Arising from the Central Bank of Ireland’s decision to fine stockbroking firm Davy, serious concerns have now emerged about how Davy may have operated the grey market for trading Kerry Co-op shares over recent years.

The Irish Farmers Journal has heard multiple concerns from shareholders in Kerry Co-op over recent days relating to Davy’s facilitation of a grey market for Kerry Co-op shares.

Davy has emerged as the dominant facilitator for selling Kerry Co-op shares on the grey market over recent years, following the introduction of a share redemption scheme by Kerry Co-op in 2019.

The concerns relate to the possibility of whether Davy acted as both the broker and the buyer for Kerry Co-op shares. If this was the case, this could raise conflict of interest issues.

Spotlight

Davy has been in the spotlight for the past week after the Central Bank of Ireland fined the firm €4.1m for breaking conflict of interest rules after employees and senior executives at Davy personally profited after buying bonds in Anglo Irish Bank in 2014.

Given the Central Bank’s findings, similar questions are now emerging about whether there are potential conflicts of interest in how Davy may have handled trades of Kerry Co-op shares.

Questions are also being asked by shareholders about the possibility of whether Davy may have cashed in Kerry Co-op shares via Kerry Co-op’s share redemption scheme.

Redemption scheme

Kerry Co-op introduced its share redemption scheme in 2019 as a means for shareholders to cash in their shares, while realising the full value of the shares at roughly €650 per share.

Up to that point, Kerry Co-op shares were only traded on a grey market, typically for anywhere between €250 and €500 per share.

Shareholders selling their co-op shares on the grey market had to pay capital gains tax (CGT) of 33% on the value of the shares.

Kerry Co-op’s share redemption scheme, which is open for applications twice each year in May and November, has proven to be extremely popular with private pension funds that hold shares in Kerry Co-op as there is no requirement for pension funds to pay tax on the gains made from these types of investments.

In contrast, a private individual redeeming shares must pay income tax on the full value of the shares. Hence, selling shares on the grey market was often more attractive than using the redemption scheme for private shareholders.

This gave rise to a scenario where a private pension fund could buy Kerry Co-op shares on the grey market for €500 or less and then cash these shares in via the redemption scheme in a short turnaround time to make a very healthy profit with no tax liability and little or no risk.

In the very first share redemption window in May 2019, almost €90m worth of Kerry Co-op shares were redeemed.

The Irish Farmers Journal understands that the majority of the shares redeemed in this window of the scheme came from private pension funds.

Scheme

Informed sources close to Kerry Co-op have told the Irish Farmers Journal that Davy’s interest in Kerry co-op shares really ramped up in 2019 when the redemption scheme was first introduced.

The firm began actively working to get its hands on as many Kerry Co-op shares as possible for its clients over recent years because of the benefits of the share redemption scheme.

It’s understood Davy regularly contacted shareholders in Kerry Co-op to gauge their interest in selling their shares.

Questions are now being asked was it possible that Davy purchased Kerry Co-op shares on the grey market and if these shares ended up in the private pension funds of their own employees, which were then potentially cashed in for a profit via Kerry Co-op’s redemption scheme.

It’s understood there are currently about 65 Davy nominee accounts that hold shares in Kerry Co-op. Between them, these accounts own just under 25,000 Kerry Co-op shares, which are valued at more than €15m.

It is not clear whether all of these Davy nominee accounts are owned by private clients of Davy. However, Kerry shareholders have concerns that some of the beneficial owners of these accounts may be Davy employees.

Compliance

When contacted by the Irish Farmers Journal, a spokesman for Davy said the firm could not comment on any matters relating to its clients or employees.

However, the spokesman did point out that the same restrictions, compliance and oversight requirements apply to any staff trading shares on a grey market just the same as if they were trading shares in a public company.

The spokesman also noted that Davy had proper protocols in place for any staff trading for themselves in listed or unlisted assets.