Texas brokerage Southwest Securities ( SWS) may find itself alone at the altar despite all the romancing going on among financial-services companies.

More than four months after announcing that it hired Bear Stearns to search for a partner, factors are stacking up against a Southwest sale. And in the past 10 days, Southwest's stock has moved back to pretakeover talk levels. It's up 1.6% from Dec. 31's 27 1/8 close, well before the takeover talk started.

For investors who bought the stock earlier this year in anticipation of a quick and easy sale, the process has been anything but. Systems problems angered some customers, and no bids were disclosed.

Now there's more to worry about. Southwest will soon lose one of its largest customers, a daytrading firm that sends its orders to Southwest. In addition, the company surprised analysts and investors two weeks ago by announcing plans to buy a thrift -- its second this year -- which could muddy the picture for a potential acquirer. Beyond that there are the questions about whether Southwest monitors its network of independent broker-dealers closely enough.

David Glatstein, Southwest's president and CEO, dismisses talk that the company's plans to partner up have changed, saying discussions are continuing and that the firm hopes to find a partner by the fall. If there's no deal by then, he says, the company will move on.

Riding the Online Broker Wave

Southwest first came to investors' attention in 1997 as online stock trading took off. The company started its own cyber broker MyDiscountBroker.com, which some investors hoped would make the firm the next E*Trade. Its stock began moving in lockstep with the then hot online-broker stocks, pushing up to a high of 69 27/64 on May 21, 1999. But the trading doldrums last summer soured investors and as the online-broker stocks fell out of favor, so too did Southwest. At the end of 1999, it was trading in the high 20s again.

Blushing Bride?
Shareholders may not be pleased with Southwest's performance since March.

Early this year, Southwest took another turn. Equity trading exploded nationwide, which played into Southwest's strength as a clearing house for daytrading firms, which cater to individuals who jump in and out of stocks. Clearing houses handle all of the back-office operations for brokerages, which include executing and settling trades and sending confirmations and account statements to customers.

But the growth was almost too much for the small-cap broker. Its systems were strained, causing customers problems. One of its largest customers, electronic trading system Archipelago, left. The New York Stock Exchange, which regulates Southwest, was on site for a regular audit this spring and extended its stay, digging into its systems problems.

On March 15 came the news that Southwest was looking for strategic partners, including a potential buyer or merger partner. The stock began trading in the 40s and high 30s. But as the weeks passed, the short position in Southwest's stock, or bets the stock would fall, grew, rising 432% between May 15 and June 15, and another 96% through July 15.

Loading Up

Now the shorts have more ammunition.

While the company has for the past several months said it's over the hump in terms of systems problems associated with communications difficulties between their new clearing software and old software, the business is still losing customers.

Terra Nova Trading, a Chicago-based daytrading firm that's one of Southwest's largest customers, will leave when its contract ends in September. It'll switch to Instinet, a Reuters' ( RTRSY) division. Southwest's Glatstein declined to comment on customer relationships.

The decision wasn't due to systems and service problems -- now largely improved, says Terra Nova President Chris Doubek. "I think there's some contribution, but it's collateral. I think we're just looking to improve the service offering that we provide to our customers," he says. (Terra Nova is a private company owned in part by its chairman Gerald Putnam, who also owns and runs Archipelago.)

One of Southwest's other large customers, daytrading shop Tradescape, also says it's weighing whether to stick with Southwest. Tradescape CEO Omar Amanat says the contract is up in August and his firm is still negotiating as it looks for low-cost clearing.

Surprise, Surprise

While Southwest's clearing business has been under the gun, the company has expanded into banking. In April, it finalized its purchase of First Savings Bank, an Arlington, Texas, thrift that also has the same chairman as Southwest Securities, Don Bucholz.

Then on July 14, Southwest said it would buy Colorado thrift Matrix Bancorp ( MTXC) in a $110 million stock deal. Investors weren't pleased, reading into the move that Southwest had little hope for the big deal. Southwest shares have since given up 20%.

Glatstein, the CEO, says buying Matrix doesn't rule out a deal. "I just can't imagine anybody that was interested in us before this announcement that would now be not interested in us because from our perspective, it's a total enhancement of the banking activity," he says.

But one analyst bullish on the stock, Jeff Putterman of George K. Baum, says the Matrix buy may not affect a deal getting done, but may affect when it gets done. Putterman, who only a few weeks ago was expecting an imminent merger, now says it's tough to pinpoint timing. "It's difficult to say because of the confusion in the marketplace about this Matrix deal." (Baum hasn't done any underwriting for Southwest.)

Meanwhile, there are questions about Southwest's network of more than 600 independent brokers called SWS Financial Services, formerly known as Brokers Transaction Services. Unlike brokers at Merrill Lynch ( MER), who work for that firm, these independent brokers are independent contractors or freelancers. One hedge fund analyst who's short the stock says this setup makes it difficult for Southwest to monitor the brokers, who produce commissions and fees for Southwest.

As evidence, the analyst points to a $10 million sexual-harassment lawsuit filed in federal court last October by two women against a now-defunct Long Island brokerage associated with SWS Financial Services. Southwest is a defendant and the co-defendants include three brokers who worked in the Hicksville firm, including Michael Aspler, Robert Mitchell and Mark Kern. Mitchell, who declined to comment, has worked at almost 20 firms since 1995, including San Diego firm La Jolla (later known as Pacific Cortez Securities) and defunct Boca Raton firm Sovereign Equity Management, according to his National Association of Securities Dealers record. Aspler worked at Duke & Co. prior to SWS Financial. Aspler and Kern couldn't be reached for comment.

Southwest outside counsel Arthur Ruegger says the firm filed a motion to dismiss the case on the grounds that one plaintiff was an independent registered representative whose actions aren't related to Southwest. If her claims make it through court, then she has a contract to go to arbitration at the National Association of Securities Dealers, he says. The firm has no record that the other plaintiff worked for Southwest, he says.

Glatstein, who declined to comment on the litigation, says the independent broker-dealer network is largely made up of financial advisers who sell insurance and mutual funds with a few securities thrown in. "That's the kind of broker the insurance company is interested in." If Southwest wanted to sell SWS Financial, he says, "we would have five firms minimum that would want it."

Maybe Southwest already knows a bit about unrequited love.