Central Bank demanded answers

The Central Bank has been getting tough on how stockbroking report financial transactions since 2010, writes SIMON CARSWELL, Finance Correspondent

THE CHAIN of events that led to yesterday’s closure of Bloxham, the country’s oldest stockbroking firm, began last Wednesday morning when the Central Bank demanded answers to questions on certain financial information.

Following what it has described as “a definite line of inquiry”, the Central Bank sent questions to Bloxham and demanded that they be answered within 36 hours, by close of business on Thursday.

The Central Bank has been getting tough on stockbroking firms since 2010 on how they report financial transactions. Four firms have been fined a total of €275,000 arising from inspections into their failure to report transactions properly to the regulator.

The sequence of Central Bank inquiries came to a head on Thursday.

In response to the queries, Bloxham called the regulator late on Thursday and requested an immediate meeting.

Managing partner Pramit Ghose and two other partners from Bloxham’s arrived at the regulator’s Dame Street office to inform them that income at the firm had been overstated for several years dating back to 2007.

It is understood that the overstatement relates to a small number of specific issues relating to the reporting and accounting of income. One such item may relate to a trading loss that had been booked not as a crystallised loss but as a debt still due to the firm.

Based on an initial examination, the over-statements relate to 2007, 2008, 2009 and last year, but not for 2010, though investigations are still going on into the exact detail of the irregularities.

The effect of the overstatement was that the firm’s capital reserve has been in effect wiped out. Bloxham was obliged to maintain at least €5.8 million in reserve to trade as a regulated stockbroker.

The overstatement is “sufficient to put a big dent in the regulatory capital”, said a well-placed source. It is estimated at between €4 million and €5 million, said another.

The Central Bank said that at 5pm last Friday it imposed directions on Bloxham to cease all regulated activities with immediate effect.

The firm was given a deadline of yesterday morning to find the required capital to protect the business or a buyer who could provide that financial cover for the clients.

Frantic discussions took place over the weekend following Bloxham’s call to rival firm Davy late on Friday to see if they were interested in buying the asset management business given that Davy had agreed a deal in March to buy the firm’s private clients business.

There had been some contact with another rival firm Merrion Capital which had been interested in Bloxham’s wealth management and bonds business in the past.

But a deal could be transacted quickly with Davy given that the firm had already carried out due diligence for the deal to buy the private client business in March.

Time was of the essence as the Central Bank’s order on Friday left the firm unable to trade as a regulated entity without the required regulatory capital. This would put the client funds potentially at risk which would have forced the Central Bank to take more wide-ranging action against the firm. Des Carville in Davy’s corporate finance team worked on the deal for that firm.

Davy agreed to buy Bloxham’s wealth management business and accelerate the completion of the purchase of the private client business. This meant the customers would be protected by Davy, which has three times the regulatory capital it requires, by the time the business had to open yesterday.

News of the internal irregularities and the transaction with Davy broke yesterday morning shortly after the deal was signed.

Some staff at Bloxham’s were told of the fate of the stockbroking firm in calls late on Sunday night.

A statement from Bloxham reassured clients that their funds were “completely intact and safe” and unaffected by the transfer to Davy, though a client complained to The Irish Times about the lack of any response from Bloxham about their money following correspondence in recent weeks.

Bloxham said it had discovered the internal issues “for the first time late last week on foot of an inquiry from the Central Bank.”

“The financial partner of the firm was immediately suspended and the Central Bank informed,” the firm said in the statement.

Tadhg Gunnell, a 36-year-old accountant, is the financial partner, one of eight partners in the unlimited partnership that owns the stockbroking firm, according to Bloxham’s website. (Insurer FBD is also a partner but as a limited liability entity is protected from the liabilities of the firm; the others are not so lucky.)

Gunnell joined Bloxham as finance and compliance manager in 2000 after working in the audit and assurance department at Deloitte, which audited Bloxham.

He became a partner at Bloxham in 2005 at the same time that Pramit Ghose, a well-known figure and investment picker in the Dublin stockbroking community, was also made a partner. Besides Ghose, other high-profile employees of Bloxham’s include head of research Joe Gill and economist Alan McQuaid.

Originally from Roscrea in Co Tipperary, Gunnell was described as “the most unassuming guy” and “a back-office sort of guy” by a fellow member of staff.

He had a reputation for doing all that was asked of him, the source said.

His office was on the second floor of Bloxham’s offices in the IFSC between the asset management business on the first floor and trading room on the third.

Bloxham’s partners asked forensic accountants from KPMG led by Seamus Murphy to verify the firm’s financial position and assist with further investigations.

Given what has been uncovered at Bloxham, Gunnell’s former employers at Deloitte will face questions about the quality of their audits of the stockbroking firm.

Central Bank officials Gareth Murphy, director of markets supervision, and Michael Hodson, head of stockbroking supervision, are leading the regulator’s investigation into the firm’s finances.

The enforcement department of the regulator may yet become involved which could lead to penalties and reprimands of the firm.

Given that Bloxham’s partners raised issues with the firm’s reports to the Central Bank, the regulator will widen its inquiry to examine other areas. A handful of regulatory officials are checking the firm’s books and “recreating the numbers”, said one source, but other regulators will get involved.

About 25 staff are transferring from Bloxham to Davy as part of the firm’s purchase of the private client and asset management businesses including three partners, Ghose, asset management partner Niall Tinney and Paddy Finnegan, who is in charge of private clients.

Some of its remaining 45 staff have already moved to other firms, while the rest of the employees were given one month’s notice as the rump of the business – the institutional equities and bonds businesses – will be wound down.

Bloxham has had other troubles in recent years. The broker faces claims for more than €20 million over the Saturn bonds sold to investors. It was joined to a lawsuit against investment bank Morgan Stanley in London last year.

Staff were said to be “shocked” and “distraught” at yesterday’s closure of Ireland’s oldest stockbroker and that Gunnell had allegedly a role in it as he was “the least likely guy” to be at the centre of the alleged financial irregularities, said one member of staff.

“It’s like watching The Usual Suspects [the film],” the employee said of Bloxham’s demise. “You didn’t see this ending coming.”

BLOXHAM'S PARTNERS

PADDY FINNEGAN

Finnegan (47), headed up Bloxham's private clients business, the division that was sold to Davy in March. He was previously general manager of direct business with Irish Life and Permanent. Joined Bloxham in May 2007 to manage its private clients division.

RAYMOND DEASY

Deasy (58), joined in 1985, initially as a private client broker before establishing an institutional equity sales desk and becoming a partner in 1992. He is Bloxham's representative on the board of the Irish stock exchange.

PETER COSTIGAN

Costigan (44) heads up Bloxham's fixed-income team. He joined the firm in 1993, having worked for KBC as a fixed income fund manager from 1990. Having initially joined Bloxham in bond sales, he became head of fixed income and a partner in 1995.

NIALL TINNEY

Tinny (46), joined Bloxham in 2003, having worked in New Ireland Assurance. He is responsible for sales in the asset management division, focusing on the intermediary market in particular. He is one of the three partners who will transfer directly to Davy.

ANGUS McDONNELL

McDonnell (69), the managing partner for 21 years, was succeeded by Pramit Ghose in 2007. Previously president of the Irish stock exchange, he is still actively involved in the business and is responsible for a number of key client accounts.

PRAMIT GHOSE

Ghose (48) is the managing partner of Bloxham's. He is also head of investment strategy. He joined the firm in 2002, having previously worked as a fund manager at Friends First, and then Hibernian, and was appointed as managing partner in 2007.

TADHG GUNNELL

The youngest of Bloxham's partners, 36-year-old Gunnell joined the company in 2000, heading up the finance and compliance divisions. Prior to Bloxham's he worked at Deloitte from 1997 as a manager in audit and assurance services.

PATRICK DEMPSEY

The head of institutional equities at Bloxham. Between 1990 and 1992 he worked as UK equity sales executive at ABN Amro Hoare Govett. The 45-year-old partner became head of equity sales at Davy in 1992, joining Bloxham as a partner in 2006.