Pair charged in ‘wash-trading’ liquidity-rebate scam
21:00, 27 September 2021
Two retail investors have been charged with securities fraud in connection with options trading activity involving “meme stocks” which are actively promoted on social media sites, the US Securities and Exchange Commission announced Monday.
The pair, identified in the complaint as Sunyun Gu of Florida and Yong Lee of California, bought and sold put options to take advantage of liquidity rebates offered by no-fee retail brokers, the SEC complaint alleges, including but not limited to, Robinhood Markets.
“As alleged in our complaint, Gu and Lee engaged in a deceptive wash trading scheme to game the exchanges’ maker-taker programmes and take advantage of market conditions associated with meme stocks trading," said Joseph Sansone, chief of the SEC's Market Abuse Unit, in a prepared release.
SEC staff attorney James Connor declined further comment through the SEC’s press office.
Gu, a former financial professional himself, allegedly was inspired to create his scheme after watching the testimony of what the SEC calls “CEO of Broker-dealer B” before the US House Financial Services Committee. “Broker-dealer B” is only identified in the complaint as “a retail broker-dealer located in Menlo Park, California.”
Separate testimony links brokerage
On 18 February, Robinhood CEO Vlad Tenev testified before the House Financial Services Committee, drawing scrutiny from Rep. Alexandria Ocasio-Cortez (Democrat-New York), in particular. Robinhood is headquartered in Menlo Park, California. Four other retail broker-dealers are listed in the complaint, identified only by location.
After realising the retail-investor interest in certain equities over social media platforms, such as r/WallStreetBets, Gu opened an account at three separate retail broker-dealers, with the understanding based on Tenev’s testimony, they all offered what are called “make rebates” for certain illiquid put option securities. Gu eventually expanded to five different broker-dealers.
Gu opened his first account, with Broker-dealer A, identified only as “a broker-dealer headquartered in Greenwich, Connecticut,” on 19 February, the day following Tenev’s testimony. On the same day, Gu called Lee, a friend and former co-worker, who opened his account with “Broker-dealer B’ that day, the complaint outlines.
Pair collected rebates
Targeting put options of up to 15 specific company’s shares, Gu proceeded to trade with himself over the various broker-dealers to move money from one account to another and collect the rebates after watching “CEO of Broker-dealer B” testify the rebates were incentives “to promote liquidity on (a) particular exchange.”
Gu admitted in testimony to the court his intent was not to provide liquidity to exchanges, but “to trade against (him)self.”
From February through mid-April, Gu executed 11,400 such trades with himself, collecting $668,671 in liquidity rebates. Lee, on the other hand, executed 2,3000 trades, netting $51.334 in rebates.
Alleged to have misled broker-dealers
The SEC alleges the pair misled all five broker-dealers about their market knowledge, trading experience and even created accounts under false identities after existing accounts were closed for suspicious trading activity.
While Gu’s case is ongoing, Lee has settled with the SEC and agreed to pay $76,849 in penalties and fees, the SEC’s release added.
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