According to FINRA, the deficiencies permitted one of Southwest Securities ‘ 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.
In its report, FINRA said that on August 6, 2009, 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 $6.3m.
FINRA executive vice president and chief of enforcement Brad Bennett said 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," Bennett said.
