of stockbroking and resigned as a company director. He subsequently left the group.

Separately, but around the same time as the EAT was sitting in Tralee, Fexco's stockbroking operation was already facing problems because its systems and staffing were not adequate to cope with the sheer volume of business coming to the execution-only firm. Since it opened in late 1996 the firm had grown rapidly - it now has some 23,000 clients.

Late last year the Central Bank, as its regulator, and Fexco discussed the problems in the Fexco back office which is involved in the administration and settlement of share deals. Subsequently the Bank wrote to Fexco telling the firm not to advertise, promote its services or market itself in any way until its systems and staff numbers were upgraded to handle the volume of business they firm had taken on. Shortly afterwards the company decided that it would not take on any new clients until the upgrading was completed.

While the company sees this development as "unfortunate timing" in the light of the false returns allegations, the Central Bank will now be anxious to ensure that Fexco is fully investigated to confirm that it meets all the requirements under the Stock Exchange Act 1995.

As the investigations proceed, Fexco continues to expand its businesses which range from money transmission through the Western Union franchise, its bureau de change network, VAT Refunds, the Gullivar tourist booking system and its call-centre customer response operations.