Davy chief executive and deputy chairman resign in fallout from €4.1m Central Bank fine

Davy chief executive Brian McKiernan, deputy chairman Kyran McLaughlin and head of bonds Barry Nangle have resigned their roles in the country's largest stockbroking firm amid the fallout from a Central Bank fine and rebuke over a breach of market rules.

The firm named Bernard Byrne, the former AIB chief executive who joined Davy two years ago as deputy chief executive and head of its capital markets division, as its interim chief executive, according to a statement issued on Saturday afternoon.

“As we reflect on the Central Bank investigation our priority now is to restore trust in the integrity and robustness of our control environment and culture, and to ensure we provide our clients with the standard of service and protection that I know our people are committed to,” said chairman John Corrigan.

The Central Bank revealed on Tuesday it had fined Davy €4.1 million and reprimanded the firm after finding that 16 staff, including top executives, had sought to make a profit by taking the other side of a bond deal involving a client in 2014 - without telling him or the firm’s compliance team.

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The Irish Times reported on Wednesday that the 16 staff members of the so-called O'Connell Partnership included Mr McKiernan, Mr McLaughlin, head of bonds Barry Nangle, former chief executive Tony Garry and one-time head of institutional equities David Smith.

The situation quickly spiralled into the biggest crisis in Davy's 95-year history as the Minster for Finance Paschal Donohoe called on the firm to address how it fell "gravely short of standards that are expected of leaders in position of financial responsibility", some of its clients, including the National Treasury Management Agency (NTMA) and Bank of Ireland, expressed concern, and the identities of the most senior participants in the bond deal emerged.

In a personal statement issued on Saturday, Mr McKiernan said: “I regret my role in a transaction in 2014 and I am very sorry for the hurt that it has caused to the reputation of Davy and its people. I have decided to stand down from my role as my continued presence in light of the extended commentary on those events is damaging for the company and my colleagues.”

Mr McLaughlin said in a separate statement that he was bringing forward his planned full retirement from the company next year, having stepped back from a full-time role in 2018. He did not address the Central Bank investigation in his statement.

The overhaul at the helm of Davy has been complicated by the fact that the three men are among the largest shareholders in firm, which is estimated to be worth about €400 million.

Mr McKiernan (58), the largest shareholder, is understood to have a stake of about 13 per cent, while Mr McLaughlin (76) is reported to retain a 5 per cent interest. It is not clear what Mr Nangle’s holding stands at.

The case at the centre of the Central Bank investigation related to a deal in 2014 where Northern Ireland property developer Patrick Kearney sold junior Anglo Irish Bank bonds through Davy at a steep discount in order to settle a debt. The Davy 16 were the buyers on the other side of the trade seeking to make a profit, without Mr Kearney’s knowledge.

The Central Bank found that Davy had failed take steps to identify whether a conflict of interest arose in relation to the trade. It also found the 16 circumvented the firm’s personal account dealing framework completely by not informing compliance officials of the transaction at the time.

The non-executive members of the board, led by Mr Corrigan, asked senior officials within the firm that were not involved in the bond trade to seek the views of employees in recent days, after commencing a detailed review of the regulator’s findings and promising on Wednesday to take “appropriate action”.

The managers reported back accounts of frustration and anger from various levels across the 700-strong workforce over the deal as well as the firm’s handling of the fallout.

Founded in 1926, Davy would grow in the following decades by tapping into the emerging Catholic middle class in an industry that was typically run by – and catered towards – a Protestant business elite.

The firm is corporate broker to two-thirds of the companies listed on the Iseq 20 index in Dublin. The sheer scale of the business it carries out on the Irish stock market meant that it ended up with a 37.5 per cent stake in the exchange before the bourse’s €158 million sale to pan-European bourse operator Euronext in 2018.

Davy is the only Irish-owned primary dealer of Government bonds and manages over €14 billion of client assets, according to its website, having added to its private clients and wealth management divisions over the past decade through a number of deals. These included the takeover of key Bloxham businesses in 2012 when the State’s then oldest stockbroker collapsed amid an accounting scandal, as well as what was once AIB Investment Managers, Danske Bank’s wealth unit in Northern Ireland, and the Irish arm of UK asset manager Sarasin.

Mr McKiernan, who trained as a chartered accountant with Arthur Anderson, joined Davy in 1989 and took over as head of private clients in 2001. He was named as CEO of the group in November 2014, the same month as when the bond deal went through.

Mr McLaughlin was for decades one of the most influential financial figures in the State, advising on some of the biggest stock market flotations and corporate deals and holding senior board positions on Ryanair and Elan.

Mr McLaughlin resigned as joint chief executive of Davy in 1999, when as the Revenue Commissioners began investigating a family trust he had established in Liechtenstein. He rejoined the Davy board in 2004 after resolving his tax issues.

Mr Nangle has been with Davy since 1998. Mr Garry retired as CEO in 2015 after 36 years with the business, while Mr Smith left Davy in 2016 after nearly a quarter of a century.

Spokesman for the Central Bank and the Minister for Finance said that they noted Davy’s statement on Saturday.

“The Central Bank’s reprimand and fine imposed on Davy reflects the serious regulatory breaches and aggravating factors in this investigation, including the firm’s lack of candour when first reporting the matter to the Central Bank,” the spokesman for the regulator said. “The Central Bank reiterates that this case serves as an important reminder that conflicts of interest are an inherent risk to all regulated entities, and when not properly managed, they pose a risk to investors and diminish market integrity.”