Dallas-based Southwest Securities, Inc. was hit with a $650,000 fine this week, the second fine imposed on the firm by FINRA in less than 30 days ("Finra socks Southwest Securities again," InvestmentNews, March 22, 2011).
On March 7, FINRA fined the brokerage firm $500,000 for Municipal Securities Rulemaking Board (MSRB) violations, which included the use of consultants who were paid by the firm to solicit municipal services business on its behalf. (See FINRA's news release for more information.)
Just over two weeks later, on March 22, FINRA fined Southwest Securities an additional $650,000 for:
Deficiencies in due diligence, risk assessment and written supervisory procedures that permitted one of its correspondent firms, Cutler Securities, to create risk for Southwest through improper short sales.
As reported by InvestmentNews, Southwest Securities suffered a $6.3 million loss due to improper short sales established by Cutler Securities. On Aug. 6, 2009, Cutler Securities established a 2.5 million share short position, which it was unable to cover. According to the FINRA statement, Southwest Securities received trading alerts about Cutler's activities but did nothing to prevent the establishment of the position.
In the statement, Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said:
Southwest's systemic failures in overseeing its clearing services … illustrates the risks that can be created by correspondent firms. Southwest's failure to effectively monitor Cutler's reckless behavior jeopardized its ability to meet its obligations to its other correspondent firms and counterparties.
