Who was involved, what happened, and what are the possible consequences?

It is yet another scandal in Irish financial services. Davy’s recent fine may be the largest of its kind ever imposed on a broker in Ireland, but the damage inflicted on the company may still be greater than the € 4.13 million sum that was sanctioned by the Bank. Central.

A rogue personal gain from 16 Davy Stockbrokers employees has left the company paddling through stormy waters, while trying to preserve its reputation and customer base. Three of the highest-ranking stakeholders left the firm over the weekend, while the 16 members involved could still face sanctions from the Central Bank. But what exactly happened at the company and what could happen next?

Trade

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

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

But instead of selling them on the market, the company formed a consortium, the O’Connell Association, comprising 16 Davy staff members, to purchase the bonds.

In effect, the broker’s senior staff sold the bonds themselves and did so without notifying the compliance function at Davy, something that is not allowed on the stock market under EU rules.

Tánaiste Leo Varadkar has explained it in the following way: “It is as if you were selling your house, the auctioneer pretended to be trying to get the best price but in reality it was the same buyer.”

Therefore, not only has the market failed to determine what was the “best price” for your home, but the buyer has an obvious interest in keeping the final sales price low.

The bonds were sold for 20.25 euro cents, with an amount of 5.58 million euros.

Mr. Kearney determined that the price was less than its value, after being told that another buyer would be willing to pay about 60 percent more. He sued Davy, finally solving his case in Superior Court in 2016 for a figure that is understood between 2 and 3 million euros.

However, the final benefit obtained by those involved in the company that acquired the bonds is unknown. What is known is that the company sold a large part of these bonds to a fund manager in New York, about three weeks after their acquisition. It is understood that some in the group held onto their ties for a few years afterward.

The regulator’s vision

The Central Bank then stepped up its investigation and it has taken about seven years to get to the point where the Central Bank fined the company 4.1 million euros for the transaction. It claimed that by allowing the transaction to proceed, the brokerage violated 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 Association has not been revealed. However, The Irish Times has established that the list includes Davy CEO Brian McKiernan, Vice President Kyran McLoughlin and Bond Director Barry Nangle, all of whom resigned over the weekend, as well as former CEO Tony. Garry and former director. Institutional Equity Company David Smith.

That list includes three CEOs of the firm on the list; two of which were implicated in an earlier scandal at the firm, back in 1993, when the broker was fined for Greencore shares that were bought by companies owned by some senior Davy executives.

What has happened to those involved?

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

Now Davy’s board, which includes Chairman John Corrigan, a former chief executive of the National Treasury Management Agency (NTMA), which is responsible for increasing the state’s debt, is conducting its own review of the Bank’s findings. Central. It will evaluate if other cases of irregularities occurred in the brokerage.

The situation is complicated a bit because it is estimated that those involved in the trade own at least a third of Davy, a company valued at around 400 million euros. The late CEO McKiernan is understood to have a 13 percent stake in the stockbroker.

On Sunday, the Minister of State of the Department of Finance, Seán Fleming, said that this shareholding issue must be addressed “very quickly.”

“The problem that the people who have significant stakes in that company continue to have a significant influence on the operations, even though they have resigned from their executive functions, is an issue that must be dealt with very quickly,” he said.

What will happen next?

As Finance Minister Paschal Donohoe said at the weekend, now that the company has been sanctioned, the regulator can now focus on the behavior of the people involved. The Central Bank has a variety of sanctions available, including fines and a ban on people from working in a regulated company.

The Department is locked in discussions with the NTMA about Davy’s continued involvement in the sale of state debt as the primary distributor and a decision is expected Tuesday.

There is also the potential reputational damage the business could face, which could lead to it losing customers. Clients such as the Bank of Ireland have raised concerns about the transaction.

Given the pressure on the equity stake in the company, as Minister Fleming describes it, the broker may also need to find buyers for a sizeable stake in the company.