SEC fines broker $125,000 for halting GameStop trades for 10

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The 2021 GameStop stock surge (opens in new tab) seems to have acquired a new lease of life in recent weeks. First, one of the hedge funds that took a big short position against the stock announced it was to close (opens in new tab). And now, the US Securities and Exchange Commission (SEC) has concluded an investigation (opens in new tab) into an online brokerage and its co-founder—and slapped them with a combined $125,000 in fines for a ten-minute restriction on trading so-called meme stocks.

The SEC charged broker-dealer TradeZero America Inc. and co-founder Daniel Pipitone with "falsely stating to the firm’s customers that they didn’t restrict the customers’ purchases of meme stocks when in fact they did." And how!

The investigation found that, on January 28, 2021, many brokers were restricting investors' ability to buy meme stocks: the stocks in question here being GameStop, AMC Entertainment Holdings, and Koss Corporation. On this day, TradeZero was told by its clearing broker to halt purchases of these stocks through its platform.

What happened next is pretty wild, according to the SEC's report (opens in new tab). Essentially, on January 28 2021, TradeZero refused to implement the clearing broker's instruction to cease trading, for two hours. Then, under increasing pressure, TradeZero's board of directors (including Pipitone) decided to do what they were told and cease trading in the meme stocks.

Ten minutes later, a representative of the clearing broker phoned Pipitone and told him that the restrictions were being lifted. That is: now meme stocks were fine.

TradeZero had resisted the pressure to roll over for two hours, then rolled over, and ten minutes later was told to roll back. Pipitone's solution to this was simple: he denied it had happened.

The SEC's press release reads: "After the halt, TradeZero and Pipitone made misleading public statements via interviews, social media, and in a press release in an effort to distinguish their company from brokers that restricted trading during that period."

(Image credit: GameStop)

The examples given by the SEC are judiciously chosen. In a Reddit 'Ask Me Anything' thread on January 29, Pipitone wrote some incredible things:

"That some trading firms are blocking these symbols is disgusting, unprecedented..." Pipitone writes. "Our clearing firm tried to make us block you and we refused. After three hours on the phone they backed down."

You what now? That's not even the best one. This masterclass in punching your own face on the internet was just getting started.

Pipitone claimed he'd told the clearing broker "theres [sic] NO WAY we are shutting these off" without disclosing that TradeZero did, in fact, shut buying these stocks off. Our hero then went on to promise TradeZero boasted "a leadership team that will go thermonuclear on clearing firms if they try to block your trades. Screw everyone that rolled over on this." Which omits that he and TradeZero had just rolled over on this.

Despite all of this, TradeZero and Pipitone are going to get away with a fine and some bruised egos. The company and the individual consented to the SEC order's finding "that they violated Sections 17(a)(2) and (3) of the Securities Act of 1933. Without admitting or denying the charges, TradeZero and Pipitone agreed to a cease-and-desist order, retention of an independent compliance consultant to ensure future compliance with the federal securities laws, a $100,000 penalty for TradeZero, and a $25,000 penalty for Pipitone."

$125,000 in penalties is minor in the context of a brokerage, though it's a hell of a lot to pay for ten minutes (and dissembling about it afterwards).

"This case sends a powerful message that participants in our capital markets cannot exploit market turbulence to deceive customers," said Melissa Hodgman of the SEC’s Enforcement Division. "The SEC has been committed to ensuring that our capital markets continue to function in times of uncertainty, and today’s action highlights this commitment."

I've reached out to TradeZero and Pipitone for comment.

The GameStop stock surge caused such huge losses and gains that the event has been the subject of Congressional hearings. It is remarkable to watch the fallout, which continues to claim careers and result in censures like this. Meme stocks are a lot of things, but they ain't a joke.