The United States Securities and Exchange Commission (SEC) today filed a complaint against Suyun Gu and Yong Lee, accusing the duo of perpetrating a fraudulent options-trading scheme, involving “wash trades”.
According to the SEC’s complaint, submitted today at the New Jersey District Court and seen by FX News Group, from February to April 2021, Gu and Lee perpetrated a fraudulent options-trading scheme to collectively obtain over $1 million in rebates from U.S. national security exchanges through thousands of “wash trades” – simultaneous or near-simultaneous purchases and sales of securities without an actual change in beneficial ownership.
To effectuate their scheme, Gu and Lee used accounts at a broker-dealer that passes back to clients make rebates collected for providing liquidity by placing non-marketable limit orders for out-of-the-money options – options that would be unprofitable to exercise at the time of the trading. Gu and Lee then used accounts at a different brokerage firm that does not pass along take fees to place orders on the opposite side of the market for the same put options, completing the wash trade.
For example, if they used one account that passes back make rebates to place a sell order, they would use a second account that does not pass back take fees to place a buy order for the same put options. These two orders would be routed to the same exchange and execute against each other. Gu and Lee would then collect the make rebate for that trade in the first account and avoid paying the take fee in the second account.
Over the course of the scheme, Gu executed approximately 11,430 wash trades, which represented approximately 2.9 million option contracts traded in numerous underlying securities. Gu received at least $1,370,000 in rebates as a result of the scheme, resulting in a net gain of at least $668,671 after commissions and fees.
Lee executed approximately 2,360 wash trades, which represented approximately 405,000 options contracts traded in numerous underlying securities. Lee received at least $174,000 in rebates as a result of the scheme, resulting in a net gain of at least $51,334 after commissions and fees.
The SEC alleges that the defendants violated Section 17(a) of the Securities Act of 1933 (“Securities Act”) [15 U.S.C. § 77q(a)] and Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5]. Moreover, Gu has informed the SEC staff that he may continue his wash trading scheme in the future.
The Commission seeks a permanent injunction against the defendants, enjoining them from engaging in the transactions, acts, practices, and courses of business alleged in the Complaint, disgorgement of all ill-gotten gains from the unlawful conduct set forth in the Complaint.