Davy ‘breached market rules’ in 2005 deal with credit unions

Stockbroker disputes review finding, which was not publicly disclosed by stock exchange

Davy breached market rules in a multimillion-euro deal with credit unions by acting as “principal in the purchase and sale” of a bond, according to the findings of an Irish Stock Exchange review that raises further questions for the stockbroker.

The transaction in 2005 took place almost a decade before the disputed Anglo Irish Bank bond deal that led last week to a €4.13 million Central Bank penalty, the departure of top Davy executives, its removal as a primary dealer in government bonds and moves to sell the company.

But the disclosure that regulators previously found Davy was on the two sides of a deal for bonds in which dozens of credit unions lost money is likely to intensify demands for an independent examination of the stockbroker’s affairs.

This finding – which Davy disputes, and which was never publicly disclosed by the stock exchange – was in addition to the conclusion that the bond sale didn’t comply with the rules governing credit union investments.


In the Anglo Irish Bank bond case that led to the Central Bank fine, Davy executives bought the bond without telling the client. In the case of bonds in Oko Bank of Finland, which were bought by a group of credit unions, the clients bought bonds that Davy had acquired from Merrill Lynch 10 weeks previously.

Davy set out the finding to credit union clients in 2010 after the Central Bank directed it to tell them. In a November 2010 letter seen by The Irish Times, the broker said the Irish Stock Exchange’s findings included the conclusion that “Davy had dealt as principal in the purchase and sale of the bond, and was in breach of the rules of the ISE by not disclosing this fact on its contract note to credit union”.

Bank bonds

The deal, involving about €50 million of bonds in Oko Bank, was one of several perpetual bond investments – totalling some €183 million – that went sour for more than 140 credit union clients of Davy as the global financial crisis took hold. A dispute arose because the open-ended bonds in question didn’t comply with credit union investment rules, ultimately leading to a €35million settlement with Davy in May 2008 that covered about half the credit union losses. The losses on the Oko bond were in the region of €10 million, it is understood.

The Irish Stock Exchange, Davy’s regulator at the time of the sales, issued a statement in April 2009, saying Davy breached rules in relation to the “completeness of disclosure of certain information concerning the bonds.”

The statement followed two reviews into the deals, in June 2007 and February 2008. It cited breaches linked to the requirement for “reasonable steps to ensure the bonds were in full compliance” with investment rules, which Davy also disputes, but did not say the broker was principal on both sides of the deal.

Davy was a shareholder in the exchange at the time of the reviews and had representation on its board. There was no comment yesterday from the exchange on why the statement failed to mention the broker’s dual role in the Oko bond sale, no comment on whether there was any sanction and no comment on the case itself.

Remedial action

In its 2009 statement the exchange said the settlement dealt with the “core issue of the loss of value of the bonds”, adding that it was satisfied Davy took “appropriate remedial action” to ensure its internal controls and conduct of procedures were rectified to mitigate against any recurrence of the breaches.

The broker in its 2010 letter said it always “strongly disputed” that it was principal in the purchase and sale. “Davy’s clear position is that it acted as agent and not as principal. The bond was never treated as an asset of Davy’s and it was never included in Davy’s daily trial balance.”

Some credit unions who did settle in 2008 came to regret doing so in the wake of the 2010 letter, it is understood, because they felt the exchange’s findings would have strengthened their case in settlement talks.

Arthur Beesley

Arthur Beesley

Arthur Beesley is Current Affairs Editor of The Irish Times