FINRA fines brokerage SWS a second time this month

Tue Mar 22, 2011 2:39pm EDT

* FINRA says Southwest Securities had weak supervision

* Cutler Securities expelled from securities business

* SWS to pay $650,000 fine, second FINRA fine this month

By Joseph A. Giannone

NEW YORK, March 22 (Reuters) - Wall Street regulator FINRA on Tuesday brought its second case this month against Southwest Securities, fining the Dallas broker-dealer $650,000 for letting a customer execute a "reckless" short-sale trade.

The Financial Industry Regulatory Authority said poor due diligence, risk assessment and supervision allowed a correspondent clearing customer, Cutler Securities, to create risk for Southwest. FINRA expelled Cutler as a broker-dealer and barred its chief executive, Glenn Cutler, from the industry.

FINRA said that on Aug. 6, 2009, Cutler's second day clearing trades through Southwest, Cutler bought 18 million shares of a stock and sold more than 20 million shares of the same stock, resulting in a 2.5 million-share short position.

Cutler, a Delray Beach, Florida, firm formed in 1996, was unable to meet its obligations on the trade. FINRA said this forced Southwest to close the position and left itself with a $6.3 million loss.

"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," said Brad Bennett, FINRA's enforcement chief.

Southwest, a unit of SWS Group Inc (SWS.N), and Cutler neither admitted nor denied the charges. Cutler had a history of failing to comply with short-selling regulations, FINRA said.

SWS, which has been weakened by large commercial real estate loan losses, on Monday agreed to swap a 34 percent stake for $100 million in loans from two investors. The new capital is expected to help SWS bolster its financial strength.

Earlier this month, FINRA fined SWS $500,000 for paying former Texas municipal officials and others to solicit underwriting assignments, a violation of municipal securities market regulations. (Reporting by Joseph A. Giannone, editing by Matthew Lewis)

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