The Financial Industry Regulatory Authority (Finra) has fined Southwest Securities Inc. $650,000 for allowing a corresponding firm to engage in risky short sales, which created substantial unsecured debt for the company.

Finra also expelled the clearing services firm, Cutler Services, and barred its president, Glenn Cutler, for the firm's volatile short selling practices. Finra says that Cutler Securities has a history of regulatory and supervisory deficiencies related to short sales.

In addition to the fine, Southwest was ordered to designate a risk management officer to identify and manage the risks posed by corresponding clearing services businesses.
Finra claimed 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. Southwest allowed Cutler to establish the 2.5 million share short position, despite receiving alerts throughout the trading day. When Cutler was unable to meet its obligation, Southwest was forced to close the position, resulting in an unsecured debt of $6.3 million.

"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," says Brad Bennett, Finra's executive vice president and chief of wnforcement. "Southwest's failure to effectively monitor Cutler's reckless behavior jeopardized its ability to meet its obligations to its other correspondent firms and counterparties."

In settling the matter, Southwest and Cutler consented to Finra's findings, while neither confirming or denying the charges.