Washington, D.C., Jan. 10, 2005 – LAWFUEL – Best for law news – The Securities and Exchange Commission and the New York Stock Exchange today announced the institution and settlement of enforcement proceedings against Southwest Securities, Inc., a Dallas, Texas based broker-dealer and investment adviser, and three of its managers.
According to the SEC and NYSE, Southwest and the managers failed reasonably
to supervise brokers in Southwest’s downtown Dallas branch office who
engaged in fraudulent mutual fund market timing schemes, late trading of
mutual fund shares, or both.
The SEC also announced that it filed a civil action in U.S. district court
in Dallas today, against two former Southwest brokers, for allegedly
engaging in a fraudulent market timing scheme. In that action, the SEC
seeks injunctions, disgorgement of illicit profits, and civil money
penalties, based on allegations that the two brokers committed securities
fraud.
In settlement of the SEC and NYSE actions, Southwest has agreed to pay a
total of $10 million, consisting of $2 million in disgorgement and an $8
million civil money penalty, and to undertake a number of measures to
prevent future misconduct. The managers have agreed to settlements that
include payments of disgorgement and civil money penalties totaling
$275,000, as well as 12-month suspensions from association with a
broker-dealer or investment adviser in any supervisory capacity. As part
of the settlement, the firm and the managers neither admitted nor denied the
SEC and NYSE findings.
Harold F. Degenhardt, Director of the SEC’s Fort Worth Office, remarked,
“The SEC and NYSE actions against Southwest and three of its managers
underscore the responsibility of broker-dealers and their managers to
respond swiftly and completely when confronted with indications of late
trading and improper market timing by their employees and customers.”
Spencer C. Barasch, Associate Director and head of enforcement at the SEC’s
Fort Worth office, added, “The actions against Southwest, its managers, and
the registered representatives demonstrate the continuing resolve of the SEC
and the NYSE to protect mutual fund investors from improper trading
practices.”
Susan Merrill, Chief of Enforcement, NYSE Regulation, said, “This action
sends a strong message that member firms and their managers must diligently
supervise their mutual fund trading business to prevent and detect market
timing and late trading. They cannot ignore red flags that should alert
them to their brokers’ improper conduct.”
“Market timing” refers to the practice of short term buying and selling of
mutual fund shares in order to exploit inefficiencies in mutual fund
pricing. Although market timing is not per se illegal, many mutual funds
try to prevent it because it tends to harm long-term mutual fund
shareholders. “Late trading” refers to the practice of placing orders to
buy or sell mutual fund shares after market close at 4:00 ET, but at the net
asset value (NAV), or price, determined at the market close. Late trading
enables the trader to profit from knowledge of market moving events that
occur after 4:00 ET, but are not reflected in that day’s fund share price.
Late trading is illegal.
According to the SEC and the NYSE, the fraudulent market timing schemes
sought to circumvent trading restrictions that mutual fund companies imposed
on Southwest brokers and accounts, by concealing from mutual fund companies
improper market timing activities of Southwest brokerage customers. The SEC
and NYSE found and alleged that more than 30 fund companies, representing
hundreds of individual mutual funds, detected market timing trades by
Southwest customers, and attempted to prevent further market timing by
barring future trades, either in particular accounts or by a particular
Southwest broker or branch office. In response, according to the SEC and
the NYSE, 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. For example, according
to the SEC and NYSE, brokers in Southwest’s downtown Dallas branch office
executed trades for a single hedge fund adviser customer, using 21 accounts
held by nine customer-affiliated entities, and using three broker
identification numbers. According to the SEC and NYSE, the brokers used
these masking tactics for the sole purpose of circumventing trading
restrictions imposed by the fund companies.
The SEC and the NYSE found that the managers failed reasonably to supervise
the brokers, by failing to investigate or respond appropriately to red flags
that should have alerted them to the brokers’ improper conduct. According
to the SEC and NYSE findings, the red flags included hundreds of notices,
warnings, complaints and trading restrictions (“block notices”) sent by
mutual fund companies in response to the brokers’ mutual fund market timing
activities, and also included the brokers’ requests for multiple account
numbers per customer, and for additional broker identification numbers. The
SEC and NYSE also found that Southwest failed to implement procedures
designed to detect and prevent late trading. According to the NYSE and the
SEC, Southwest also violated rules against late trading, and SEC rules that
require broker-dealers to make and keep certain business records, including
order tickets and electronic messages.
The settled SEC and NYSE proceedings name Southwest and three of its
managers, as follows:
Southwest – The firm is a wholly owned subsidiary of SWS Group, Inc., a
publicly traded company listed on the NYSE. The firm is a member of the
NYSE, the National Association of Securities Dealers (NASD), the Chicago
Stock Exchange, and the American Stock Exchange.
Daniel R. Leland – Leland was the president and CEO of Southwest, and in
that capacity he supervised all Southwest brokerage operations other than
clearing operations. In settling the SEC and NYSE actions, Leland has
agreed to pay disgorgement of $1 and a civil money penalty of $200,000, in
addition to being suspended for twelve months from association with a
broker-dealer or investment adviser in any supervisory capacity.
Kerry M. Rigdon – Rigdon was a senior vice president and the director of
Southwest’s Private Client Group. In settling the SEC and NYSE actions,
Rigdon has agreed to pay disgorgement of $1 and a civil money penalty of
$50,000, in addition to being suspended for twelve months from association
with a broker-dealer or investment adviser in any supervisory capacity.
Kevin J. Marsh – Marsh was a vice president and the branch manager of
Southwest’s downtown Dallas branch office. In settling the SEC and NYSE
actions, Marsh has agreed to pay disgorgement of $1 and a civil money
penalty of $25,000, in addition to being suspended for twelve months from
association with a broker-dealer or investment adviser in any supervisory
capacity.
The SEC also named the following Southwest brokers as defendants in its
civil action in U.S. district court in Dallas, alleging that they engaged in
a fraudulent mutual fund market timing scheme:
Scott B. Gann – Gann was a senior vice president and registered
representative in Southwest’s Private Client Group. Gann worked in the
firm’s downtown Dallas branch office.
George B. Fasciano – Fasciano was a vice president and registered
representative in Southwest’s Private Client Group. Fasciano also worked in
the firm’s downtown Dallas branch office.
