A regional U.S. investment brokerage today agreed to pay US$10 million to settle regulators’ allegations of failing to supervise brokers who engaged in fraudulent and improper trading of mutual fund shares.

The Securities and Exchange Commission and the New York Stock Exchange said that they have settled with Dallas, Texas based Southwest Securities Inc. and three of its executives.

The three officers, including Southwest’s former president and CEO, agreed to pay an additional total of US$275,000

Neither the firm nor the managers admitted nor denied the SEC and NYSE findings.

In their settlements, the regulators said Southwest and the managers — Daniel Leland who was president and CEO, Kerry Rigdon, a senior vp and the director of Southwest’s Private Client Group, and Kevin Marsh, a vp and the branch manager — failed reasonably to supervise brokers in the firm’s Dallas branch who engaged in fraudulent mutual fund market timing schemes, late trading of mutual fund shares, or both.

According to the regulators, 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 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, 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 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. These included hundreds of notices, warnings, complaints and trading restrictions sent by fund companies in response to the brokers’ market timing activities, and also included the brokers’ requests for multiple account numbers per customer, and for additional broker identification numbers.

The SEC said has 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.