In March this year, Paddy Finnegan, head of private clients at Bloxham, gathered stunned staff to tell them the division he ran was being sold to Davy, their larger rival.
Bloxham, he commented in the course of a contentious meeting, was a “country club” compared with Davy, a premierdivision business. The reaction to this portrayal was furious, sources say.
Little did staff know, but there was much worse to come for the country’s oldest broker.
On Friday evening nine days ago, Tony Garry, head of Davy, was in Co Clare when he got a call from Pramit Ghose, Bloxham managing partner. Ghose revealed that the Central Bank had ordered Bloxham at 5pm to cease trading because of a gaping hole in its balance sheet as a result of financial misreporting.
A finger had been pointed at Tadhg Gunnell, Bloxham’s financial partner, who informed his fellow partners of financial discrepancies the previous Wednesday.
Advertisement
Bloxham had been ordered to make good a €5.8m hole in its regulatory capital or find a buyer by Monday morning.
At the same time, Tony Mulderry, a corporate financier who previously worked with Barry O’Callaghan in Riverdeep, was ringing Des Carville of Davy Corporate Finance at home.
Mulderry had been called in by Bloxham to try to help cut a deal to get it out of its financial mess.
Carville and Brian McKiernan, the head of Davy’s private clients division, spent three hours in Bloxham that night hammering out a deal with Ghose, Finnegan and Mulderry to buy the firm’s asset management and private clients arms.
McKiernan and Carville returned the next day and spent the weekend carrying out a quick and hasty due diligence. After the Gunnell revelations, Davy needed to satisfy itself nothing worse lurked within the balance sheet.
Advertisement
On the Sunday, a bigger Davy team hit Bloxham. By Monday morning, the deal was done. After a Davy board meeting on Sunday night by telephone, and an all-night session in McCann Fitzgerald, a Dublin law firm near Bloxham’s base in the International Financial Services Centre, a statement was issued at 8.19am.
Davy was buying the Bloxham private clients and asset management businesses. For private clients, it would be “business as normal”. Asset management customers would receive “unbroken service”.
For others, things were not so smooth.
At another fractious Bloxham meeting on Monday, Ghose told workers that he was among a total of 21 staff who would be moving to Davy, along with the asset management business. He expressed his regrets that the employees losing their jobs — up to 39 of them — would get nothing more than statutory redundancy pay. Staff simmered.
The next day, Bloxham was placed in liquidation. Kieran Wallace of KPMG, the liquidator, had been drafted in by the firm a week earlier to crunch the numbers and review its options.
Advertisement
Last Friday, Wallace updated Bloxham staff who had not made the cut for the Davy deal.
They would no longer work out their four-weeks’ notice as they had been told. Nor were staff likely to get payment for any expense claims, they heard. Staff with more than a decade of service would walk away with €12,000 in severance.
Ghose, Finnegan, and Niall Tinney, the Bloxham asset management partner, were already ensconced in their new base across the river in Davy’s headquarters on Dublin’s Dawson Street. The mood, said one source, was poisonous.
IT IS hardly the outcome envisaged by Ghose when he was appointed managing partner in 2007.
In bullish mode, he declared then that his ambition for the broker was to achieve profits of €25m-€30m over the following five years, he said.
Advertisement
“We’ll need a fair wind at our backs but we think it’s possible if the markets remain strong,” he said.
Barely months passed before the firm felt the first stirrings of an ill wind. That same year, Bloxham agreed an out-of-court settlement with Paul Fogarty, a trader who had moved there from Davy earlier that year and who challenged his dismissal.
It made expansionary moves, setting up a bond joint venture in London called Sonas, which it has since tried to sell.
Like other brokers in a shrinking market, though, Bloxham had explored deals with its rivals. Merrion expressed interest at various times. Two years ago, Bloxham had talks with Dolmen. Last September, Ghose approached Goodbody, which is now owned by Fexco.
As late as last year, Bloxham was eyeing up AIBIM, the’ investment management unit at Allied Irish Banks.
Advertisement
Before Wednesday, May 23, the partners must have felt they were progressing with a successful restructuring of the business.
A deal had been agreed to sell its private client business to Davy. The price was originally €5m plus a €4m earnout. After mass defections to Dolmen and Goodbody, the price was pared back to €2m up front and an earnout of up to €5m.
It was also in advanced talks with Merrion Capital on a sale of its asset management business, which had made up to €4m a year in the good times. That would have pulled in another substantial cash payment and earnout.
The broker was also betting on clawing back some of the €14m it was forced to pay out in compensation and legal fees in relation to losses suffered by clients on the Saturn bonds.
Clients, including the Solicitors Mutual Defence Fund, had spent about €30m buying the bonds from Bloxham, which acted as agent for Morgan Stanley, the issuer. They suffered huge losses when the bond was terminated in 2009.
The investors are suing Morgan Stanley in the London High Court later this month, claiming misrepresentation, and seeking damages of €20.5m. Bloxham is supporting their case and has covered the cost of insuring the clients against an order for costs being awarded against them.
If the action is successful, Bloxham will get a partial refund on previous settlements made.
Sources say the firm was hopeful of recouping up to €7m, and had been offered €5m by Morgan Stanley as part of an out-of-court settlement.
The cash would provide welcome relief for the seven partners, including Ghose, Finnegan, Gunnell and Tinney, who borrowed heavily from National Irish Bank (NIB) to fund a buyout of other equity partners in 2007.
The partners owe a collective total of €14m to NIB, in different proportions, through individual unlimited companies that hold their Bloxham interests. They are also liable jointly and severally for the firm’s €8.5m NIB overdraft.
All these best-laid plans would unravel with frightening speed. Michael Hodson, for many years Gunnell’s equivalent at Merrion Capital, joined the Central Bank last autumn to head up stockbroking supervision.
He undertook a general trawl of stockbrokers’ finances. Issues were raised with Bloxham and its financial partner, Gunnell, who joined the firm in 2000 from Deloitte. On the morning of Wednesday, May 23, Bloxham was given a deadline of the following evening to respond to particular Central Bank queries.
Gunnell told his fellow partners that trading losses of €2.6m had been recorded incorrectly as an asset. Some of these losses were incurred as far back as 2007.
The partners were also told €1.7m paid in April 2011 to the partner’s unlimited liability companies had been recorded incorrectly as an asset. A €1m prepayment of partners’ income tax obligations in 2011 was also booked as an asset. Combined, there was a more than €5m overstatement of the broker’s financial health.
“The realisation of the true state of affairs has come as a total shock to me and to the other partners of Bloxham,” Dempsey said.
On May 24, Ghose trooped with fellow partners into the Central Bank to admit they could not give a satisfactory answer to questions posed by Hodson and his team. In a market already hit this year by the collapses of Worldspreads and last year by the Custom House Capital scandal, Bloxham’s number was up. Merrion, which backed off from talks after being informed of the financial reporting debacle, was back in the frame at the weekend but withdrew on Sunday.
The firm would take over the business, it told Bloxham, but was not prepared to put up cash at such short notice.
NIB, Bloxham’s largest creditor, was not going to accept.
Davy agreed to pay less than €6m combined for the private clients and asset management businesses. Private clients was to be sold for €2.2m with no earnout. The asset manager, with some €700m under management, was sold for just €3.6m.
With the broker ceasing trading, Bloxham also lost any right to its share in any future demutualisation of the Irish Stock Exchange. The broker had valued the share at €6.25m.
THERE is some bewilderment in stockbroking circles at the casting of Gunnell as a maverick rogue. He lunched regularly with Ghose and Finnegan.
Ghose is a stock-picking guru, capable of crunching the most complex balance sheets. Yet here was a company, where he and other highly paid partners were heavily exposed financially, carrying a €5m hole in a balance sheet with net assets of €12m.
Bloxham employed fewer than 100 people. “It’s not exactly Apple,” said one disgruntled ex-staffer.
There is also bewilderment that the accounting errors were missed over five years of audits and of regulatory returns to the Central Bank.
“Both the regulator and the auditor had staff in here for up to a week every year, like they do in any other broker, and they ask even junior staff questions about their work,” said one source.
The Central Bank will argue that it has to be able to rely on audited financial accounts. Deloitte, Bloxham’s auditor, will have questions to answer.
The price of collapse is high for the Bloxham partners, even those now in Davy’s embrace — the partners’ overall personal liability may top €30m, say sources.
Staff last week learnt that a profit of more than €5m “was available to partners” in 2009, a year when employees took voluntary pay cuts of 20%. It was truly a bitter end.