will pay $10 million in fines and restitution to settle a regulatory investigation into allegations that some of the firm's brokers engaged in abusive mutual fund trading.
Three former managers at the Dallas-based broker, including Southwest's former CEO, Daniel Leland, also were fined and received partial 12-month suspensions as part of the settlement.
Securities and Exchange Commission
New York Stock Exchange
allege that Southwest, a division of
, failed to properly supervise a group of brokers who engaged in fraudulent market-timing and late trading of mutual fund shares.
The action against Southwest is part of a continuing effort by regulators to widen the 18-month investigation into improper trading in the mutual fund industry to the role of the brokers in aiding rogue traders.
The initial phase of the inquiry begun by New York Attorney General Eliot Spitzer focused mainly on improper conduct by mutual fund companies that inked surreptitious deals with market-timers and late traders. To date, the investigation has collected nearly $3 billion in fines and restitution from a dozen mutual fund companies.
Regulators contend that market-timing, or the frequent trading of fund shares, is unethical and harmful to long-term investors because it increases the administrative costs for the fund. Late trading, meanwhile, is an illegal practice in which someone buys shares of a mutual fund after their 4 p.m. closing price in order to take advantage of late-breaking, market-moving news.
In the Southwest case, regulators found that the brokerage failed to heed complaints from dozens of mutual fund companies about several of the firm's brokers. The regulators contend that the firm failed to "respond appropriately to red flags that should have alerted them to the brokers' improper conduct.''
Southwest, which neither admitted nor denied the allegations, agreed to pay $8 million in fines and $2 million in restitution as part of the settlements.
The regulators also handed down a partial suspension to Leland and two other former Southwest executives, Kerry Rigdon and Kevin Marsh, for ignoring those red flags. The three former Southwest managers are suspended from serving in any supervisory capacity with a brokerage firm for a year.
Leland, who also had been an executive vice president with SWS, resigned last September.