Southwest Securities Racks Up $1.1M in FINRA Fines in March
March 23, 2011
Donna Mitchell
securitiestechnologymonitor.com
March has been a lion for Southwest Securities, so far.
It's faced an unsolicited takeover attempt. It agreed to borrow $100 million in new capital. And it's been fined twice by the Financial Industry Regulatory Authority.
The Dallas-based registered investment advisor and broker-dealer Tuesday agreed to pay a $650,000 fine to FINRA, over compliance stumbles in its clearing business.
The oversights, or lack thereof, allowed Cutler Securities, one of its correspondent firms, to cause a $6.3 million loss through improper short sales in a single day, FINRA said in a statement on Tuesday.
FINRA also expelled Cutler Securities from the industry and barred its president, Glenn Cutler.
The improper short-selling fine from Tuesday came a little over two weeks after FINRA levied a $500,000 punishment on Southwest Securities for improperly soliciting municipal bond business.
Regarding Tuesday's news, FINRA said that Cutler Securities bought more than 17.8 million in shares of a stock on Aug. 6, 2009, while selling more than 20.3 million shares of the same stock. Although Southwest Securities, Cutler’s clearing broker-dealer, had received alerts regarding this trading during the day, it still allowed Cutler Securities to establish a 2.5 million-share short position. Cutler was unable to meet its obligation on the position, requiring Southwest to step in and close it, and leaving it with the unsecured debit balance of $6.3 million.
The size of the short sale exceeded pre-set limits that were supposed to put boundaries on the correspondent's actions, according to press reports. Nasdaq’s Automated Confirmation of Transactions (ACT) system sent intraday alerts that the correspondent went past its pre-set limits. But the alerts were not properly dealt with. The losses on the trades happened when the stock jumped $4.84 after the stock market opened the next day, according to press reports.
The trades happened on Cutler Securities’ second day of clearing through Southwest Securities. Although Cutler was new to Southwest in August 2009, the company had been around for about 13 years previously, according to FINRA Broker Check.
“Southwest’s failure to effectively monitor Cutler’s reckless behavior jeopardized its ability to meet its obligations to its other correspondent firms and counterparties,” Brad Bennett, FINRA’s executive vice president and chief of enforcement said in a statement.
Southwest Securities took a charge for the receivable against its first-quarter 2010 earnings, according to a statement from the company. It also severed its relationship with Cutler Securities. Southwest pointed out that there were no allegations of monetary harm done to investors, and that SWS Group, its holding company, has laid aside reserves that covered the liability.
FINRA faulted Southwest Securities for failures to establish written due diligence policies, written criteria to determine the acceptability of potential correspondents, awareness of the proper procedure for terminating correspondent firms on an intra-day basis, appropriate trading alert parameters for many of its correspondent firms, and procedures recognizing that it had clearing and settlement responsibility for all correspondent firms that could carry out trades away from Southwest.
To remedy this, FINRA required Southwest to designate a risk management officer to manage the risks associated with its correspondent clearing services business.
“We took significant remedial action including various improvements to our risk management procedures, and when FINRA subsequently commenced an investigation, SWS cooperated fully,” James H. Ross, chief executive officer of SWS Group said in a statement.
The fines come in the same month SWS Group tries to fend off an unsolicited offer to buy all its outstanding shares for $6.25 each, made by Sterne Agee Leach, a financial services firm based in Birmingham, Ala.
SWS said its board refused to accept the offer on the grounds it was "highly conditional and opportunistic."
SWS Group Monday also said it entered into a definitive agreement to take in $50 million each from Hilltop Holdings and Oak Hill Capital Partners.
Hilltop and Oak Hill Capital will extend a senior unsecured loan to SWS Group in aggregate principal amount of $100 million pursuant to a credit agreement.
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