SEC Lodges Complaint Against Perpetrators of Alleged Wash Trading Scheme Involving Options of ‘Meme Stocks’

On Monday, the Securities and Exchange Commission (SEC) filed a civil complaint against two men, one of whom was allegedly the chief coordinator of a deceptive option trading scheme for “meme stocks,” or those actively promoted on social media, like GameStop Inc., Nokia Corporation, and others currently the subject of ongoing short squeeze litigation. According to the District of New Jersey filing, Suyun Gu and friend and business associate Yong Lee collected liquidity rebates from unnamed exchanges by wash trading put options of selected stocks in early 2021.

The complaint explains that once Gu noticed an increased market volume and volatility driven by these stocks, he took unfair advantage of “maker-taker” programs 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,” the SEC’s press release states.

The complaint contends that primarily Gu, but also Lee, generated ill-gotten profits by using broker-dealer accounts that passed rebates back to their customers to place orders on one side of the market, and then using broker-dealer accounts that did not charge fees for taking liquidity for their subsequent orders on the other side of the market. In their selection of stocks, Gu and Lee would reportedly choose “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.”

The men reportedly executed these trades, in the case of Gu, more than 11,400, this year between late February and early March and again between late March and mid-April. Lee reportedly stopped trading once broker-dealers closed the men’s accounts in early March. However, Gu, the “mastermind” of the operation, was able to continue trading by using accounts held in the names of friends and family members, private servers to shield his identity, and misrepresenting his trading strategy to broker-dealers through which he made wash trades.

According to the complaint, Gu netted approximately $669,000 and Lee $51,000 as a result of their scheme. In addition, “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.”

The lawsuit seeks disgorgement of ill-gotten gains, declaratory and injunctive relief, and the assessment of civil penalties against the defendants.