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Volume XI, Number 336

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SEC Charges Case Featuring Alleged Wash Sales Involving Options of “Meme Stocks”

The United States Securities and Exchange Commission recently charged two individuals— Florida residents, Suyun Gu, and his friend, Yong Lee—for their involvement in allegedly fraudulent wash sales involving out-of-the-money options in “meme stocks.” So-called “meme stocks” [1] are stocks that were being actively promoted on social media in early 2021.

In a complaint filed in the United States District Court for the District of New Jersey in late September, the SEC alleges that the two defendants placed orders on opposite sides of the market for the same put options with two different broker-dealers. In these wash sales, one of the two dealers allowed clients to collect a rebate when placing limit orders to sell while the other dealer did not pass on a “taker” fee when placing buy orders.

Gu was able to take advantage of the “maker-taker” program by trading options of the particular stocks effectively with himself. Under this program, resting limit orders sent to an exchange that execute against an aggressive order after a particular time “make” liquidity and generate a rebate from the exchange. On the other hand, orders that are aggressive and immediately execute against pre-existing limit orders “take” liquidity and a fee is typically assessed.

Gu generated profits using accounts that passed rebates to customers to place initial orders on one side of the market and using accounts that didn’t charge fees for liquidating his later orders on the other side of the market. According to the SEC, Gu and Lee specifically chose put options that were far out of the money to trade against themselves because the high interest in the meme stocks was driving prices higher and made the put options easy to match internally.

Despite Gu and Lee’s accounts being closed early March 2021 by certain broker-dealers, Gu allegedly continued his scheme until mid-April 2021 by deceiving broker-dealers about his trading strategy by using accounts in other people’s names and accessing them through vpns in an attempt to cover up his activities. Gu executed about 11,400 trades with himself and made about $668,671 in liquidity rebates while Lee made 2,300 trades with himself and made about $51,334 in liquidity rebates. Their activity also allegedly affected the market by skewing the volume in some option contracts and causing other traders to place trades in illiquid option contracts they otherwise would not have traded.

Both Gu and Lee were charged with violations of the antifraud provisions of the federal securities laws, including Section 17(a)(1) and (2) of the Securities Act, Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5. The SEC is seeking permanent injunctions, disgorgement with prejudgment interest, and civil monetary penalties against both Gu and Lee. Lee settled his charges by agreeing to an injunction, pay disgorgement of $51,334 (with prejudgment interest of $515), as well as a $25,000 civil monetary penalty.  Gu has not settled and appears to be litigating against the SEC.

FOOTNOTES

[1] "SEC Charges Two Individuals for Wash Trading Scheme Involving Options of 'Meme Stocks'"

© 2021 Winstead PC.National Law Review, Volume XI, Number 279
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About this Author

Toby M. Galloway Securities Litigation & Enforcement Attorney Winstead Law Firm Fort Worth Texas
Shareholder

Toby Galloway is Co-Chair of Winstead's Securities Litigation & Enforcement Practice Group. He also practices in the areas of white-collar defense, governmental & internal investigations, and business litigation. Before developing his private practice, he served as an attorney with the United States Securities and Exchange Commission, in roles of increasing responsibility, for more than 11 years.

During his last four years at the SEC, Toby was the chief trial counsel for the Commission’s Fort Worth Regional Office. In this capacity, he...

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