TAG | Southwest Securities failure to manage Cutler
Southwest Securities, Inc. Fined $650,000 by FINRA for Compliance Failures That Permitted Correspondent Firm Cutler Securities to Cause a $6.3 Million Single-Day Loss Through Improper Short Sales
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WASHINGTON — It was announced on FINRA’s website that The Financial Industry Regulatory Authority (FINRA) has fined Southwest Securities, Inc., of Dallas, $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. FINRA also required Southwest to designate a risk management officer to identify and manage the risks associated with its correspondent clearing services business. In addition, FINRA expelled Cutler Securities and barred its President, Glenn Cutler, for Cutler Securities’ violative short selling.
The FINRA article stated that on August 6, 2009, its second day of clearing through Southwest, Cutler Securities bought over 17.8 million shares of a stock while selling over 20.3 million shares of the same stock. Despite receiving alerts regarding this trading during the day, Southwest allowed Cutler to establish a 2.5 million share short position. Cutler Securities was unable to meet its obligation on the position, requiring Southwest to close the position, leaving it with an unsecured debit balance of approximately $6.3 million.
Adding, Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, “Southwest’s systemic failures in overseeing its clearing services led to considerable financial losses for itself, and 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.”
Cutler Securities also had significant regulatory and supervisory deficiencies relating to its short sales, including a history of failing to comply with Regulation SHO by obtaining locates and properly marking order tickets, and a failure to comply with SEC Emergency Orders.
Additionally, the deficiencies in Southwest’s supervisory practices were 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 had the ability to execute trades away from Southwest.
In settling this matter, Southwest and Cutler neither admitted nor denied the charges, but consented to the entry of FINRA’s findings. This information was obtained on FINRA’s website.
Securities Attorney, Lars Soreide, of Soreide Law Group, PLLC, has represented clients nationwide. If you feel you have become a victim of Southwest Securities, Inc., or Cutler Securities, please call a Securities Arbitration Lawyer for a free consultation on how to potentially recover your losses. To speak with an attorney, call 888-760-6552, or visit www.securitieslawyer.com
Soreide Law Group, PLLC., representing investors nationwide before FINRA the Financial Industry Regulatory Authority.
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