SEC: two people charged for wash trading with Meme Stocks
SEC: two people charged for wash trading with Meme Stocks
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SEC: two people charged for wash trading with Meme Stocks

By Stefania Stimolo - 28 Sep 2021

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The US Security Exchange Commission (SEC) has charged Suyun Gu and Yong Lee with wash trading of “meme stocks”, volatile assets actively promoted on social media. 

The two allegedly took advantage of the “maker-taker” program offered by the exchanges to trade options of these stocks for themselves and generate illicit profits. 

The SEC and the Wash Trading case with Meme Stocks

According to the SEC’s disclosure, since the beginning of 2021, Suyun Gu and Yong Lee allegedly created a fraudulent scheme to collect cash refunds from exchanges through wash trading involving assets referred to as meme stocks.

The two allegedly used the maker-taker service offered by the exchanges, which can create liquidity by generating a refund from the exchange. This happens because the trading order sent is executed against a trading order subsequently received.

Something different happens when the trading order is executed immediately against a pre-existing order. In this case, no liquidity is provided for the exchange but the fee is charged. 

Having said that, Gu and Lee allegedly played around with the maker-taker generating illegal profits. 

After the closure of the broker-dealer account in March 2021, Gu managed to continue until mid-April 2021, lying to broker-dealers about his trading strategy and using accounts in other people’s names. The broker-dealer accounts were accessed through virtual private networks to hide the activity. 

The stocks chosen for the illicit activity were meme stocks. In essence, Gu and Lee were able to trade meme stocks against themselves, thinking that interest in those stocks and the associated price increases would make put options on those stocks less attractive. 

The final ruling and new controls on meme finance

The total amount of cash declared by the SEC was exactly $668,671 gained by Gu and $51,334 by Lee

The violations reported by the SEC against the two fraudsters involve 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. 

Lee consented to the entry of a final judgment requiring him to repay the total of $51,334 he earned, plus $515 in prejudgment interest, and a $25,000 civil monetary penalty. As for Gu, the case is still pending. 

Joseph G. Sansone, head of the SEC’s Market Abuse Unit stated:

“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. This case demonstrates the SEC’s ability to quickly investigate and expose complex trading schemes, including those conducted during times of significant market volatility”.

SEC meme stock
SEC’s headquarters

The SEC and the new 2021 trend of Meme Stocks

Picking up on Samson’s discussion, “The market conditions associated with meme stock trading,” it is intended to highlight the SEC’s presence in relation to the new 2021 trend of meme stocks that has seen a number of key players, most notably GameStop and AMC

The stocks of these businesses, defined by finance as “less strong” or even “bankrupt”, become the object of support by small traders who, through social media platforms, manage to push the price up.

At the end of May 2021, the shares of AMC Entertainment Holdings had increased in price by 50% in one day and 110% in 5 days. This pump seems to have been the result of an analysis by Jason Bazinet and the coordinated action on social media of small investors. 

A bit like what happened with GameStop’s (GME) shares in early 2021, which, thanks to the action of young investors on WallStreetBets (a group on Reddit), had increased its share price by 93.4% in just one day

Stefania Stimolo

Graduated in Marketing and Communication, Stefania is an explorer of innovative opportunities. She started out as a Sales Assistant for e-commerce, and in 2016 she began to develop a passion for the digital world, initially in the Network Marketing sector, where she discovered and became passionate about the ideals behind Bitcoin and Blockchain technology, which lead her to work as a copywriter and translator for ICO projects and blogs, and organize introductory courses.

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