Can Davy’s clients stay silent as board goes into conclave?

Staff anger ‘palpable’ at perceived golden circle following €4.1 million fine by regulator

Senior executives in AIB and Goodbody Stockbrokers were bracing themselves for political and public pushback as they prepared to confirm at 2pm on Tuesday that the two were getting back together after a decade.

The deal, after all, involves the thorny matters of Goodbody being allowed to continue to offer bonuses after AIB’s planned purchase, and the deal value of €138 million being a multiple of the €24 million AIB received in early 2011, when it sold control of the firm to Kerry-based Fexco under a European Union restructuring plan tied to its taxpayer bailout.

With AIB still 71 per cent State owned, Minister for Finance Paschal Donohoe let his press office issue a notification shortly after midday to say he'd be free to talk to journalists on "banking matters" that afternoon. The plan was partially to use it to assuage concerns about the Goodbody deal heralding a return to bonus culture within banking.

But by the time the virtual briefing took place, the Goodbody deal had been eclipsed by a far bigger industry matter: a Central Bank lunchtime bombshell that it had fined Davy, the largest stockbroker in the State, €4.1 million for breaching market rules in a 2014 transaction.


The regulator found that a Davy consortium of 16 unnamed staff members, including senior executives, had sought to profit from taking the other side of a bond deal involving a client – without telling him or the firm's compliance team. The Irish Times subsequently revealed that the names included chief executive Brian McKiernan, deputy chairman Kyran McLaughlin, head of bonds Barry Nangle, former chief executive Tony Garry and one-time head of institutional equities David Smith.

Sale of junior bonds

The case centres on the sale by Davy of junior bonds in the defunct Anglo Irish Bank for Northern Ireland property developer Patrick Kearney, in 2014, for 20.25 cent on the euro, raising €5.58 million.

Part of the proceeds were to be used to pay off a debt to US investment firm CarVal. What Kearney didn’t know at the time was that the Davy consortium bought the bonds.

Kearney would claim in a subsequent legal action that the price significantly undervalued the bonds. He said he had met an investment banker on the day the deal went through, in November 2014, who offered to buy the bonds at 32 cent each. Davy, he claimed, told him that it was too late to back out.

The Central Bank found that Davy breached market rules by failing to take all reasonable steps to identify whether a conflict of interest arose in relation to the trade – and for sidestepping its own compliance team by keeping it in the dark.

To make matters worse, Davy relied on obfuscation and failed to disclose the extent of wrongdoing when the issue first came to light. Even more egregiously, the firm, as the Central Bank put it, would present information “in such a way as to make the involvement of certain individuals appear more central to the transaction than in fact was the case”.

The bonds in question had a par value of €27 million. The holders of these bonds, at the height of the financial crisis, were among the few who refused to be taken out at a discount, as the then-nationalised Anglo sought in 2010 to share its massive losses with subordinated debt investors.

While the Davy group sold a large portion of the bonds within weeks of the 2014 deal (with US hedge funds being among the few willing buyers), sources say that some of the 16 continued to hold the Anglo bonds for some years afterwards.

Jump in value

In any case, the value of the bonds would jump by more than €21 million over the subsequent five years, as better-than-expected proceeds from the liquidation of Anglo's successor, Irish Bank Resolution Corporation, meant that these notes came good for whoever was holding them at the end of 2019.

No one was to know back in 2014 that the junior bondholders would be made whole. But in permitting the deal in the first place, Davy acted in a “reckless manner”, according the Central Bank.

Indeed, weaknesses in its controls “created a risk that Davy employees could engage in personal transactions that gave rise to conflicts of interest, without detection by Davy compliance, along with an attendant risk of detriment to investors or other market users”.

The anger among most of Davy’s 700 staff in recent days is said to be palpable, as the board – which has seen two independent reviews of the transaction – has now decided to commence a “detailed review of the findings so as to ensure that lessons are learned and appropriate actions are taken for the benefit of all stakeholders”.

It begs questions about the scope of the earlier inspections.

By all accounts, processes have been tightened up considerably internally in recent years and rank-and-file employees are continually pressed to focus solely on clients’ needs. But the message in how the debacle has been handled is that there is an untouchable golden circle within the firm.

Davy shareholders

The whole situation is hugely complicated by the fact that the 16 staff members own a sizeable slice of Davy between them. McKiernan is the largest shareholder with an estimated 13 per cent stake in a business that was conservatively worth between €350-€400 million on last year’s earnings.

Ireland Plc isn’t exactly covering itself in glory either. Of the 13 Irish companies on the Iseq 20 that use Davy as a corporate broker, 11 have so far declined to comment on the actions of the firm that acts as their eyes and ears in the financial market.

This list includes Ryanair, Dalata Hotels, Smurfit Kappa, Flutter Entertainment, Kerry, CRH, Total Produce, Glanbia, Origin Enterprises and Irish Residential Properties Reit.

To open any of their annual reports these days, you have to wade through pages highlighting their environmental, social and governance (ESG) credentials before getting to their figures. Only Bank of Ireland and Glenveagh Properties have publicly expressed their concern.

Euronext Dublin and the London Stock Exchange, of which Davy is a member, have been equally mute. How long can they stay silent?

Joe Brennan

Joe Brennan

Joe Brennan is Markets Correspondent of The Irish Times