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SEC charges two individuals in wash trading meme stocks options scheme

The Securities and Exchange Commission of the United States of America has charged two people for engaging in a fraudulent scheme.

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The Securities and Exchange Commission (SEC) has charged two Florida residents today for wash trading of put options in certain meme stocks during the aftermath of the January short squeeze of GameStop. The SEC's complaint, filed in the United States District Court of the District of New Jersey, states that Suyun Gu and their friend Yong Lee engaged in a fraudulent scheme netting them close to $700,000 in profits.


Here's the entire release posted directly to the SEC.gov website:

The Securities and Exchange Commission today charged a Florida resident and his friend for engaging in a fraudulent scheme designed to collect liquidity rebates from exchanges by wash trading put options of certain "meme stocks" in early 2021.

According to the SEC's complaint, filed in the United States District Court for the District of New Jersey, starting in late February 2021, Suyun Gu became aware of the increased market volume and volatility driven by so-called "meme stocks" – stocks that were being actively promoted on social media platforms. Gu allegedly then devised a scheme to take advantage of the "maker-taker" program offered by exchanges by trading options of these stocks with himself.

Under the maker-taker program, a trade order that is sent to an exchange and executes against a subsequently received order makes liquidity and generates a rebate from the exchange. In contrast, an order that immediately executes against a pre-existing order takes liquidity and is charged a fee.

The SEC's complaint alleges that Gu was able to generate illicit profits by using broker-dealer accounts that passed rebates back to their customers to place initial orders on one side of the market, and then using broker-dealer accounts that did not charge fees for taking liquidity for his subsequent orders on the other side of the market. When identifying a product to trade, Gu and his friend and business associate, Yong Lee, selected far out-of-the-money put options on some "meme stocks," which they thought would be easier to trade against themselves because interest in buying the "meme stocks" and related price increases would make put options on those stocks less attractive. After certain broker-dealers closed Gu's and Lee's accounts in early March 2021, Gu was able to continue the scheme through mid-April 2021 by lying to broker-dealers about his trading strategy, using accounts in the names of other people, and accessing these accounts through virtual private networks to hide his activity. The complaint alleges that Gu executed approximately 11,400 trades with himself, netting at least $668,671 in liquidity-rebates, and that Lee executed approximately 2,300 trades with himself, netting $51,334 in liquidity-rebates. In addition to collecting these ill-gotten rebates, the wash trading scheme allegedly impacted the market as it skewed the volume in certain option contracts and induced other traders to place trades in otherwise illiquid option contracts.

"As alleged in our complaint, Gu and Lee engaged in a deceptive wash trading scheme to game the exchanges' maker-taker programs and take advantage of market conditions associated with meme stocks trading," said Joseph G. Sansone, Chief of the SEC's Market Abuse Unit. "This case demonstrates the SEC's ability to quickly investigate and expose complex trading schemes, including those conducted during times of significant market volatility."

The SEC's complaint charges Gu and Lee with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Section 17(a) of the Securities Act of 1933. Without admitting or denying the SEC's allegations, Lee has consented to the entry of a final judgment, subject to court approval, that enjoins him from violating the antifraud provisions and orders him to pay $51,334 in disgorgement, plus $515 in prejudgment interest, and a civil monetary penalty of $25,000. The SEC's litigation against Gu is continuing.

The SEC's investigation was conducted by Andrew McFall, with the assistance of Matthew Koop and Mandy Sturmfelz, of the Market Abuse Unit, and Maxwell Clarke, of the SEC's Division of Economic and Risk Analysis. The case was supervised by Paul Kim and Mr. Sansone. The SEC's litigation is being led by James Connor and Mr. McFall, and is being supervised by Stephan Schlegelmilch. The SEC appreciates the assistance of the Financial Industry Regulatory Authority.


What is Wash Trading?

Wash trading is a process whereby a trader buys and sells a security for the express purpose of feeding misleading information to the market. In some situations, wash trades are executed by a trader and a broker who are colluding with each other, and other times wash trades are executed by investors acting as both the buyer and the seller of the security. Wash trading is illegal under U.S. law, and the IRS bars taxpayers from deducting losses that result from wash trades from their taxable income. - courtesy of Investopedia


Noticeably absent from the press release is any mention of GameStop, AMC,. or any specific stock. It appears that Gu and Lee were engaging in this fraudulent scheme across multiple securities. Things definitely seem to be heating up with the SEC's ongoing investigation of meme stock trading, with SEC Chairman Gary Gensler telling investors that a GameStop report's release was imminent as recently as a week ago. Other regulators are also getting into the mix. Earlier this month, the Massachusetts securities regulator fined MassMutual for failing to monitor trading activities of Keith "TheRoaringKitty Gill

GameStop (GME) has remained pretty quiet about the ongoing SEC investigation. They have included language in their quarterly reports about the investigation, but many investors have been frustrated by the lack of question and answer sessions during earnings results conference calls.

GameStop's chart over the last year highlights the wild ride investors have been on in 2021.
GameStop's chart over the last year highlights the wild ride investors have been on in 2021.

It appears that this meme stock saga is going to head into October with even more SEC investigations and actions to come. Just this weekend, famed short seller Michael Burry tweeted out that he had received a subpoena from the SEC regarding GameStop. Burry's story was told in the popular movie and book "The Big Short," but it appears that he was actually long GameStop shares this time around.

All of this news is hitting the wire as rumors continue to circle Reddit and Twitter that Citadel Securities CEO Ken Griffin may have lied under oath during the GameStop congressional hearing. While it is commendable to see the SEC go after the fraudulent activities of Gu and Lee today, it would be nice to see the United States government's largest securities regulator actually do something on behalf of the many retail investors damaged by the actions of Citadel and Robinhood in January 2021.


This article is only meant for educational purposes, and should not be taken as investment advice. Please consider your own investment time horizon, risk tolerance, and consult with a financial advisor before acting on this information.

Full Disclosure:

At the time of this article, Shacknews primary shareholder Asif A. Khan, his family members, and his company Virtue LLC had the following positions:

Long GameStop via GME shares

Long GameStop via GME call options

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