Davy hit with €4.1m fine over Anglo Irish Bank bond trade
Davy has been fined €4.1 million by the Central Bank of Ireland in relation to a bond deal in which a group of 16 staff, including senior executives, sought to make a profit without telling the client or the stockbroker’s own compliance officers. The fine is a record for an Irish stockbroking firm.
The case is known to relate to the handling of the sale in
2014 of subordinated bonds in the then-defunct Anglo Irish Bank by Northern
Ireland property developer Patrick Kearney, which was the subject of a High
Court action that was settled in early 2016.
Davy and the Central Bank declined to comment on the case.
They also declined to identify the Davy staff involved, believed to also
include current and former employees, or comment on whether the regulator plans
to pursue any action against individuals.
Mr Kearney, who was part of the so-called Maple 10 investors
that bought shares in Anglo in 2008 with loans from the bank, was separately
lent money by the lender the following year to buy junior bonds in the company
that had a par value of €27 million, according to court documents for the
previous legal case.
Loans secured on the bonds were subsequently sold to an
affiliate of US debt investment firm CarVal, called Stapleford Finance. Mr
Kearney engaged advisory firm LeBruin Private, co-founded by former Anglo Irish
executive Tom Browne, in 2014 to help him deal with his debt to Stapleford.
Following discussions involving Mr Kearney, LeBruin and Tony
O’Connor, an employee of Davy at the time, it was decided Davy would sell the
bonds for a price which would discharge the €2.36 million debt to Stapleford
and leave a profit to be divided between him, LeBruin and Davy.
The bonds were sold for 20.25 cent in the euro, realising a
total price of around €5.58 million. The consortium of 16 Davy staff would
emerge on the other side of the trade as the buyers of the bonds, which was unknown
at the time to Mr Kearney or Davy’s own compliance function.
Mr Kearney claimed in his action that the €5.58 million
price significantly undervalued the bonds, as he met with an investment banker
on the day the deal went through in November 2014 who offered to buy the bonds
at 32c each. He said that Davy persuaded him that the original deal for 20.25c
had already been agreed. The developer had an execution-only account with Davy.
Investigation
The legal case was settled in early 2016. The subsequent
Central Bank investigation has found that Davy breached EU rules – known as the
Markets in Financial Instruments Directive – by failing to take all reasonable
steps to identify whether a conflict of interest arose in relation to the
trade.
It also 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 firm’s personal account
dealing framework completely, such that Davy’s compliance function first became
aware of the transaction four months later, when certain information about it
became public.
Davy provided “vague and misleading details and wilfully
withheld information that would have disclosed the full extent of the
wrongdoing” when it engaged initially with the Central Bank on the case, the
regulator said.
“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,” said Seána Cunningham,
the Central Bank’s director of enforcement and anti-money laundering.
“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 - to
trade for themselves rather than for a client - the risk of conflicts of
interest arising is heightened.”
Davy chief executive Brian McKiernan told staff in an
internal email on Tuesday that “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”
“We deeply regret and are sorry for the shortcomings that
gave rise to the findings which could not recur today,” he said in the email,
seen by The Irish Times. “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.”
The board of Davy oversaw two independent reviews of the
issues arising from the transaction, the Central Bank said.
Following on from this, Davy introduced a revised conflicts
of interest policy and revised personal account dealing rules in May 2016.
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