SHUTTS & BOWEN LLP

Patricia A. Leonard, Esq.

Florida Bar #0065455
525 Okeechobee Blvd., Suite # 1100
West Palm Beach, FL 33401
Telephone: (561) 671-5821
Facsimile: (561) 822-5534
E-mail: pleonard@shutts.com

SPARTAN SECURITIES GROUP, LTD.

Anna Patricia Morales-Christiansen, Esq.
Florida Bar # 27634
15500 Roosevelt Blvd., Suite 303
Clearwater, FL 33760
Telephone: (727) 502-0508
Facsimile: (727) 289-0069
E-mail: pmorales@spartansecurities.com

Attorneys for Claimant

Spartan Securities Group, Ltd.

FINANCIAL INDUSTRY REGULATORY AUTHORITY

SPARTAN SECURITIES GROUP, Case No. ___________________

LTD.,

Claimant, STATEMENT OF CLAIMS FOR:

v. (1) BREACH OF FIDUCIARY DUTY;
(2) FRAUDULENT MISREPRESENTATION;
SCOTT REYNOLDS, an individual, (3) NEGLIGENT MISREPRESENTATION;
(4) BREACH OF CONTRACT;
Respondent.
_______________________________/

INTRODUCTION

Claimant Spartan Securities Group, Ltd. (“Spartan”, “Claimant”, or the “Firm”), hereby

submits this Statement of Claims against Respondent Scott Richard Reynolds (“Reynolds”).

1. This case arises from Reynolds’ reckless disregard of Firm policy and the

limitations imposed by Spartan on Reynolds for trades he was authorized to make in the Firm’s

proprietary trading account held at non-party Axos Clearing, LLC, formerly known as COR
Clearing, LLC (“Axos” or “COR”). On March 6, 2019, in a matter of hours, Reynolds placed a

series of large, unauthorized “short” trades in the proprietary trading account in just one security.

Such trades were in direct violation of the Firm’s limitations and restrictions on Reynolds’ trading

– notably, limitations and restrictions to which Reynolds had previously agreed – not to mention

express instructions from Firm management provided that same day. Subsequent to making the

unauthorized trades, Reynolds attempted to mask the size and exposure of the short position he had

created. As a result of his actions in Spartan’s inventory account, in just hours, Reynolds caused a

capital loss to Spartan of $16.6 million, which led directly to the Firm’s demise. Reynolds, a

registered representative then employed by Spartan, knew his transactions did not adhere to

Spartan’s policies and procedures, as well as industry and regulatory guidelines, and knew the

trades he placed – particularly those he placed after explicitly being told to stop – were

unauthorized.

THE PARTIES

2. Claimant Spartan is a Florida limited partnership. Its sole general partner is

Spartan Advisors, LLC, a Florida limited liability company, whose manager resides in Florida.

Spartan is a broker/dealer registered with the Financial Industry Regulatory Authority (“FINRA”)

and the U.S. Securities and Exchange Commission (“SEC”). Spartan is a wholly-owned

subsidiary of Connect X Capital Markets, LLC, (“Connect”), which is a Florida limited liability

company whose manager resides in Florida. Until the events of March 6 and 7, 2019, Spartan had

been a profitable broker/dealer generating income not only from proprietary trading, but from its

consulting and investment banking business, for approximately 17 years.

3. Respondent Reynolds is an individual and citizen of Florida, residing at 91 North

Hibiscus Drive, Miami Beach, Florida 33139, CRD # 2705340. Reynolds worked at all relevant

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times as a registered representative licensed with Spartan, where he was a trader. Reynolds also is

and has been a member of Connect at all relevant times.

4. Reynolds’ compensation with Spartan called for him to receive an 80% payout of

net revenue from his trading, after payment of Spartan’s expenses, but he would also be

responsible for 80% of any losses.

FACTUAL BACKGROUND

Spartan Imposed Limitations Upon Reynolds’ Trading Ability

5. Until his recent termination on or about March 27, 2019, Reynolds had been

registered with Spartan since 2005. Reynolds has his General Securities Principal license and

served as the principal of an Office of Supervisory Jurisdiction of Spartan in Miami at all relevant

times.

6. In addition, Reynolds is, and has at all relevant times herein been, a member of

Connect, of which Spartan is a wholly-owned subsidiary.

7. Among the type of business it conducted, Spartan engaged in proprietary trading

and was a market maker in several securities.

8. Among his duties at Spartan, Reynolds effected trades in Spartan’s proprietary

account, using Spartan’s capital.

9. At all times, Spartan imposed specific limits on the nature and amount of trading

that Reynolds was permitted to conduct on Spartan’s behalf, and Reynolds agreed to operate

within those limits. Those limits were amended from time to time, but most recently those

limitations were as follows:

(a) The lesser of 20% of the 30-day average daily volume or $500,000

intra-day position maximum per symbol. This included both long and short positions.

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 (b) The total aggregate amounts per symbol traded for the day could be larger;

however at no single time could the position maximum exceed the lesser of 20% of the 30-day

average daily volume or $500,000.

(c) The total aggregate intra-day basket of all positions held at any given time

could not exceed $3,000,000 (aggregate of both listed and OTC positions).

(d) A single position held overnight could not exceed $100,000 and the total

aggregate intra-day basket of positions held at any given time could not exceed $1,000,000

(aggregate of both listed and OTC positions).

(e) The total Firm aggregate purchases for the day was limited to $10 million

and total aggregate sales for the day also was $10 million. This was based on Axos’ limits and they

had the right to reject any ACT/ORF for trades that went beyond these limits. Reynolds was also

told that requests to increase the daily limits were required to be made prior to the executions to

Execution Services at executionservices@corclearing.com.

(f) Requests to increase the maximum intra-day or overnight level could be

made to the Firm’s FINOP or its CEO under special circumstances; but approval was required

prior to increasing the position level.

10. Reynolds agreed that as a condition of his employment and his ability to trade on

behalf of Spartan, he would abide by the limitations imposed by Spartan.

11. Having trading limitations imposed on traders, like those Spartan imposed on

Reynolds, is consistent with industry and regulatory standards and requirements.

12. Any trading that exceeded or circumvented those limits was unauthorized by

Spartan.

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 13. To assist in the execution and monitoring of trading, Spartan utilized BRASS, an

integrated trade order, execution, and compliance management system. Spartan also had a full

time registered representative dedicated to monitoring Spartan’s accounts and trades.

Reynolds’ Unauthorized Trading In “Short” Positions In BPTH

14. On or around March 6, 2019, Reynolds executed a series of sales transactions that

resulted in a “short” position of approximately 850,000 shares of Bio-Path Holdings, Inc. (traded

on the Nasdaq under the ticker “BPTH”).

15. The short position had an average cost of $9.32 per share, or an aggregate

$7,802,338 in short market value.

16. Reynolds actively attempted to conceal from Spartan the extent of the short

position in BPTH he had created by masking the transactions in the BRASS order management

system to create the impression that he was covering the positions and that the short position was

not as extensive.

17. Reynolds entered certain “buy” transactions on the system to make it appear to

Spartan that he was “short” a smaller number of shares of BPTH than was actually the case. In

reality, Reynolds increased Spartan’s exposure to BPTH by shorting shares well in excess of the

agreed-upon limitations on his trading.

18. Spartan’s management first learned on March 6, 2019 of the magnitude of

Reynolds’ unauthorized position in BPTH.

19. Immediately upon learning of the extent of the short positions, Spartan

management instructed Reynolds to stop adding to the short position in BPTH. Soon after,

Spartan management demanded that Reynolds close out the BPTH short position by the end of the

trading day on March 6, 2019, a demand that was also coming to Spartan from COR.

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 20. Upon being confronted by the Firm’s management about the short position in

BPTH he had created through his unauthorized trades, Reynolds represented that he would close

the position completely by the end of that trading day and that he would wire $2,000,000 to COR

to cover the margin call and or loss

21. Reynolds, however, failed to do as promised, thereby increasing Spartan’s

exposure. Instead, he only partially closed his position in BPTH. Specifically, Reynolds, on

behalf of Spartan, maintained a short position of -649,113 shares, at an average price of $9.3155.

The closing price of BPTH on March 6th was $12.02.

22. In fact, not only did Reynolds fail to close the position in BPTH as he was

instructed and agreed to do, but he thereafter (on March 6, 2019) proceeded to place additional

orders to short a significant number of additional shares of BPTH without authorization, greatly

exacerbating Spartan’s risk exposure.

23. In the afternoon on March 6, 2019, Reynolds advised that he was unable to wire

funds from his TD Ameritrade account directly to COR, as third-party transfers could not be made

from his brokerage account, but he promised Spartan that he was going to send the money to his

bank account and then wire it out to COR the next day. Reynolds never did send thee funds.

Further Losses Caused To Claimants As A Result of Reynolds’ Unauthorized Acts

24. Reynolds’ actions on March 6, 2019 delayed Spartan’s ability to mitigate the

damages that arose as the share price of BPTH increased dramatically after Reynolds’ short sale

trades.

25. Because the share price of BPTH increased dramatically soon after Reynolds made

the short sale trades, the cost to Spartan to “cover” those short sales was significant.

26. 5,386 BPTH shares were covered in the extended trading session at an average

price of $12.14.

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 27. On March 7, 2019, BPTH opened at $17.01 per share.

28. BPTH’s stock price increased more than 220% on March 7, 2019 alone, ending the

day at a per share price of $38.86, after having reached a high of $73.52 per share during the

trading day.

29. By the time Spartan closed out its remaining short position in BPTH, it was at an

average price of $34.55 per share.

30. Reynolds’ unauthorized trades thus resulted in a net loss of approximately

$16,600,000.00 to Spartan.

31. That loss caused Spartan to fall below its minimum net capital requirement under

SEC Rule 15c3-1. As a result, Spartan has had to cease its operations, and does not have the

necessary capital to cover the loss caused by Reynolds’ unauthorized trading.

32. Spartan has further had to notify FINRA that it is “net capital deficient”.

33. Spartan is a party to a Clearing Agreement with Axos pursuant to which Axos

serves as a clearing broker. This Clearing Agreement is attached as Exhibit “A”.

34. Pursuant to that Clearing Agreement, Spartan is obligated to pay Axos the amount

of the deficiency in Spartan’s firm inventory account at Axos caused by Reynolds’ actions

described herein.

35. Spartan lacks the financial wherewithal to cover the deficiency in its firm inventory

account at Axos.

36. Absent recovery from Reynolds to cover the damages caused by Reynolds’ actions,

Spartan has no means by which to meet its net capital requirement, and will be unable to reopen its

doors to resume business.

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 Reynolds Acknowledged Responsibility for Spartan’s Loss

37. On the afternoon of March 6, 2019, Reynolds promised he would send in money to

COR to cover what was then the unrealized loss in BPTH.

38. With the market opening against him on March 7, 2019, Reynolds spoke with

Spartan concerning the short position in BPTH and the resulting deficit reflected in Spartan’s

account and again agreed he would cover the loss, and would wire $2,000,000 directly to Axos that

day.

39. Early on March 7, 2019, through various communications involving some

combination of Reynolds and representatives of Spartan and non-party Axos, Reynolds

acknowledged his responsibility for the unauthorized trading and the short-sale trading losses, and

the injury he caused to Spartan.

40. Upon information and belief, at 1 p.m. EST on March 7, 2019, Reynolds failed to

pay, or to cause the payment of, $2,000,000 to Axos, as he had promised to do.

41. Reynolds has failed to make any payments towards the $16,600,000 loss.

Reynold’s Compensation Agreement with Spartan

42. Reynolds had a agreement with Spartan whereby he received compensation based

upon his production.

43. Spartan’s agreement with Reynolds was that Reynolds would be paid 80% of net

revenue, after trading expenses. That agreement also called for him to share in the losses to the

same extent as he shared in the revenue.

44. Reynold’s compensation agreement with Spartan was oral, but was confirmed in

correspondence such as a letter dated dated November 11, 2018 from management, a copy of

which is attached as Exhibit “B.”

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 Spartan’s Demise

45. Spartan has been registered as a broker/dealer since 2001.

46. Spartan has been a profitable operation, with net income of $1,682,962 in the last

three years.

47. In addition to proprietary trading, Spartan was authorized and engaged in

underwriting public offerings and provided consulting services to international companies

interested in being listed in the United States on either Nasdaq or the NYSE.

48. As a result of Reynolds’ improper, unlawful, and unauthorized trades, which

created a net capital deficiency, Spartan has been unable to continue with its pursuit of other

profitable activities that provided a source of revenue to the Firm.

49. Spartan had ongoing and active contracts with several companies for which it was

providing consulting and underwriting services.

50. Spartan had to cease all activity, including underwriting and consulting activities,

as a result of Reynolds’ unauthorized actions. Thus, Spartan lost several clients and the revenue

that investment banking activity would have generated for the Firm. The damages caused by

Reynolds were substantial.

COUNT I – BREACH OF FIDUCIARY DUTY

51. Claimant Spartan realleges and incorporates by reference as though fully set forth

herein the allegations of Paragraphs 1 through 50 of this Statement of Claims.

52. By virtue of Reynolds’ membership in the holding company that owns Spartan,

Connect, as well as his position to control Spartan’s investments and trading in its proprietary

accounts, Reynolds owed a fiduciary duty to Spartan.

53. As a result of such a fiduciary relationship, Spartan reposed trust and confidence in

Reynolds, and Reynolds accepted that repose of trust and confidence.

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 54. By reason of his membership in Connect, and his control over Spartan’s

investments and trading, Reynolds owed Spartan common law and statutory fiduciary duties and

obligations.

55. Reynolds breached his fiduciary duty and abused his relationship with Spartan

through his deceptive and unauthorized practices as described herein.

56. As set forth above, Reynolds failed to operate within the established and agreed

upon trading guidelines; he failed to accurately represent the nature of his trades; he intentionally

concealed the nature of his trades because, if accurately depicted, they would have revealed the

violative nature of Reynolds actions; and he failed to otherwise act in good faith.

57. Reynolds’ abuses of the relationship were intentional and/or reckless, or at a

minimum, a result of negligence. Reynolds traded in excess of established and agreed upon limits,

and intentionally tried to mask those unauthorized trades.

58. As a direct and proximate result of Reynolds’ breach of the fiduciary relationship,

Claimant has sustained damages subject to proof at final hearing, but in any event no less than

$16,600,000.00.

WHEREFORE, Spartan respectfully requests an award of the consequential and

compensatory damages it suffered and continues to suffer as a result of Reynolds’ actions, plus

pre- and post judgment interest, costs, and all other relief as appropriate.

COUNT II – FRAUDULENT MISREPRESENTATION

59. Claimant Spartan realleges and incorporates by reference as though fully set forth

herein the allegations of Paragraphs 1 through 50 of this Statement of Claims.

60. Reynolds engaged in a series of knowingly and affirmatively deceptive and

unauthorized transactions and made false representations of material fact, that Reynolds knew or

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should have known were false, and which that resulted in Spartan acquiring positions in BTPH that

far exceeded its total aggregate position limits.

61. Further, Reynolds failed to disclose material information (and instead intentionally

concealed such material information) about the accuracy of his trades. Reynolds intended that his

false representations, his failure to disclose material information, and his affirmative, active

concealment of material information, would induce Spartan to act and/or to refrain from acting.

62. To effectuate his scheme, Reynolds, among other things:

(a) Prevented Spartan from learning that he had engaged in these unauthorized

trades by falsifying transactions logged with the BRASS order management system to create the

false impression that he had not exceeded the limitations imposed on his trading and to which he

had agreed to abide;

(b) Falsified certain “buy” transactions to make it appear to Spartan that he was

“short” a smaller number of shares than was actually the case when, in reality, Reynolds increased

Spartan’s exposure to BPTH by shorting shares well in excess of the agreed-upon limitations on

his trading;

(c) Represented that he would close the position completely by the end of that

trading day when he had no intention of doing so. Instead, he only partially closed his position in

BPTH and in fact proceeded to place additional orders to short a significant number of additional

shares of BPTH without authorization, thereby knowingly increasing Spartan’s exposure and

delaying Spartan’s ability to mitigate the damages that arose as a result of Reynolds’ unauthorized

activities.

63. As a result of, and in justifiable reliance upon, Reynolds’ misrepresentations to

Spartan, his active concealments of materials facts from Spartan, his falsified transactions and his

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knowingly false promises to close his position, Spartan was fraudulently induced to (1) acquire

more than fifteen times its maximum allowed trading position in BPTH; and (2) keep its trading

position with Axos open, and Spartan suffered significant damages as a result.

64. Reynolds’ wrongful actions were in bad faith and in conscious disregard of

Spartan’s rights.

WHEREFORE, Spartan respectfully requests an award of the consequential and

compensatory damages it suffered and continues to suffer as a result of Reynolds’ actions, plus

pre- and post judgment interest, costs, and all other relief as appropriate.

COUNT III – NEGLIGENT MISREPRESENTATION)

65. Claimant Spartan realleges and incorporates by reference as though fully set forth

herein the allegations of Paragraphs 1 through 50 of this Statement of Claims.

66. Reynolds had a duty to Spartan to trade within Spartan’s guidelines and industry

standards.

67. Reynolds’s violated his obligation and duty to Spartan when he engaged in a series

of knowingly deceptive and unauthorized transactions outside of Spartan’s guidelines and industry

standards, all of which resulted in Spartan acquiring positions in BTPH that far exceeded its total

aggregate position limits.

68. Reynolds negligently misled Spartan into believing the stated accuracy of the

subject trades when, in reality, they were being manipulated by Reynolds to disclose the true story

that Reynolds was in violation of the trade guidelines. Reynold knew or should have known that

his representations and actions were false, and he intended them to induce Spartan to act, or refrain

from acting, in reliance upon those representations and actions.

69. Spartan justifiably relied on the foregoing misleading representations.

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 70. As a direct result of Reynolds’ negligence and his negligent misrepresentation

regarding his trade activity, Spartan was damaged.

WHEREFORE, Spartan respectfully requests an award of the consequential and

compensatory damages it suffered and continues to suffer as a result of Reynolds’ actions, plus

pre- and post judgment interest, costs, and all other relief as appropriate.

COUNT IV – BREACH OF CONTRACT

71. Claimant Spartan realleges and incorporates by reference as though fully set forth

herein the allegations of Paragraphs 1 through 50 of this Statement of Claims.

72. This claim is pled in the alternative to Count I thorugh III, because Reynolds is at

least responsible for 80% of the losses based on his revenue share agreement with Spartan.

73. Spartan has a contractual employment agreement with Reynolds.

74. Spartan and Reynolds had an oral agreement whereby Reynolds received 80% of

net revenue after expenses. Pursuant to this compensation arrangement, losses were deducted

100% from the net revenue.

75. Spartan has been damaged by Reynolds’ breach of the agreement. Reynolds’

conduct put Spartan out of business in its entirety. Thus, Reynolds should be responsible for at

least 80% of the losses based on the revenue share agreement between the parties.

76. As a result of the foregoing, Reynolds has a duty to make restitution to Spartan

based on his revenue share agreement with Spartan.

77. WHEREFORE, Spartan respectfully requests an award of the consequential and

compensatory damages it suffered and continues to suffer as a result of Reynolds’ actions, plus

pre- and post judgment interest, costs, and all other relief as appropriate.

PRAYER FOR RELIEF

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 Claimant Spartan Securities Group, Ltd., prays for relief against Respondent Scott R.

Reynolds as follows:

1. For all compensatory and consequential damages in an amount to be proven, but

which will be in excess of $16,600,000.00

2. For costs;

3. For interests on all sums awarded as damages at the prevailing rate;

4. For punitive and exemplary damages in an amount to be proven; and

5. For such other and additional relief as deemed just and proper.

Date: April __, 2019 Respectfully submitted,

SHUTTS & BOWEN LLP

By: /s/ Patricia A. Leonard

Patricia A. Leonard, Esq.
Florida Bar No.: 0065455
525 Okeechobee Boulevard, Suite 1100
West Palm Beach, FL 33401
Tel: (561) 671-5821
Fax: (561) 822-5534
Email: pleonard@shutts.com
Secondary Email: iavila@shutts.com
Secondary Email: kmeyer@shutts.com

and

SPARTAN SECURITIES GROUP, LTD.

By: /s/ Anna Patricia Morales-Christiansen

Florida Bar No: 27634
15500 Roosevelt Blvd., Suite 303
Clearwater, FL 33760
Telephone: (727) 502-0508
Facsimile: (727) 289-0069
Email: pmorales@spartansecurities.com

Counsel for Claimant Spartan Securities Group,

Ltd.

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