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SEC Lodge a Complaint in Court Regarding Wash Trading by Two Robinhood Users

The Securities and Exchange Commission has filed a complaint against two Robinhood users. The complaint alleges using a wash-trading-based arbitrage scheme that utilized meme stocks, amounting to more than $700,000.

Wash trading is when a trader buys and sells the security to provide misleading information to the market. It is illegal under U.S. law and is liable to a lawsuit against those involved.

Wash Trading Accusations

SEC accused the defendants, Suyun Gu and Yong Lee,  on September 27. The two Robinhood users pretend on different trading fee schedules from other brokers and exchanges. They used the information to extract arbitrage while wash-trading.

The SEC estimates that the alleged wash trading scam earned more than $1.5 million in rebates. They traded between venues that pay rebates to market makers and those that do not charge fees to market takers.

Gu and Lee allegedly benefitted from nearly half of the refunds. The commission calculated they made $668,671 and $51,334, respectively. The wash-trading activities date from February to April. The plan resulted in 11,400 and 2,300 trades for the pair, respectively.

The SEC has been looking into several issues relating to the meme-stock phenomenon. Certain brokers restricted trading in GameStop and other equities due to high retail interest in these stocks. It then prompted colossal broker collateral obligations to a central equity clearinghouse.

Without admitting or denying the SEC’s allegations, Lee has agreed to the entry of a final judgment. Subject to court approval, enjoining him from violating the antifraud provisions, he had to pay $51,334. Also, Plus $515 in prejudgment interest and a civil monetary penalty of $25,000. The SEC’s case against Robinhood user Gu is still ongoing.

The Accused RobinHood Users

So far, the trading platforms used by the duo remain anonymous in the court records. It appears they were utilizing the popular fee-free investment program Robinhood.

According to the documents, Gu devised the scheme after witnessing the CEO of “Broker-dealer B” outline in court testimony in February. He said that his firm does not charge taker fees to its customers. The same month, Robinhood CEO Vlad Tenev testified before Congress about market volatility related to GME and other meme stocks.

As a result of the Robinhood and Reddit-based pump and dump group r/wallstreetbets saga earlier this year, so-called “meme stocks” like AMC and GameStop became hugely popular.

Robinhood sparked outrage in January when it froze trading on GME during the legendary short squeeze against hedge funds organized by the fiery-eyed Reddit forum r/wallstreetbets.

The group immediately converged on cryptocurrency. Dogecoin increased by 980% on January 28; the same day, Robinhood intervened to dampen the frenzied meme stock speculation.

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Since then, Robinhood has estimated that Dogecoin accounted for 62% of its crypto revenues in Q2.

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