Robinhood CEO Unwittingly Inspired $1 Million Meme Stock Fraud

According to the SEC, Robinhood CEO Vlad Tenev unwittingly inspired brokerages to engage in a scheme involving illegal wash trading, or trading with yourself. An anonymous reader shares the report from Bloomberg: The SEC accused Suyun Gu and Yong Lee of improperly pocketing more than $1 million of rebates from stock exchanges from February through April, after placing thousands of options trades for hot shares like GameStop, AMC , BlackBerry and Nokia. The U.S. equity market, including the related options business, is built atop a system known as maker-taker. Traders who submit orders that sit on an exchange's public order book are, in many cases, paid a "maker" rebate -- an incentive designed to attract more liquidity. Those who trade against those resting orders are charged a "taker" fee. Gu, who lives in Miami, and Lee, a resident of Torrance, California, placed the first part of their trades through a broker based in Greenwich, Connecticut and another in Morristown, New Jersey, that pass along the maker rebates to their clients, according to the SEC's complaint. They targeted out-of-the-money puts for their resting orders, investments that others were unlikely to trade against because the holdings offered little opportunity to make money -- barring something nefarious. Gu, 35, and Lee, 37, then traded against their own orders through accounts they opened at brokers including Robinhood, which doesn't pass along "taker" fees to customers. In summary, their profits came from collecting maker rebates without having to pay taker fees. Gu executed approximately 11,430 wash trades, pocketing $668,671, according to the SEC. For Lee, it was 2,360 wash trades and $51,334 of profits, the regulator said.

The SEC didn't name Tenev or Robinhood. Instead, the agency refers to a "Broker-dealer B" based in Menlo Park, California. The SEC complaint adds that the firm's CEO appeared before the House Financial Services Committee on Feb. 18, where he said the firm "pioneered commission free and zero contract fee options trading." For Tenev, that day was a grueling five-hour ordeal. He faced dozens of probing questions from lawmakers, who accused Robinhood of turning the stock market into a casino while failing to protect retail investors amid the frenzied run-up of GameStop and other stocks. But Gu heard opportunity, according to the SEC. The former trade-system developer who had worked at several financial firms concluded from Tenev's testimony that Robinhood didn't charge its customers "take fees," the agency said. Gu's friend, Lee, joined in the scheme, according to the SEC. While Gu is contesting the regulator's claims, Lee agreed to pay a $25,000 fine and about $52,000 in disgorgement and interest without admitting or denying wrongdoing. The SEC added that its investigation didn't initially prompt Gu to stop breaking the law.

And with that, all the fraud was fixed.

[spun]

Move along people, nothing to see here. Just the SEC cleaning up those few bad apples who manipulate the stock market. It's done now, and everything is peachy-keen. Might as well sell those meme stocks now, haha. But seriously. Sell Gamestop now. Stop trying to register your shares at Computershare! Just leave your shares in your broker's account, they know what's best for you.

All stocks should require a 30 day hold time

[GrumpySteen]

Buy a stock, you're stuck with it for 30 days. Yes, that would massively reduce the number of stock sales. That's NOT a bad thing. The rapid buying and selling of stocks is what allows pump and dump, wash trading, high frequency trading and many other scams to exist. Eliminate it and you get a more stable stock market that is truly about investing and less about gambling.

Re: All stocks should require a 30 day hold time

[reanjr]

Wouldn't help. Exchanges would just create some sort of derivative swap allowing you to trade something other than the underlying asset, which would get sold after the 30-day window to close out the derivative.

It's essentially front-loading risk too, which leads to price distortions when the market becomes available. You see this with options trading. When the options expire, the underlying asset gets a huge pump/dump due to all the pent-up trades that haven't been closed out.

Re: All stocks should require a 30 day hold time

[IcyWolfy]

I would likely suggest removing the ability to offset profits from short-term losses. Losses are eaten by the buyer, and lost with no benefit. Gains are taxed at full rate. No need to publicly subsidize the behaviours. If I had to fully eat losses -- I would invest much, much less. What I would buy would be better researched rather than emotional whims. Remove the impulse to emotionally sell due to a dip, and to be more responsibile.

Perhaps create an added 50% tax bracket for any security sold within 29 days;

Re:

[Zekolas]

That would setup all sorts of other problems like huge bid/ask spreads and wild swings in prices .

Re:

[burtosis]

Hell, I’d settle for trades resolving in 5 minutes and not this two days if they even “remember” to deliver them.

Re:

[stikves]

In theory all of these make sense, ... but then the road to hell is known to be paved with good intentions.

Stock trades take three days to settle. But, most brokers allow "free" margin on pending transactions. So that if you sell APPL today, you don't need to wait until Thursday to buy MSFT instead. They can cover the three days interest free as a promotion. (Your money is definitely arriving anyway).

But... "interactive" traders make it all instant, letting people essentially play roulettes with their money

Re:

[ayesnymous]

There is somewhat of a 30 day rule for stocks already, called the "wash sale" rule. Basically if you sell a stock for a loss and buy the stock again within 30 days, you cannot claim that loss on your tax return.

Re:

[igreaterthanu]

Willing buyer / willing seller... HFT is not a scam.

1 million stock fraud ...

[znrt]

... that's what ... not even pocket change level of stock fraud? 1 mill ... how is that even news?

Re:

[burtosis]

... that's what ... not even pocket change level of stock fraud? 1 mill ... how is that even news?

Maybe if we only bust the tiniest droplet of fraud possible people might move on and not see the sea it wafted over from.

Irony so thick you could cut it with a knife

[hyades1]

So Tenev got a five-hour grilling from the House Financial Services Committee for giving small investors just about the only chance they've ever had to deliver a good kick in the balls to the sharks who routinely "cheat legally". Yes, some of the little guys got hurt, but it was no secret there was always a chance that would happen.

Meanwhile, the SEC turns a blind eye while House and Senate members who play the market routinely outperform seasoned Wall Street traders, even though most of them are so stupid they need minders to stop them from writing on walls with their own shit.

I want to be really clear: this is not a partisan issue. Utterly corrupt Senators and Congress-creatures from both sides are shoveling millions into their pockets thanks to various flavours of insider trading while the SEC uses up its limited resources chasing petty chiselers like Tenev, Suyun Gu and Yong Lee.

The United States is rapidly descending into the kind of corporate kleptocracy that has crippled some of the wealthier Third World countries, and it's running out of time to fix the problem.

The only ones who got cheated...

[russotto]

...were the "taker" brokers. Including Robinhood, who ate fees for bogus trades (for some reason they're OK with eating fees for real trades). I'm not sure why they're getting the blame. Even the exchanges profited, since the taker fee is greater than the maker rebate.

Re:

[gweihir]

Cheating idiots in illegal ways is still fraud.

Cloud servise

[lidamurcelo]

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