Davy Q&A: Who was involved, what happened and what is the likely fallout?

It's yet another scandal in Irish financial services. The recent fine on Davy may be the biggest of its kind ever levied on a stockbroker in Ireland, but the damage inflicted on the firm may yet be greater than its €4.13 million punishment from the Central Bank of Ireland.

A rogue personal gain by 16 employees at Davy has left the firm paddling through stormy waters, as it tries to survive the fallout. Three of the highest-ranking among the group left the firm last weekend, with none now remaining at the broker. All 16 could potentially face sanctions from the Central Bank.

But what exactly happened at Davy, and what could happen next?

What started it all?

The case involves the sale of bonds in the then defunct Anglo Irish Bank back in 2014. When an investor buys a bond in a company, they're effectively lending to that company, and are paid interest on this loan.

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The broker was approached by a client, Northern property developer Patrick Kearney, to sell these on his behalf.

But rather than sell them into the market, the firm put together a consortium – the O’Connell Partnership comprising 16 Davy staff members – to acquire the bonds.

In effect, the senior staff at the broker sold the bonds to themselves, and did so without notifying the compliance function in Davy, something which is not allowed in stockbroking under EU rules.

Tánaiste Leo Varadkar has explained it as follows: “It’s as though you were selling your house, the auctioneer pretended to be trying to get the best price for you but was actually the buyer himself.”

So not only has the market not been able to determine what was the “best price” for your house, but the buyer has an obvious interest in keeping the ultimate sale price low.

The bonds were sold for 20.25 cent in the euro, realising €5.58 million.

What led to a court action about the deal?

Mr Kearney determined the price was less than their value, after being told another buyer would have been prepared to pay close to 60 per cent more. He sued Davy, ultimately settling his case in the High Court in 2016 for a figure understood to be between €2 million and €3 million.

The ultimate profit made by those involved in the partnership who acquired the bonds, however, is not known. What is known is that a large tranche of these bonds were then sold on by the partnership to a New York fund manager, some three weeks after they were acquired. It’s understood that some in the group held onto their bonds for some years afterwards.

What did the regulator do?

The Central Bank’s investigation took seven years to get to the point where it fined Davy €4.13 million over the transaction. It asserted that, in allowing the trade to go ahead, the stockbroker breached EU market rules by failing to identify and manage a potential conflict of interest with the client and by keeping its compliance team in the dark at the time.

Who are the 16?

The full list of those involved in the so-called O'Connell Partnership has not been disclosed. However, The Irish Times has established that the list includes Davy chief executive Brian McKiernan, deputy chairman Kyran McLoughlin, and head of bonds Barry Nangle – all of whom resigned last weekend – as well as former chief executive Tony Garry and one-time head of institutional equities David Smith.

That list includes three chief executives of the firm, two of whom were implicated in a previous scandal at the company, back in 1993, when the broker was fined in connection with Greencore shares, which were bought by companies owned by some Davy senior executives.

What has happened those who were involved?

Until Friday, the only sanction was at the corporate level, and the €4.1 million fine from the Central Bank. However, on Saturday McKiernan, McLaughlin and Nangle resigned with immediate effect.

Davy said on Monday evening that it had closed its bond desk, resulting in four redundancies. The stockbroker said that, following the move, none of the 16 individuals involved in the controversial trade was working for the firm.

The announcement came hours after the National Treasury Management Agency (NTMA) withdrew Davy's ability to act as a primary dealer of Irish Government bonds. It was an unprecedented move. Davy is estimated to have made €4.5 million in fees from being involved in the NTMA's big bond sales on behalf of the State since January 2020.

What comes next?

The board of Davy, which is chaired by John Corrigan, a former chief executive of the NTMA, which is responsible for managing the State's debt, is set to commission an independent review of the firm and the Central Bank's findings. It will assess whether other cases of wrongdoing occurred at the stockbroker.

The situation is complicated somewhat in that those involved in the trade are estimated to own at least a third of Davy, a business that was valued at about €400 million recently. Departed chief executive McKiernan is understood to have a 13 per cent stake in the stockbroker.

Last Sunday, the Minister of State at the Department of Finance, Seán Fleming, said the shareholding issue needs to be addressed. "The issue of people who have major shareholdings in that company continuing to have a major influence on the operations, even though they may have resigned from their executive roles, is a matter than needs to be dealt with very promptly," he said.

How does Davy’s future look?

Davy last weekend appointed its deputy chief executive Bernard Byrne, a former AIB chief executive as interim head of the stockbroker. It will be his task to stabilise the business in the immediate term.

As Minister for Finance Paschal Donohoe has said, now that the company has been sanctioned, the regulator can focus on the behaviour of individuals involved. The Central Bank has a range of sanctions available, including fines and barring people from working in a regulated firm.

There is also the potential reputational damage the firm could face, which could see it lose clients. Clients such as Bank of Ireland have expressed concern about the transaction.

Given the pressure on the shareholding of the company, as outlined by Mr Fleming, the broker may also need to find buyers for a considerable stake in the company.

Bank of Ireland has made an exploratory approach to Davy about the possibility of acquiring the crisis-stricken business should it seek to find a buyer. The bank was previously a majority shareholder at Davy before selling its 90 per cent stake about 15 years ago for €316 million.

In an interview with Inside Business, a podcast from The Irish Times, UCD professor Niamh Brennan, an expert on corporate governance, said the Davy brand was probably beyond repair.

“I think the brand has become toxic so I don’t think we’ll see the Davy brand around for much longer. Davy is now a wounded animal in the jungle and it is bleeding profusely. And wounded animals ... attract predators . The predator is a takeover bidder and we can see evidence that predators are queuing up to buy Davy on the cheap. The brand value is eroded so I don’t think the shareholders are going to get as much for the business as they might have if that brand was worth something.”