The Financial Industry Regulatory Authority is really feeling its 'OATS'.   Shortly after noon today, FINRA announced it issued a $650K fine against clearing broker Southwest Securities, expelled one its correspondent firms, Cutler Securities, and barred Cutler's President Glenn Cutler.  

    Southwest Securities Specifics.   FINRA found that deficiencies in Southwest's due diligence, risk assessment and WSP's, that enabled (permitted) one of its correspondent firms, Cutler Securities, to create risk for Southwest through improper short sales. 

Among SW's supervisory deficiencies were failures to establish:   (i) written due diligence policies, (ii) written criteria to determine the acceptability of potential correspondents, (iii) awareness of the proper procedure for terminating correspondent firms on an intra-day basis, (iv) appropriate trading alert parameters for many of its correspondent firms, and (v) procedures recognizing that it had clearing and settlement responsibility for all correspondent firms that had the ability to execute trades away from Southwest.

Besides the $650K fine, Southwest must designate a risk management officer, who will be responsible for identifying and managing risks associated with its correspondent clearing services business. 

    FINRA Findings.   On 8/6/09, its 2nd 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.  When Cutler Securities could not meet its obligation on the position, Southwest was required to close the position, leaving it with an unsecured debit balance of around $6.3 million.

FINRA EVP for Enforcement Brad Bennett:  "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 Specifics.  Cutler Securities was expelled and its President Glenn Cutler was barred for having engaged in violative short selling.  Cutler Securities also had significant regulatory and supervisory deficiencies re: its short sales, including a history of failing to comply with Reg. SHO by obtaining locates and properly marking order tickets, and a failure to comply with SEC Emergency Orders.

    FINRA Staff Credits.    Investigation by Donald Sullivan, Jeanne Elmadany;  supervised by Susan Light, Enforcement Chief Counsel.

For further details, go to any of the following:

• FINRA News Release, 3/22
• Southwest Securities, Inc. Action
• Cutler Securities, Inc. and Glenn Cutler Action