Davy’s obstructionism and eventual day of reckoning

Public will be sickened at any sight of Davy 16 profiting from firm’s sale

As Davy sought during the financial crisis to pay down debt following a top-of-the-market €316 million management buyout of the business in 2006, a small group within the firm that had been on the margins for years would come into its own.

Staff on the Davy bond, or fixed-income, desk may have been way behind stars in the firm’s high-flying private clients and institutional equities when it came to doling out shares to staff in the wake of the deal, as the days of making real money in trading government debt had long petered out after the launch of the euro in 1999.

“But that was before the downturn came,” said a former Davy employee. “And while the equities side of the business had a few very busy years with high volumes of trading between 2007 and 2008, the focus of investors inevitably turned to the next big play, which was bonds.”

The fixed-income desk, led at the time by Barry Nangle, would go from making about €5 million in revenues a year before the financial crash to generating, at one stage, upwards of €25 million a year between 2009 and 2012, according to sources, as investors furiously traded Irish government and all classes of bank bonds. The call at the centre of every trade was whether the debt would come good or be reneged upon, even as the State was subject for most of the time of an international bailout.


“The guys on the bond desk liked to say that they saved the firm during those years,” said the former employee.

The past 10 days have seen Davy convulsed, however, by a 2014 bond transaction brought to the firm by one of its bond specialists at the time, Tony O’Connor. The transaction has come back to haunt the firm.

Following years of investigation, the Central Bank of Ireland sent shockwaves through Dublin's financial circle, and beyond, at 1pm on March 2nd as it revealed it had fined Davy €4.1 million and reprimanded it for breaching market rules by failing to identify whether a conflict of interest existed as 16 staff bought junior bonds in Anglo Irish Bank, in liquidation at the time, from a client, Northern Ireland developer Patrick Kearney, without disclosing that they were the buyers.

The regulator also found that Davy had kept its own compliance officials in the dark on the deal.

Crisis and exit

The ensuing crisis has resulted in the exit of all of the remaining 16 employees in the firm who took part in the ill-conceived trade, including former chief executive Brian McKiernan, former deputy chairman Kyran McLaughlin, and Nangle. It also saw Davy being dropped on Monday as a primary dealer of government debt, the immediate closure of the bond desk, and, on Thursday evening, the stockbroker formally put itself up for sale.

While the Central Bank didn't identify the bond or client in question, the background was immediately clear, as it had been the subject of a lawsuit that had been settled by Davy in early 2016 for what sources say amounted to between €2 million and €3 million. The Davy 16 would go on to make a substantial profit on the bonds, which they bought for €5.58 million, or 20.25 in the euro.

While the Central Bank said that the consortium of 16 sold a “large tranche” of the bonds three weeks later, sources said that some continued to hold the notes for years.

The bonds would ultimately come good as proceeds from the liquidation of Anglo, under the umbrella of Irish Bank Resolution Corporation (IBRC), beat expectations. This resulted in their par value of €27 million being handed over to holders of the bonds in late 2019.

The Irish Times has established that the "executive committee" referred to by the Central Bank as permitting the bond deal, failing to identify whether conflicts of interest arose, and sidestepping internal compliance, comprised O'Connor, McKiernan, McLaughlin, Nangle, former head of institutional equities David Smith and the company's then chief executive Tony Garry.

Excluding O'Connor, the other five were known internally as the G5 group of powerful executives that mastered all they surveyed.


The shock move by the remaining members of the board on Monday to close the bond desk, hours after the NTMA's unprecedented move to drop the only Irish-owned primary dealer of government bonds, resulted in the redundancy of four other members of the wider consortium: Anthony Childs, who had been a director of bonds at Davy, Barry Murphy, Eamonn Reilly and Stephen Lyons. Another member of the 16, former director of bonds Finbarr Quinlan, had left the business a few years ago. None of these men were part of the committee.

“There’s a huge amount of sympathy for the junior guys who were encouraged to get in on the trade,” a Davy source said. “They would have drawn huge comfort that the whole thing was legit from the fact that the top executives were all over it. Everyone is just shell-shocked.”

Anger among most of the 700 staff at Davy, where chairman John Corrigan and interim chief executive Bernard Byrne are left to clean up the mess, has also spilled over to former employees who have found themselves having to tell their associates, clients and employers that they were not part of the Davy 16.

“The 16 do not represent what I, and the vast majority of staff, saw as the rules which were to be respected – and which were followed,” said a former employee. “There is a false impression out there now that everyone in there was some sort of cowboy. The people in the organisation have been hugely let down by the personal greed of that group and their circumventing of the rules everyone else followed. There are a lot of good people in there really hurting from this.”

Central Bank director general of financial conduct Derville Rowland told the Oireachtas finance committee on Tuesday that the regulator's long investigation had caused a "day of reckoning" for the State's largest stockbroking firm in respect of its governance, conduct and culture. She said the bank had to deal with "litigious challenges" from Davy's lawyers throughout the process.

“There was very vigorous legal analysis activity in this case,” she said. “It meant that we had to be diligent, resolute and precise.”

But before the Central Bank even resorted to an investigation, it found that Davy had sought, when parts of the deal emerged six years ago in a civil lawsuit, to “minimise the transaction and mischaracterise the seriousness of the events”.

McKiernan’s email

Rowland said, however, that her staff found nothing in their "very meticulous and careful investigation" to suspect any criminal activity, which it would have been obliged, by law, to report to An Garda Síochána and the Office of the Director of Corporate Enforcement (ODCE).

Industry observers say that mismanaged attempts by the firm to contain the crisis – including a staff email from McKiernan that sought to downplay the findings (which he was forced to amend), and a number of top figures remaining in office for four days after the scale of the scandal broke – put pressure on the NTMA to act, while also putting the focus on other major clients to weigh their positions.

The NTMA said its decision to pull Davy’s ability to act as a primary dealer was based on “its assessment of the very serious findings relating to the firm that were made by the Central Bank of Ireland last week and following engagement with investors in Irish government debt”.

Still, the line-up of 14 remaining primary dealers includes units of international banks like Barclays, Citigroup, JP Morgan, Deutsche Bank, HSBC and NatWest, that have, combined, been hit with billions of euro of fines from authorities on both sides of the Atlantic in the past decade relating to the rigging of benchmark interest rates used to price trillions of euro of loans globally.

The biggest crisis in Davy’s 95-year history is set to bring its independence to an end, with the board preparing to put the firm on the market, 15 years after it broke free from Bank of Ireland.

The development comes after The Irish Times reported that Bank of Ireland had made an exploratory approach to Davy about the possibility of doing a deal.

Julius Baer has been reported as interested in looking at a deal, while Cantor Fitzgerald, which acquired Irish stockbroker Dolmen in 2012, Irish unit of UK wealth manager Brewin Dolphin, and UK investment house Permira are also expected to express an interest.

Other interested parties are likely to emerge. Crucially, the members of the G5, who are estimated to own a third of the business, are said to be in agreement that a sale is the best way forward to stabilise the business.

Eroded value

While there has been speculation about the dynamics at play between the former executives and the board, a source said there was “no gap” between both sides that the future ownership of the business needs to be addressed by way of a sale. A further 30 per cent of the stock is understood to be in the hands of other former staff who left the business over the past decade.

While Davy was estimated to be worth about €400 million before the crisis struck, the value of the business has been eroded significantly by events of the past 10 days, according to observers.

Due diligence by any potential buyer to make sure that there are no other skeletons will be rigorous. Davy also plans to hire an independent third party to review issues arising from the Central Bank investigation. It is expected to look into whether other instances of wrongdoing occurred.

A suitor, meanwhile, would also be likely to protect itself from potential issues emerging in future by holding back a certain amount of the consideration for a number of years.

“The boys that ran Davy have had their eye for years on selling the business at some stage for a big price,” said an industry source. “That prize is now gone. The real penalty from all of this is that they are set to get nowhere near what they once thought.”

The sale will trigger its own issues.

“The notion that these high-rollers at the very top of the Irish finance tree who sought to brazen out this shameful episode for days before they were helped out the door stand to make eye-watering sums of money from any sale of the firm illustrates all that is wrong with the business culture in the finance world,” said Ged Nash, finance spokesman for the Labour Party.

“I accept that Davy is a private company and it is for shareholders to decide on the fate of the company and whether or not it will go up for sale. But the sight of some of the Davy 16 walking away with vast amounts of money from any sale would not sit well with me or with the wider public.”

Davy: a history of fines and dubious practices

Greencore shares (1993)

Davy was hit with a £150,000 fine by the London Stock Exchange in 1993 after it ran into difficulties selling the State-owned shares in Greencore, the renamed former semi-State company Irish Sugar. The broker was supposed to sell 25.4 million Greencore shares at 275p each to raise £70 million for the exchequer but more than a quarter of the shares were not sold and were bought by three directors of Davy: Kyran McLaughlin, chairman Brian Davy and chief executive Tony Garry. It was the first public reprimand handed down by the London Stock Exchange to a member firm. Albert Reynolds, then taoiseach, said: “You employ professional people to do a professional job, you pay the top rate of the day and you expect the job to be done in a professional manner. It was not done in a professional manner.”

Planning scandal (early 1990s)

Davy Hickey Properties – described as Davy’s property arm at the Mahon tribunal into planning corruption – was involved in a consortium behind the rezoning of lands at the former Baldoyle Racecourse in north Dublin. Former lobbyist Frank Dunlop paid bribes to politicians to have the lands rezoned, including £25,000 to the late Fianna Fáil TD Liam Lawlor. Dunlop told the tribunal that the idea for the rezoning was Lawlor’s and that he set up an initial meeting between Dunlop and John Byrne, the owner of the land, in Davy’s offices. He said Davy executives Brendan Hickey and David Shubotham become involved in the project at that point. Dunlop told the tribunal he received thousands of pounds in payments from the two men.

Note to John Furze (1999)

Kyran McLaughlin was forced to resign as joint chief executive of Davy in 1999 after his former wife sent the famous “Note to John Furze” 1980s memo detailing a tax evasion scheme in Liechtenstein – to the State-led investigation into tax evasion using the Ansbacher deposits. It subsequently emerged that McLaughlin set up an offshore trust fund in 1986 investing about £250,000 of what he called “after tax” money into the trust for the benefit of his children. He rejoined the board of Davy in 2004 after resolving his tax issues.

Unsuitable credit union investments (2009)

Davy paid a settlement of €35 million to cover losses at more than 130 credit unions that lost huge sums on high-risk bonds sold by the broker. The Irish Stock Exchange found in 2009 that Davy had breached rules on disclosing information to credit unions about the bonds following accusations that the credit unions did not understand what they were signing up for.

Unsuitable personal investments (2014)

The High Court awarded €2.1 million to a “very vulnerable” young man with intellectual and other difficulties against Davy over its “deliberate neglect” of him that led to heavy losses from risky investments. Mr Justice Peter Charleton found Davy to be in breach of contract and a duty of care by encouraging the man, an orphaned, only child aged just 20 when he started investing through Davy in 2005, to place €1.75 million of his €5 million inheritance in contracts for difference, a highly leveraged investment. The judge found that Davy never properly explained the investments to the man and that there was a “systems failure” within Davy concerning its treatment of the man who was not in the full of his intellectual, physical and mental health.

Joe Brennan

Joe Brennan

Joe Brennan is Markets Correspondent of The Irish Times