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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.

Read more of this story at Slashdot.