Southwest Securities Background Information
Southwest Securities, a subsidiary of SWS Group, Inc., was founded in 1986 in Arlington – near Dallas – Texas. Mergers and acquisitions of other regional firms has caused Southwest to become the largest Texas-based brokerage-dealer, with almost 900 employees, and the only Texas-based securities firm with a seat on the New York Stock Exchange (NYSE). SWS Group operates four segments, is listed on the NYSE, reported 2006 earnings of $266 million and it has a market capitalization of half-billion dollars.
Southwest Clearing provides clearing and execution services for other securities firms, including small broker/dealers, bank affiliated firms and trading firms. “Clearing firms,” including Southwest, provide products and inventory, transact orders, maintain margin and other accounts and provide the back-office operations to smaller “introducing firms,” which are merely sales firms.
Thinly-capitalized introducing firms often experience problems and cease operations after only a few years. Many have regulatory problems and leave behind uncompensated victims of illegal and/or unethical sales practices. Despite such problems, clearing firms such as Southwest are content to glean revenues – especially margin interest income – yet deny all responsibility for the wrongdoing or the damages caused to investors.
Southwest Securities is a regional brokerage firm that sells securities, insurance and other investment products and services and provides managed accounts to individual investors and small businesses. It transacts orders in securities, options, commodities and futures contracts on securities and commodities exchanges and over-the-counter.
Southwest’s institutional segment provides corporate and public finance business, fixed income sales and trading, equity trading and securities lending business. It serves corporations and institutional investors through mergers, acquisitions, equity, and debt issuances and facilitates securities loan and borrowing transactions. The banking division receives deposits into checking, savings, money market accounts and CD’s, while providing business and consumer loans as well as residential mortgage loans.
Shepherd Smith Edwards & Kantas LTD LLP Law Firm
Our law firm represents institutional and individual investors nationwide with significant losses in their portfolios, retirement plans and investment accounts. Our attorneys and staff have more than 100 years of combined experience in the securities industry and in securities law. Several of our lawyers served for years as Vice President or Compliance Officer of brokerage firms.
Each lawyer and staff member of our firm is devoted to assisting investors to recover losses caused by unsuitability, over-concentration, fraud, misrepresentation, self-dealing, unauthorized trades or other wrongful acts, whether intentional or negligent. Each attorney at our firm has experience representing investors in securities arbitration claims and/or lawsuits. We have handled in more than thousand cases against hundreds of large and small brokerage firms, including Southwest Securities and SWS Group.
Call us at (800)259-9010 or contact us through our Website to arrange a free confidential consultation with an attorney to discuss your experiences with an investment advisor or financial firm which resulted in losses.
Southwest Fined $10 Million in Late-Trading Scandal
Southwest Securities, Inc. was fined by the Securities Exchange Commission and New York Stock Exchange for its role in a widespread scandal involving late-trading of mutual funds. Three senior officials of Southwest were also fined and sanctioned and two of its registered representatives face court actions for fraud.
According to the SEC and NYSE, Southwest and its managers failed to reasonably supervise brokers in its downtown Dallas branch office who engaged in fraudulent mutual fund market timing schemes and late trading of mutual fund. Without admitting or denying to the charges, Southwest agreed to pay an $8 million fine a $2 million in disgorgement penalty and to undertake measures to prevent such future misconduct.
Illegal “Late trading” of funds is transacting orders to buy or sell mutual fund shares after market close at 4:00 ET, but at the net asset value (NAV) determined at the market close. Late trading enables traders to profit from news and/or price changes after the close but not reflected in funds’ share prices. Profits made by late-trading loot the fund’s portfolio, victimizing the other shareholders of the mutual funds.
Furthermore, the SEC and the NYSE claim that Southwest brokers used “masking activities,” such as multiple customer accounts, multiple broker identification numbers, and multiple branch office numbers, to disguise their customers’ market timing trades and trick the fund companies into accepting the trades. The regulators described many “red flags” which should have alerted Southwest and its senior supervisors.
Daniel R. Leland, president and CEO of Southwest was fined $200,000; Kerry M. Rigdon, director of Southwest’s Private Client Group was fined $50,000; and, Kevin J. Marsh, branch manager of Southwest’s downtown Dallas branch office was fined $25,000. Leland, Rigdon and Marsh were each suspended from association with any broker, dealer, or investment adviser in any supervisory capacity for a period of twelve (12) months.
The SEC also named three Southwest vice president/registered representatives as defendants in a civil action in a U.S. district court in Dallas, alleging they engaged in a fraudulent mutual fund market timing scheme.
Southwest Sanctioned for Mutual Fund Overcharges
The SEC and NASD sanctioned Southwest Securities, Inc. and other firms for failing to provide mutual fund breakpoint discounts. Southwest and the other firms must reimburse clients and take corrective measures to prevent future wrongdoing. All the firms, including Southwest, agreed to the sanctions but would not admit wrongdoing.
Breakpoint discounts are volume discounts on front-end sales charges on Class A mutual fund shares (front-end loads). The discounts are not available to those sold Class B and Class C mutual fund shares. Examinations of broker-dealer firms indicated many mutual fund investors were not receiving available discounts (with brokers and their firms thus earning higher commissions). The regulators then directed firms to assess transactions in funds to determine the percentage of trades in which available discounts were not used.
Of the 15 firms made the subject of the regulators’ sanctioning order, Southwest Securities had the worst record of discounts delivered to clients during the period surveyed. Almost 90% of Southwest clients who could have received break-point discounts did not. The average of missed discounts for all firms surveyed was reportedly just over 20%. Southwest was ordered to refund overcharges to the affected clients.
The National Association of Securities Dealers fined MetLife’s securities subsidiaries $5 million for their role a widespread scandal over late-trading in mutual funds. Included were MetLife Securities, New England Securities and Walnut Street Securities. The firms were also charged with providing inaccurate and misleading information and failing to timely produce email evidence to the NASD during the investigation.
Late-trading involves buying and selling mutual fund shares after the market closes at prices set on the close. This gives the traders the advantage of knowing events and after-hours trading prices on shares of stock owned by the funds. In addition to the late traders, others involved are those who assist by hiding the actual time of the trades and who conceal the traders’ identities to avoid detection. The victims are the innocent holders of the mutual funds whose portfolios were robbed of the illegally gained profits. Billions were stolen industry-wide.
Southwest Securities Caught ‘Yield Burning’
NASD regulators censured Southwest Securities and nine other firms for “yield burning” activities and required these firms to collectively pay more than $20 million to the U.S. Treasury.
Just as homeowners refinance their homes at lower rates when interest rates fall, so also do state and local governments seek to reduce borrowing costs by retiring high rate bonds through the issuance of new bonds at reduced rates. If the old bonds are not due or callable, the municipality can set-up an "advance refunding."
In an advance refunding, new bonds are issued and the funds received from the sale of these bonds are placed in escrow to pay off the old bonds when these are due or can be called. U.S. Treasury bonds are purchased in the escrow account to avoid any risk the funds will not be available to pay the old bonds when due or called.
Because municipalities can sell bonds which are tax-free to buyers, they usually can pay rates even lower than that paid on U.S treasury bonds. Thus, there is the potential for municipalities to abuse their situation by repeatedly issuing low rate bonds, then using the proceeds to buy higher paying U.S. bonds, and pocket the interest difference.
A law was therefore passed to prevent municipalities from earning more on the bonds purchased than those they issue. This has the further benefit of providing lower cost funds to the U.S. government. Yet, municipalities can include the financing costs – money paid to investment firms – when computing the interest on the bonds they issue.
This can allow investment firms to overcharge municipalities, with the U.S. Treasury footing the bill, not the municipalities. This unscrupulous practice is called “yield burning,” which the NASD considers a violation of its “just and equitable principals of trade.”