FINRA Panel Awards Spartan Securities Over $5.4MM.
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Posted On: 05/29/2021 8:04:25 AM
FINRA Panel Awards Spartan Securities Over $5.4MM........
Trader Owes $23M In FINRA 'Short Squeeze' Arbitration Case
By Al Barbarino
Law360 (May 28, 2021, 9:04 PM EDT) -- A Financial Industry Regulatory Authority arbitration panel has ordered an ex-Spartan Securities Group trader to pay the firm and a third party a total of nearly $23 million for allegedly making unauthorized short trades that crippled Spartan in 2019, according to an award filing made public Friday.
Scott Reynolds must pay more than $5.4 million to Spartan and more than $17.4 million to Axos Clearing, which was custodian of the proprietary account that Reynolds made the trades from, the panel ruled. The trades lost more than $16 million in just hours and led to Florida-based Spartan's demise, according to the panel.
"The panel finds that Reynolds' unlawful actions were not merely negligent or reckless, but intentional," according to the filing, which was finalized on Thursday.
On March 6, 2019, Reynolds initiated a short sale position in Biopath Holdings, was caught in a so-called short squeeze, then disregarded the "explicit directives" of Spartan's compliance officer to cover the short, the FINRA panel said, largely corroborating Spartan's account from an April 2019 claim filed with FINRA.
"[Reynolds] exacerbated the highly risky short position by adding to it, in contravention of his supervisor's instructions and his own trading limits," the panel said. "Primarily using Axos' money and being aware of Axos' lending limits and its right to reject trades and close trading positions, he was caught in a short squeeze, causing Spartan to violate its net capital requirement, which as a member of FINRA, it self-reported."
After defying the orders to close out of the position, Reynolds also "lied to keep it open and concealed his intent," including creating false tickets to hide the true size of the short position, leading to the millions in losses and "destruction of Spartan's on-going business," the panel added.
Reynolds must pay Spartan more than $1.4 million in compensatory damages plus interest and $4 million in punitive damages based on his "willful and intentional behavior." Reynolds must pay Axos roughly $15.4 million in compensatory damages plus more than $2 million in interest that will continue to accrue until the amounts are paid.
In March 2019, Axos filed its own claim against Reynolds in a Florida district court after the trader failed to make an initial payment on a $10.5 million settlement that was struck earlier that month.
Reynolds later claimed that Axos had used fraudulent intimidation to induce him to sign the settlement agreement, but the FINRA panel didn't buy it, also dismissing counterclaims from Reynolds against Spartan, Axos and their associated principals for more than $35 million for alleged damages, failure to pay wages and legal fees.
The panel also denied Reynolds' request for indemnification in the amount of $27 million if he were to be found liable.
A short squeeze occurs when there is an excess of investors shorting a stock, or betting that its price will go down, but the stock's price shoots up instead. The market phenomenon took center stage earlier this year when a flood of retail investors in the stock of video game retailer GameStop led to major losses for hedge funds who had shorted the stock.
Counsel for Reynolds did not immediately respond to requests for comment.
Spartan Securities Group is represented by Patricia A Leonard and Ella A. Shenhav of Shutts & Bowen LLP.
Scott Richard Reynolds is represented by Adam C. Ford and Matthew A. Ford of Ford O'Brien LLP.
Axos Clearing is represented by Polly Towill, Martin Katz and Madalyn Macarr of Sheppard Mullin Richter & Hampton LLP.
The case is Spartan Securities Group Ltd. v. Scott Richard Reynolds et al., case number 19-00926, before FINRA Dispute Resolution Services.
--Editing by Jill Coffey.
For a reprint of this article, please contact reprints@law360.com.
https://www.google.com/amp/s/www.law360.com/a...es/1389423
Trader Owes $23M In FINRA 'Short Squeeze' Arbitration Case
By Al Barbarino
Law360 (May 28, 2021, 9:04 PM EDT) -- A Financial Industry Regulatory Authority arbitration panel has ordered an ex-Spartan Securities Group trader to pay the firm and a third party a total of nearly $23 million for allegedly making unauthorized short trades that crippled Spartan in 2019, according to an award filing made public Friday.
Scott Reynolds must pay more than $5.4 million to Spartan and more than $17.4 million to Axos Clearing, which was custodian of the proprietary account that Reynolds made the trades from, the panel ruled. The trades lost more than $16 million in just hours and led to Florida-based Spartan's demise, according to the panel.
"The panel finds that Reynolds' unlawful actions were not merely negligent or reckless, but intentional," according to the filing, which was finalized on Thursday.
On March 6, 2019, Reynolds initiated a short sale position in Biopath Holdings, was caught in a so-called short squeeze, then disregarded the "explicit directives" of Spartan's compliance officer to cover the short, the FINRA panel said, largely corroborating Spartan's account from an April 2019 claim filed with FINRA.
"[Reynolds] exacerbated the highly risky short position by adding to it, in contravention of his supervisor's instructions and his own trading limits," the panel said. "Primarily using Axos' money and being aware of Axos' lending limits and its right to reject trades and close trading positions, he was caught in a short squeeze, causing Spartan to violate its net capital requirement, which as a member of FINRA, it self-reported."
After defying the orders to close out of the position, Reynolds also "lied to keep it open and concealed his intent," including creating false tickets to hide the true size of the short position, leading to the millions in losses and "destruction of Spartan's on-going business," the panel added.
Reynolds must pay Spartan more than $1.4 million in compensatory damages plus interest and $4 million in punitive damages based on his "willful and intentional behavior." Reynolds must pay Axos roughly $15.4 million in compensatory damages plus more than $2 million in interest that will continue to accrue until the amounts are paid.
In March 2019, Axos filed its own claim against Reynolds in a Florida district court after the trader failed to make an initial payment on a $10.5 million settlement that was struck earlier that month.
Reynolds later claimed that Axos had used fraudulent intimidation to induce him to sign the settlement agreement, but the FINRA panel didn't buy it, also dismissing counterclaims from Reynolds against Spartan, Axos and their associated principals for more than $35 million for alleged damages, failure to pay wages and legal fees.
The panel also denied Reynolds' request for indemnification in the amount of $27 million if he were to be found liable.
A short squeeze occurs when there is an excess of investors shorting a stock, or betting that its price will go down, but the stock's price shoots up instead. The market phenomenon took center stage earlier this year when a flood of retail investors in the stock of video game retailer GameStop led to major losses for hedge funds who had shorted the stock.
Counsel for Reynolds did not immediately respond to requests for comment.
Spartan Securities Group is represented by Patricia A Leonard and Ella A. Shenhav of Shutts & Bowen LLP.
Scott Richard Reynolds is represented by Adam C. Ford and Matthew A. Ford of Ford O'Brien LLP.
Axos Clearing is represented by Polly Towill, Martin Katz and Madalyn Macarr of Sheppard Mullin Richter & Hampton LLP.
The case is Spartan Securities Group Ltd. v. Scott Richard Reynolds et al., case number 19-00926, before FINRA Dispute Resolution Services.
--Editing by Jill Coffey.
For a reprint of this article, please contact reprints@law360.com.
https://www.google.com/amp/s/www.law360.com/a...es/1389423
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