Stories
Nobody in Davy has been asked to resign by the Central Bank of Ireland despite Ireland’s biggest stockbroker being fined €4.13 million and an extensive investigation concluding that it “fell well below the standard required in meeting its regulatory obligations in relation to conflicts of interest and personal account dealing.”
An enforcement action by the Central Bank found that a group of 16 employees including a “group of senior executives” prioritised making a “personal financial gain over ensuring that it was complying with its regulatory obligations” to a Davy client.
The Central Bank also criticised Davy for its “lack of candour” and for failing to “disclose the full extent of the wrongdoing” when first discussing the matter with it following a report in the media.
The client was a developer called Patrick Kearney, who asked Davy to sell a bond in Anglo Irish Bank with a face value of €27 million in November 2014 at the best price it could get in the market. A group of 16 Davy employees, including some of its most senior executives, bought the bond on their own behalf for €6 million instead. Soon afterwards, they sold it on into the market, where the bonds were trading at a much higher value, a transaction that ensured a multimillion-euro profit for themselves.
The Central Bank has been engaged with Davy since 2015 and a number of the 16 staff have since left the business to take up other positions, while others continue to play senior roles in the stockbroker.
The Central Bank determined the appropriate fine for Davy to be €5.9 million which was reduced by 30 per cent to €4,130,000 in accordance with the settlement discount scheme provided for in the Central Bank’s Administrative Sanctions Procedure.
“The Transaction highlighted a weak internal control framework within Davy in relation to conflicts of interest management and personal account dealing. All of this served to create an elevated risk of investor detriment,” the Central Bank said in its enforcement action.
“Following details about the Transaction becoming public four months after it occurred, Davy contacted the Central Bank to provide an explanation. At that stage, Davy failed to disclose the full extent of the wrongdoing. This lack of candour was treated as an aggravating factor in this case.”
Conflicts of interest
The Central Bank found that Davy breached MiFID regulations by failing to take all reasonable steps to identify whether a conflict of interest arose. The Central Bank found that, in 2015, Ireland’s oldest stockbroker was “not operating in a conflicts of interest aware environment”.
The regulator added: “Whilst Davy did have a conflicts of interest policy, employees were permitted to decide whether transactions in which they had an interest could give rise to a conflict of interest on a case-by-case basis, without independent oversight and without a requirement to keep a record of steps taken.
“In deciding at the outset whether the transaction was permissible, Davy’s primary focus should have been to identify whether any conflict of interest arose between the consortium (the group of Davy employees) and the client.
“Davy failed to do this properly because the only cursory discussion of this issue was by senior individuals who intended to participate in the transaction and were therefore not impartial.”
The Central Bank concluded: “In effect, this amounted to no consideration of the issue at all by Davy.”
Among the group of 16 employees were some of its most senior executives both at the time and currently.
Personal account dealing and compliance
The Central Bank found that: “Davy did not have a robust control framework in place to prevent employees from entering into personal transactions that could give rise to a conflict of interest. The Consortium circumvented the personal account dealing framework completely, such that Davy’s compliance function (Davy Compliance) first became aware of the transaction four months later, when certain information about the Transaction became public.”
A compliance function can only discharge its role effectively when it has access to all relevant information, the Central Bank said.
“Davy permitted the Transaction to proceed without any oversight by Davy Compliance,” the Central Bank said. “Davy Compliance was sidestepped by the Consortium, and as the personal account dealing framework was circumvented, Davy Compliance did not detect the Transaction as part of its monitoring,” it added.
Diminished market integrity
The Central Bank’s Director of Enforcement and Anti-Money Laundering, Seána Cunningham said: “The Central Bank’s investigation found that Davy fell 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.”
Cunningham added: “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. Where investment firms permit employees to engage in personal account dealing – i.e. to trade for themselves rather than for a client – the risk of conflicts of interest arising is heightened. In promoting a relationship of trust between regulated entities and their clients, the Central Bank expects boards to embed conflicts of interest awareness into their firm’s culture.
“This is critical to ensure that clients’ interests are consistently prioritised, and not overlooked in favour of commercial or personal interests. To achieve this in practical terms, firms are required to have in place a robust framework and to ensure that there is a no-exceptions approach taken to adherence to the applicable rules.”
According to Cunningham: “It must be driven from the top and embraced by all employees of the firm. It was a striking feature of our investigation, how easy it was for the individuals involved to circumvent Davy’s personal account dealing framework,” she said. “Finally, when failures do occur, the Central Bank expects firms to demonstrate accountability in terms of how they deal with regulatory breaches. In this investigation, Davy’s lack of candour when first reporting the matter to the Central Bank was treated as an aggravating factor.”
No written records
The Central Bank also revealed new details of just how Patrick Kearney lost out on millions of euro and the lengths that individuals in Davy who stood to gain at his expense went to disguise what they were doing. The Central Bank does not name Kearney in its report for confidentiality reasons, so he is referred to simply as the client.
Nor does it name the Davy employee who first put the deal together or name the group of senior Davy executives who allowed the deal to occur. These same senior executives, the Central Bank states, also stood to personally gain from waving the deal through.
The Central Bank has, however, only fined Davy. The individuals who cashed in are neither named nor personally sanctioned.
“A number of years before the Transaction occurred, the Client (who at that stage was not a client of Davy) had contacted a Davy employee informally and sought the employee’s view on the value of bonds he owned,” the Central Bank said.
“The bonds in question were unlisted and traded infrequently by a small number of hedge and distressed debt funds. In the weeks prior to the transaction the client, through his financial advisor, contacted the Davy employee.
“He wanted to know the Davy employee’s opinion on the value of the bonds. At that point in time, the Client was trying to sell the bonds. The Davy employee spoke to members of the committee (senior Davy executives) about the opportunity to buy the bonds. The Client subsequently opened an execution only account with Davy and transferred the bonds into this account in anticipation of a possible transaction.
“Initially the Davy employee, the Client and his advisor discussed selling the bonds on the open market subject to achieving a minimum price. The Client agreed to a profit share between himself, his advisor and the Davy employee.
“The amount of the profit depended on the price achieved for the bonds. The committee were interested in buying the bonds. They formed the Consortium with other staff members, including the Davy employee.
“A draft legal agreement was provided to the Client, whereby the bonds would be transferred to the consortium off-market at an agreed price. No disclosure was made to the client as to the identity of the consortium members. The transaction proceeded on that basis.”
In its investigation, the Central Bank concluded this was at the “very least” a conflict of interest between Davy, the consortium and the client due to the “informal nature” of the agreement and the “potential for the Client to believe that the Davy employee was advising him on the highest achievable price for the bonds”.
According to the regulator, other conflict of interest issues included “the fact that the Davy employee had been offered a form of inducement by the Client to find a buyer for the bonds”.
The bank added that “at the same time the Davy employee was a member of the Consortium who were buying the bonds. The potential conflict of interest should have been identified by Davy and managed properly through explicit written disclosure to the Client before undertaking any business on the Client’s behalf. Davy kept no written record of what steps were taken to identify whether any conflicts of interest arose with respect to the transaction.”
“The investigation found that the decision that no conflict of interest arose was taken by the Committee, each of whom were members of the Consortium. They did not minute any discussion in relation to the matter,” the Central Bank said.
The Central Bank then sets out all the things that Davy should have done but failed to do under the regulations.
Aggravating factors
The Central Bank said that all of Davy’s contraventions represented a “serious departure” from the standard required under legislation and the Central Bank’s expectations regarding compliance culture within regulated firms.
“Cooperation with the regulator is a basic expectation of the Central Bank in the context of engagement with firms, whether in a supervisory or enforcement context,” it said.
“When information about the Transaction entered the public domain, Davy contacted the Central Bank to provide an explanation. During the course of that first engagement, Davy provided vague and misleading details and wilfully withheld information that would have disclosed the full extent of the wrongdoing as was known to Davy at the time.
“The Central Bank subsequently wrote to Davy identifying specific areas of concern and seeking additional information from Davy. In a letter of response, Davy once again failed to disclose the full extent of the wrongdoing as it was known to it at the time.
“It was only after the commencement of the investigation that the Central Bank realised the extent of the inaccurate information provided. In particular, the information provided by Davy was presented in such a way as to make the involvement of certain individuals appear more central to the Transaction than in fact was the case. This has been treated as an aggravating factor in this case.”
The Central Bank of Ireland concludes its statement by saying its investigation is now closed.
The Davy response to staff
Brian McKiernan, the chief executive of Davy, sent an email to his employees following the settlement between the firm he leads and the Central Bank of Ireland (CBI). The contents of this email are below:
“The CBI has today released details of a settlement between the CBI and J&E Davy arising out of their investigation of a transaction that took place in 2014. The transaction involved 16 employees, including senior managers, making an unsecured loan and a payment to a third party in exchange for the transfer of ownership of a series of unlisted corporate bonds.
“This was part of a larger debt settlement transaction undertaken by the third party with his lender. While there are no findings of actual conflict of interest or customer loss, there were significant shortcomings in how the transaction was conducted, particularly in the context of the policies and controls relating to the management of potential conflicts of interest. There was also a failure to engage with our compliance team.”
“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. If you have any queries personally, please email or call me.”
Further reading
Who owns Davy: With 30% of Ireland’s biggest broker owned by former staff, what is next for Davy?
