When attorney Brian McDonough won more than half a million dollars for an investor in arbitration against brokerage firm Sands Brothers & Co. a year ago, his opponent told him there was a chance that his client might not see the bulk of that money.
“They told me if we didn’t accept a deeply discounted settlement offer I might not be able to recover the entire amount of the award,” said McDonough, of Drinker Biddle & Reath LLP in New York. “They pointed to a number of other large arbitrations pending against Sands Brothers, and suggested that if enough others won the race to claim their awards, there might not be much left for us in the end.”
McDonough refused the settlement offer, and his client went on to receive the full $664,217 he had won in arbitration, although it took many months as Sands Brothers & Co. appealed the award to a court.
Today, attorneys with arbitration cases on behalf of investors say they are hearing the same argument for accepting low settlement offers from Sands Brothers & Co., but the threat of risking an unpaid award carries far more weight: Last month, the firm filed with regulators to withdraw as a broker-dealer, 18 months after withdrawing as a member of the New York Stock Exchange.
The application for withdrawal as a broker-dealer, which must be approved by the Securities and Exchange Commission, has unnerved investors with arbitration cases pending against Sands Brothers & Co., because the NASD and NYSE aren’t able to wield their biggest punishment tool – suspension – against firms that are no longer members.
It has also worried two former Sands Brothers & Co. customers who have won awards – one in April for $261,000 and another in July for $3.1 million – but are spending months in limbo as the firm attempts to appeal through the courts, a strategy that investors’ attorneys believe is a delaying tactic, since courts rarely overturn arbitration awards.
“The judge ruled right from the bench – usually it takes weeks for a ruling – in favor of confirming our award. And exactly four days after the judge upheld our award, Sands Brothers filed a broker-dealer withdrawal form with the NASD” and has since gone on to appeal the judge’s ruling, said an attorney in Beverly Hills, Calif., who won the $3.1 million award in July in front of a New York Stock Exchange panel.
Sands Brothers & Co., a private company formed in 1990 by brothers Martin and Steven Sands to cater to wealthy investors, has the right to continue appealing the awards and to make settlement offers that are lower than awarded amounts, said Richard Roth, a New York attorney who represents Sands Brothers & Co. and the two founders. He denied that he threatened that the firm will not be able to pay arbitration awards if clients don’t agree to lowball settlements.
“That’s only somewhat accurate,” Roth said of his settlement strategy. “I have been telling investors that they (Sands Brothers & Co.) have filed to withdraw as a broker-dealer, and if they want to settle, there is money that has been set aside. I do try to get them down to as little as possible – I’ve settled from 1.5 cents on a dollar to 10 cents on a dollar.”
Asked if Sands Brothers & Co. will pay the two outstanding awards if it loses its appeals, Roth responded, “Let’s cross that bridge when we get to it.”
Martin Kaplan, another Sands Brothers & Co. attorney, said that Sands Brothers & Co. continues to operate in other nonbrokerage businesses, such as merchant banking and private equity, and the firm “expects to deal with whatever liabilities exist – if they exist – in a reasonable fashion.” Kaplan said after reviewing the arbitration claims against the firm, he felt most are without merit.
It’s not unusual for brokerage firms, even small ones like Sands Brothers & Co., to be subject to multiple arbitration awards and claims, particularly in the wake of a market downturn. The cases facing Sands Brothers & Co. are varied, with no single broker named repeatedly, and with fairly common claims cited, ranging from unauthorized trading to negligence.
But adding to former investors’ concerns at Sands Brothers & Co. is the fear that executives will move assets to another broker-dealer, Laidlaw & Co. (UK) Ltd., to avoid paying the awards. Laidlaw & Co., which recently changed its name from Sands Brothers International Ltd., is licensed to do business in 48 states, has an unblemished regulatory record, and is operating as a brokerage even as Sands Brothers & Co. is winding down its brokerage operations.
Although its headquarters are based in London, Laidlaw & Co. has a mailing address listed with the NASD at the same Park Avenue address as the old Sands Brothers & Co. The NASD lists Martin and Steven Sands, as well as several other former Sands Brothers & Co. brokers and employees involved in past arbitration cases, as holding their brokerage registrations at Laidlaw. The Financial Services Authority, a British securities regulator, lists Martin and Steven Sands as directors and investment advisers at Laidlaw. Kaplan, the Sands Brothers & Co. attorney, said Laidlaw is not a successor firm to Sands Brothers & Co., and has been operating as a broker-dealer apart from Sands Brothers & Co. for a number of years, with multiple offices and a full staff. He described Martin and Steven Sands as having “titular” activities at Laidlaw, adding that they are not directly involved in the business on a day-to-day basis. A secretary for Martin Sands said he doesn’t speak to reporters; when contacted by telephone Wednesday, Steven Sands said he didn’t have time to speak then but would call back at some point.
“This is not something that was formed two days ago,” said Kaplan. “Some people, looking in from the outside without all the facts at hand, might say, ‘Oh, look, this is some kind of flimflam to try to conceal assets.’ Any firm would have to be pretty silly to do a flimflam under the eye of the NASD.”
Indeed, the NASD enacted a new rule in 2003 that requires brokerage firms to seek approval when transferring 25% or more of one firm’s assets to another. But attorneys who represent investors with outstanding awards against Sands Brothers & Co. say they believe neither the NASD nor the NYSE can do anything to compel a former broker-dealer to pay an award. William Federman, an Oklahoma City attorney who won the $261,000 arbitration award in April against Sands Brothers & Co. for a doctor, said the brokerage firm has also appealed his award, but keeps filing motions that delay the ruling.
Federman said he was also told by Sands Brothers & Co. attorneys after winning the award that he probably wouldn’t be able to collect the full amount, and should accept less than half to settle the matter instead. When Federman contacted the NYSE to complain, he said NYSE officials claimed they can’t force the company to honor its arbitration awards, now that it is no longer a member. Federman was referred to the NASD, which said it is “looking into it,” he said. The NASD refused to comment on whether it is investigating arbitration award payment at Sands Brothers & Co. The NYSE confirmed that it doesn’t have the power to enforce arbitration awards against nonmembers.
“My client is required to go to arbitration with any complaint he has against a brokerage firm. Why am I going through the arbitration system if they (the NYSE and NASD) are powerless to enforce the award?” said Federman. “The bottom line is, they just don’t care.”