The Brokerage That Roared : Securities: It takes Kennedy Cabot a year to earn what industry leader Schwab makes in three weeks. But that doesn’t deter the low-budget outfit from making big plans.
From a fifth-floor office suite in tony downtown Beverly Hills, David Paul Kane runs the brokerage industry’s bargain basement.
It is Kennedy Cabot & Co., a low-budget outfit that has carved a small but visible niche for itself in Southern California by offering investors low commissions--”We will meet, beat or match our competitors,” declares Kane--and no investment advice.
Kennedy Cabot & Co. isn’t the largest discount brokerage--industry leader Charles Schwab Corp. takes in more in three weeks than Kennedy Cabot does in a year. It may the the loudest brokerage, though. Kane, a tireless self-promoter, plugs his firm through daily television “commentaries” and through shopper-style ads, some of which appear in this newspaper.
Above the din is a brokerage that has managed to make money, about $1 million last year, while limping from one crisis to the next. In the 1970s, the government suspended its license. In the 1980s, an expansion backfired. Last year, it was quietly sold.
All that hasn’t knocked the wind out of Kane.
The firm’s 75-year-old founder rises at 4 a.m. to prepare his daily market commentary. Later, on cue from KWHY-TV, he reads his speech into the telephone while a videotape of Kane appears on the screen.
The advice is easy. “Take profits,” he says. “Shop quality.” On a recent broadcast, he advised viewers to check out “that new Mexican phone company: Taco Bell”--a flippant reference to Irvine-based unit of Pepsico.
In the afternoon, Kane goes to work on his other TV show, “The American Jewish Hour,” a schmaltzy variety show that airs on cable channels in Beverly Hills and West Los Angeles. Kane claims that it promotes “peace and brotherhood” while pursuing less lofty objectives: “It gives us a corner on the Jewish market.”
Kane’s style is low-budget, despite his firm’s upscale address. Kennedy Cabot’s cluttered, almost shabby, offices on Wilshire Boulevard are jammed with file cabinets, newspapers, stacks of order tickets. The carpet is a mass of coffee stains.
The firm plans to move its headquarters across the street later this year, but the new, roomier offices won’t be prettier. Kane eschews “plush offices with fancy pictures,” saying his bare bones operation serves the customer because it keeps prices down. “You know my motto,” he says. “Serve the masses, you’ll eat with the classes.”
Indeed, Kane’s frugality masks a taste for life’s finer things. He has “his” table at the Bistro, a fancy Beverly Hills restaurant, and drives a Jaguar. Kane, a bachelor, boasts that he enjoys the night life; he yanks open a desk drawer that he says is stuffed with letters from models and starlets. “They love me,” he says.
It was Kane’s personal extravagance that provoked a lawsuit in 1988 from his former partner, Hawaiian investor I. Michael Kasser. Contending that Kane had “flipped out,” Kasser claimed that Kane drew “excess salary” of at least $2.4 million between 1984 and 1989.
In the suit, Kasser said Kane used Kennedy Cabot as his own private piggy bank, paying himself $60,000 a month, taking huge “creativity bonuses” and charging the brokerage for everything from jaunts to Catalina to socks, pajamas and underwear.
Kane never denied the expenditures but maintained that he was “terribly underpaid.” During a deposition, Kane described a rule of thumb that set his pay at 12 times that of Kennedy Cabot’s second-ranking officer.
And, in an interview, Kane maintained that he isn’t a spendthrift. For example, said Kane, he lives in a $946-a-month rent-controlled apartment on Rodeo Drive, his home for the last 20 years.
A Superior Court judge in Los Angeles ruled in January, 1990, that Kane had paid himself too much. Stung by the decision, Kane immediately moved to sell his stake in Kennedy Cabot to Jesup, Josephthal Securities Group, a New York investment house, for $2.1 million, court records show. When Kasser tried to block the sale, Jesup agreed to buy out Kasser as well.
The price was $8 million. Kane says he got about $2 million for most of his stock and a three-year contract that guarantees him $250,000 a year. Kane got to keep 14% of Kennedy Cabot and also got a contract to handle Kennedy Cabot’s marketing chores for an undisclosed fee.
It is too soon to say whether the sale will benefit Kennedy Cabot. Records on file with the Securities and Exchange Commission show that Jesup’s chief operating unit, Jesup, Josephthal & Co., is under financial strain; last year it borrowed $1.2 million from Kennedy Cabot. Jesup failed to meet a New York Stock Exchange capital requirement Sept. 28, the close of its fiscal year.
To raise cash, Jesup said it might sell some of its businesses; it is now closing down its securities clearing operations. A spokesman for Jesup said its chairman, John Gebbia, was unavailable for comment.
Kane founded Kennedy Cabot in 1960, naming it after John F. Kennedy, the former Democratic President whom he admires, and former GOP vice presidential candidate Henry Cabot Lodge--in honor of his mother, a staunch Republican.
The firm traded Israeli bonds at first. When the industry was deregulated in 1975, Kane converted Kennedy Cabot to a discount brokerage, hoping to attract small investors with cut-rate commissions.
Kane makes his presence felt. On a recent morning, Kane walked through the firm’s cramped trading rooms as if he still owned the place. “Show us those new teeth,” he shouts to one middle-age broker with a new set. To an elderly customer waiting in the reception area: “Are they treating you OK?”
Former traders say it isn’t unusual for Kane to slip $100 to hard workers. Kane can also be unpleasant, they say. Former trader Glen Andrews recalled Kane, depressed over a drop in sales, ordered Andrews to fire five people. “Any five. He didn’t care,” Andrews said. “His orders were to get rid of them.”
Competitors are amazed at Kane’s boldness. Thomas C. Quick, vice president at Quick & Reilly, a large New York-based discount brokerage, said Kane tried to persuade him to sponsor “The American Jewish Hour” on the East Coast. Quick, an Irish Catholic, turned him down. “It’s not our style, to say the least,” he said.
Kane needles discounter broker Charles Schwab & Co., offering its customers a free share of Schwab stock to switch their account to Kennedy Cabot. Kane boasts that Kennedy Cabot has given away 1,500 Schwab shares--picked up in the market crash of October, 1987. “When Schwab hit $7, David said to buy,” said Denise Baudoin, Kennedy Cabot’s chief executive.
The defections haven’t hurt Schwab, with its 1.4 million customers. “We’re pleased he (Kane) considers our stock a good investment,” says Hugo W. Quackenbush, Schwab senior vice president.
Kane’s run-ins with regulators have been more serious. In May, 1989, the state of Illinois fined Kennedy Cabot $500 for failing to file its annual report with state regulators on time.
Before that in 1970, the SEC charged Kane with violating the federal securities laws by selling unregistered shares of a company named American States Oil. Kane, without admitting or denying guilt, signed a consent decree pledging not to violate securities laws in the future.
As a result of the incident, the SEC suspended Kennedy Cabot’s license and barred Kane from associating with a broker-dealer for nine months. A former saleswoman, Linda D. Tallen, was barred indefinitely. She is no longer in the business, although she has an office at Kennedy Cabot and co-hosts “The American Jewish Hour.”
There are other problems in Kennedy Cabot’s past. Unlike its larger competitors, Kennedy Cabot isn’t a member of the New York Stock Exchange. It has to rely on a third party, a so-called clearing firm, to actually execute trades.
This arrangement hurt Kennedy Cabot in 1981, when its clearing broker, Wien & Co., sought bankruptcy protection. About 100 Kennedy Cabot customer accounts were frozen by the Securities Investor Protection Corp., a private corporation that insures customers’ funds, until the mess was straightend out.
An ambitious expansion program in the mid-1980s failed. In keeping with Kane’s low-budget formula, Kennedy Cabot used none of its own money to open the branches. Instead, it licensed its name to investors who owned the branches and paid all the expenses.
Only four of the 24 independent branches remain. Most shut down, though Kennedy Cabot bought a few of them. Baudoin said many of the independently owned branches failed because the investors were inexperienced in the brokerage business and were undercapitalized.
Kenneth D. Lewis, former owner of failed branches in Denver and Seattle, said he was destroyed by Kane’s abrupt decisions to slash commissions on stock trades. “When he lowered commissions, I knew there was no way I could make it,” he said.
In 1987, after two years of losses, Lewis tried to sell his branches to a regional broker in Texas. When the sale fell through, Lewis, a former branch manager for Schwab, was forced to seek bankruptcy protection.
“It was a disaster,” Lewis said.
Larry Hodoian, co-owner of a Kennedy Cabot branch in Fresno, says he held his breath in April when Kane lowered the commission on large trades to three cents from seven cents a share. “So far, it looks like we are making it up on volume,” Hodoian says. “But I was nervous. I didn’t know what to expect.”
Kennedy Cabot plans to open more branches, this time paying for the expansion itself. Baudoin says the firm plans to open an office in Seattle later this year, and an office in Sacramento sometime after that.
Kane is confident that this time, the expansion will work. “Our goal,” says Kane, using salesman’s hyperbole, “is to annihilate the competition. Our goal is to be bigger than Schwab.”
