SEC fines broker $125,000 for halting GameStop trading for 10 minutes, then denying it happened

The GameStop 2021 Stock Surge (opens in a 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 that it was going to close (opens in a new tab). And now the United States Securities and Exchange Commission (SEC) has concluded an investigation (opens in a new tab) at an online brokerage and its co-founder – and slapped them with a combined $125,000 fine for a ten-minute restriction on trading so-called meme stocks.

The SEC has accused broker-dealer TradeZero America Inc. and co-founder Daniel Pipitone of “falsely telling the company’s clients that they did not restrict purchases of meme stocks by clients while that in fact they did”. And how!

The investigation revealed 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 that day, TradeZero received an order from its clearing broker to stop buying these stocks through its platform.

What happened next is pretty wild, says SEC report (opens in a new tab). Essentially, on January 28, 2021, TradeZero refused to implement the clearing broker’s instruction to cease trading, for two hours. Then, under mounting pressure, TradeZero’s board (including Pipitone) decided to do as they were told and stop trading the shares of meme.

Ten minutes later, a representative from the clearing broker phoned Pipitone and told him the restrictions were lifted. That is to say: now meme stocks were doing well.

TradeZero 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 happened.

The SEC press release reads: “After the shutdown, TradeZero and Pipitone made misleading public statements via interviews, social media and in a press release in an attempt to distinguish their company from brokers who restricted trade during this period.”

(Image credit: GameStop)

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

“That certain commercial companies are blocking these symbols is disgusting, unprecedented…”, writes Pipitone. “Our clearance company tried to block us and we refused. After three hours on the phone, they backed off.”

You what now? It’s not even the best. This masterclass on kicking your ass on the internet was just getting started.

Pipitone claimed that he told the clearing broker “there is [sic] NO WAY we close them “without revealing that TradeZero has, in fact, closed the purchase of these shares. Our hero then promised that TradeZero boasted “of a management team that will go thermonuclear on clearing companies if they try to block your transactions. To hell with anyone who rode on this.” Which omits that he and TradeZero had just rode on this.

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

$125,000 in penalties isn’t much in a brokerage setting, although it’s a lot to pay for ten minutes (and fake 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 is committed to ensuring that our capital markets continue to function in times of uncertainty, and today’s action underscores that commitment.”

I contacted TradeZero and Pipitone for comment.

The surge in GameStop stock caused such huge losses and gains that the event was the subject of congressional hearings. It’s remarkable to watch the spinoffs, which continue to claim careers and lead to censorships like this. Meme stocks are many things, but that’s no joke.

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