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“ONLY WHEN the tide goes out, do you find out who’s been swimming naked,” says the now hackneyed Warren Buffett quote.
But the tide was high and rising in the final months of 2019 when the Central Bank of Ireland interviewed executives at Davy Stockbrokers as part of its long-running investigation into a controversial bond sale. Although the company is not required to present annual accounts, Davy enjoyed retained earnings of € 123 million at the end of 2019 with total assets on its books of more than € 500 million, according to the Business Post.
Davy was a highly respected and profitable team in an Irish economy that had regained much of its pre-crash luster. Normal service had resumed after the turmoil of the early decade.
Just two years later, CEO Brian McKiernan, Vice President Kyran McLaughlin and others have resigned.
Your bond table has been dissolved; the National Treasury Management Agency has removed its authorization as the main Irish government bond broker; and the company’s board of directors has decided, amid a spiraling scandal, that the only way to save Ireland’s largest brokerage is to put it up for sale.
All of this just over a week after the Central Bank disclosed the findings of its investigation, which began in 2016, and slapped Davy with a € 4.1 million fine for four breaches of Union market regulations. European.
Bond agreement
The Davy scandal could have been designed in a lab specifically to trigger our national post-traumatic stress disorder on the misbehavior of financial services companies.
It involved a major Irish brokerage, a secret deal, a Maple 10 developer, and largely the Anglo Irish Bank bond sale.
What the regulator uncovered was a plan, drawn up by a group of 16 Davy employees, including senior executives, to profit from the sale of the bonds on behalf of a client, developer Patrick Kearney.
Kearney had approached the firm to handle the sale, the cash he would use to pay off a vulture fund debt and any profits split between him, the firm and his advisor, LeBruin Private.
What Kearney didn’t know is that the group of 16 were also on the other side of the transaction as buyers. An internal executive committee gave the deal the green light, allowing it to bypass the company’s internal compliance framework, which likely would have raised red flags about the obvious conflicts of interest at the heart of the deal.
The transaction “highlighted a weak internal control framework within Davy regarding conflicts of interest,” which “served to create a high risk of detriment to investors,” the central bank said in its compliance notice last week.
Worse still, Davy did not initially disclose the full scope of the crime.
It was only after the beginning of the investigation that the Central Bank realized the extent of the inaccurate information provided. In particular, the information provided by Davy was presented in such a way that the involvement of certain individuals appeared more central to the transaction than was actually the case.
“This insincerity was treated as an aggravating factor in this case,” said the Central Bank.
Despite this, the fine was ultimately reduced from € 5.9 million to € 4.1 million because Davy agreed to an early settlement.
A decade of reflection
Immediately, the story awoke ghosts of the ‘bad times’.
“Of course, I am particularly concerned,” Finance Minister Paschal Donohoe said shortly after the Central Bank’s announcement, “that this incident occurred in the period after the financial crisis, which was a period during which we reflected a lot and discussed a lot on the standards of behavior that we expect within our financial services sector ”.
In any event, however, the Davy scandal has shown that the state’s ability to hold people to account is lacking, despite a decade of “thought.”
To be sure, from a regulatory perspective, the environment has improved substantially since the accident, says Professor Blanaid Clarke, McCann Fitzgerald Chairman of Corporate Law at Trinity College Dublin.
“There have been changes in terms of application since the banking crisis both nationally and internationally. Much of this has been led by the EU, ”he explains.
“They have introduced new regulations, new requirements in terms of suitability and probity and responsibility, new requirements in terms of risk management and new requirements in terms of capital.”
But this week, central bank officials made it clear that regulators need an expanded set of tools to be more effective.
Speaking to the Oireachtas finance committee, Derville Rowland, the central bank’s chief financial officer, said the legal framework “requires further strengthening with regard to individual responsibility.”
In 2018, in the wake of the follow-up mortgage scandal, the Central Bank produced a report that “indicated a renewed focus on culture,” explains Professor Clarke.
It included a recommendation for a new Senior Executives Accountability Regime (SEAR) that would allow the Central Bank to pursue people who work in regulated companies and hold them accountable for wrongdoing.
“At this time, under the current administrative sanctions regime, the Central Bank can investigate people and punish them, but only if they have participated in the infraction, belonging to the firm,” he says.
So how it works means that you have to prove the wrongdoing of the company before you can find the people. What [The Central Bank] has proposed is to break that link and the effective way to break it would be SEAR.
It also means that regulated companies would have to provide a statement of responsibility for each individual who works there. For the regulator, the advantage of this “map of responsibilities”, says Professor Clarke, is that “they can see immediately, if there is a problem, who to turn to”.
Three years after the central bank first recommended the changes, the government said this week that it plans to prepare legislation on the implementation of SEAR before the summer.
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Criminal reports
Meanwhile, Davy’s board confirmed late Thursday that it plans to sell the business. “The J&E Davy Board has decided to pursue a Group sale. Rothschild & Co has been appointed financial advisor to manage the process, ”the brief press release reads.
The Bank of Ireland is widely expected to be in first position to enter and buy the company, which the bank sold in 2006 for € 350 million.
However, big questions remain about the board’s handling of the scandal. Key members of the board, such as Chairman John Corrigan, a former chief executive of the National Treasury Management Agency, remain in place despite the resignations of senior executives and directors.
Corrigan, who has chaired Davy since 2015, is tasked with cleaning up the mess and repairing the company’s reputation in the wake of the scandal.
As for the group of 16 behind the bond sale, the Central Bank made it clear this week that the story is not over.
During the week, Derville Rowland made clear that the possibility of further investigation by other state agencies remains a clear possibility. Although he said the Central Bank did not forward any information on Davy al Gardaí, he said it had a “tentative engagement” with unidentified agencies to investigate further on the matter.
“Now that the details have been released, we are prepared to engage with other authorities,” Rowland told the committee, although he made clear that the central bank investigators did not form the opinion that “criminal reports” should be made.
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