SEC Takes Action Against Two Traders Who Wash Traded Meme Stocks

The U.S. Securities and Exchange Commission has filed a lawsuit against two Robinhood users, accusing them of using meme stock for a washtrading-based arbitrage scheme.

According to the Sept. 27 complaint, defendants Suyun Gu and Yong Lee used different trading fee schedules offered by different retail brokers and exchanges to engage in arbitrage in wash trading.

By trading between venues that offer kickbacks to market makers and venues that don’t charge takers, they collectively earned more than $1.5 million worth of kickbacks through the so-called wash trading scheme, the SEC estimates.

Gu and Lee are believed to keep nearly half of the kickbacks as profits, with US SEC estimates estimating that the duo earned $668,671 and $51,334, respectively, in profits from the wash trading between February and April of this year. The pair are believed to have executed 11,400 and 2,300 trades respectively through the scheme.

Gu and Lee are accused of wash trading put option contracts on popular meme stocks including GameStop (GME) and Entertainment (AMC). The complaint states:

"Gu and Lee believe that the interest of other market makers in buying 'meme stocks', and the associated price increases, will make put options on these stocks unattractive, making it easier for Gu and Lee to trade with themselves."

While the trading venue the pair used was not specifically identified in the court documents, they appeared to use the popular free investing app Robinhood. Gu hatched the plan after seeing the CEO of "Broker B" outline in court testimony in February that his firm doesn't charge clients taker fees — the same month that Robinhood CEO Vlad Tenev spoke to GME Testify before Congress about market volatility related to other meme stocks.

So-called “meme stocks” have become widely popular due to the famous series of Robinhood and Reddit-based pump and dump organization r/wallstreetbets earlier this year, such as AMC and Gametop.

Robinhood became the subject of controversy in January after the platform suspended trading on GME amid a short squeeze against hedge funds led by the Reddit community r/wallstreetbets.

The group responded with an immediate rush into cryptocurrencies, with Dogecoin up 980% on Jan. 28 — the same day Robinhood moved to curb wild meme stock speculation.

Since then, Dogecoin has accounted for 62 percent of its cryptocurrency revenue in the second quarter, according to Robinhood estimates.

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