It’s understood the fine relates to a transaction involving Anglo Irish Bank bonds and a Maple 10 developer.
MINISTER FOR FINANCE Paschal Donohoe has called on Davy stockbrokers to comment publicly on the €4.1 million fine that the Central Bank of Ireland fine levied against the company today.
The regulator announced its findings this afternoon after an investigation revealed four breaches of market rules by the firm between 2014 and 2016.
It’s understood to be the largest fine a brokerage in Ireland has ever faced.
The Central Bank said it had determined that €5.9 million would be the appropriate fine. This was reduced by 30% to €4,130,000 “in accordance with the settlement discount scheme provided for in the Central Bank’s Administrative Sanctions Procedure,” because Davy reached an early settlement agreement with the regulator.
Speaking to reporters this afternoon, Finance Minister Paschal Donohoe said the issue was “exceptionally serious”.
“The behaviour that has been detailed by the Central Bank of Ireland in relation to Davy stockbrokers falls gravely short of the standards of behaviour that are expected of leaders in positions of financial responsibility.
Of course, I’m particularly concerned that this incident occurred in the period after the financial crisis, which was a period during which we reflected much and commented much on the standards of behaviour that we expect within our financial services sector.
The Fine Gael TD for Dublin Central said the seriousness of the issue was reflected in the scale of the fine and “the thoroughness of the investigation” by the regulator.
“I also believe that it is appropriate that Davy publicly comment on the statement that has been made by the Central Bank today,” he added.
It’s understood that Davy is constrained in what it can say publicly due to the terms of the settlement agreement with the Central Bank.
However, in a note sent to staff this afternoon, Davy chief executive Brian McKiernan said, “We deeply regret and are sorry for the shortcomings that gave rise to the findings which could not recur today.
“Davy is an organisation that consistently looks to evolve and improve. Since 2014, Davy has gone through a process of Board and management renewal with a significant investment in people, risk management, structures, policies and processes.
“While the CBI confirms that the investigation is now closed, it may still result in client queries and we should be very open about our regret at what happened and our subsequent learnings. However, we are constrained from commenting further by the Settlement Agreement and this constraint extends to all Davy people.”
In a statement this afternoon, the Central Bank said the issue related to a transaction involving the sale of bank bonds on behalf of “a client” of the brokerage.
The Central Bank would not comment any further on the matter and has not named the client or the Davy employees involved in the transaction. However, it’s understood that the client was developer Patrick Kearney, who had purchased Anglo Irish bonds, valued at €27 million, with loans granted to him in 2009 by the now-collapsed bank itself.
In 2014, he opened an account with Davy in a bid to sell on the bonds at discount in order to settle a debt owed to Stapleford Finance, a vulture fund owned by US fund management giant CarVal.
On affidavit in 2016, Kearney said that he engaged with debt restructuring specialist LeBruin Private to advise him on how to deal with his obligations to Stapleford.
Kearney said he entered a deal with LeBruin and Davy where the latter would sell the bonds for a price that would discharge the €2.36m debt to Stapleford. Any profit would then be divided between him, LeBruin and Davy.
The bonds were sold to a consortium for 20.25 cent on the euro, realising a total price of around €5.58m. But a row over the balance ensued, which led to LeBruin suing Kearney and Kearney suing Davy in the High Court.
Both actions were settled out of court in 2016 but it prompted a Central Bank of Ireland investigation into the transaction to determine whether there were any potential conflicts of interest on Davy’s part.
The Central Bank said in a statement this afternoon that the consortium that purchased the bonds was made up of 16 Davy employees, including senior executives, a fact that Kearney was not aware of at the time.
The stockbroker “took no steps to ensure that the Client was aware that the Consortium was comprised of Davy employees. No written disclosure was made to that effect,” the Central Bank concluded.
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“While Davy employees are permitted to trade on their own accounts, they are required to do so on a designated system that is monitored by Davy Compliance.
“An account specifically for the Transaction was opened by a member of the Committee on Davy’s system for institutional clients, a system that the Committee knew or ought to have known was not monitored by Davy Compliance,” the regulator explained.
‘Conflicts of interest’
On foot of the investigation into Davy’s conduct, the Central Bank has now concluded that the stockbrokers prioritised facilitating an opportunity for a consortium of 16 Davy employees “to make a personal financial gain over ensuring that it was complying with its regulatory obligations”.
The consortium was “acting in a personal capacity”, the regulator said.
Initially, Davy failed to disclose the full extent of the wrongdoing. “This lack of candour was treated as an aggravating factor in this case,” the Central Bank said.
The transaction “highlighted a weak internal control framework within Davy in relation to conflicts of interest,” which “served to create an elevated risk of investor detriment”.
Seána Cunningham, the Central Bank’s Director of Enforcement and Anti-Money Laundering, said that Davy had fallen “well below the standard required in meeting its regulatory obligations in relation to conflicts of interest and personal account dealing.
In permitting a group of employees to pursue a personal investment opportunity, conflicts of interest were not properly considered, the rules in place in relation to personal account dealing were easily sidestepped and Davy’s compliance function was kept in the dark. The serious issues identified in this investigation required the imposition of a significant financial penalty on Davy.
“This case serves as an important reminder that conflicts of interest are an inherent risk to all regulated entities. When not properly managed, they pose a risk to investors and diminish market integrity,” Cunningham said.
Additional reporting by Christina Finn