TradeZero, Meme Stocks, and High Dudgeon From the SEC

May 26, 2022

The other day, an SEC press release claimed that a settlement constituted a powerful message. After you read the press release and learn more about the alleged misconduct, there's little power to the so-called message. Frankly, it all comes off as high dudgeon, which, like a powerful message is a bit of hyperbole because, when you think of it, has anything ever been called low dudgeon or just plain old dudgeon -- as if the SEC would admit to sending a tepid message.

SEC Press Release

https://www.sec.gov/news/press-release/2022-88:

In late January 2021, many brokers restricted investors' ability to purchase a group of highly volatile stocks generally known as "meme stocks." According to the SEC's order, on January 28, 2021, TradeZero was instructed by its clearing broker not to allow its customers to purchase three meme stocks. TradeZero ultimately halted purchases for about 10 minutes. 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. For example, in a Reddit "Ask Me Anything," Pipitone said, "That some trading firms are blocking these symbols is disgusting, unprecedented . . . Our clearing firm tried to make us block you and we refused."

"This case sends a powerful message that participants in our capital markets cannot exploit market turbulence to deceive customers," said said Melissa Hodgman, Associate Director of the SEC's Division of Enforcement. "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."  

Without admitting or denying the charges in the SEC Order
https://www.sec.gov/litigation/admin/2022/33-11066.pdf, TradeZero America Inc. and co-founder Daniel Pipitone consented to findings that they had violated Sections 17(a)(2) and (3) of the Securities Act; and they 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. 

Bill Singer's Comment

The SEC thinks that this settlement sends a powerful message? Gimme a break. There's nothing in the SEC's case that highlights the federal regulator's purported commitment to investor protection and ensuring the smooth functioning of our capital markets. As I read the settlement, it is more about manufacturing dubious headlines rather than protecting our markets. It's just more generic, non-specific whitewash, which the SEC seems to keep in buckets, ever at the ready. As that great Wall Street regulator Elvis Pressley famously crooned, the SEC's message was returned to sender.


According to the SEC Press Release, the gist of the regulator's case was that TradeZero and Pipitone made misleading public statements when, for example, Pipitone said that the firm refused to allow its clearing firm to "block" customers from trading the cited meme stocks. In contrast to the simplistic narrative in the SEC Press Release, consider these paragraphs in the SEC Order:

5. In late January 2021, extraordinary trading volume in multiple securities (later
dubbed "meme stocks") led to extreme price volatility in these issues, which included GameStop Corp. (GME), AMC Entertainment Holdings, Inc. (AMC), and Koss Corporation (KOSS).

6. On the morning of January 28, 2021, TradeZero's clearing broker instructed all of
its introducing brokers, including TradeZero, to halt all purchases in GME, AMC, and KOSS (sales of these tickers were not halted). TradeZero refused to implement this instruction for over two hours, allowing its customers to freely trade. Under increasing pressure from the clearing broker, TradeZero's Board of Directors, which included Pipitone, decided to implement the restriction. About ten minutes after implementing the instruction, a representative of the clearing broker called Pipitone to inform him that the clearing broker was lifting the restrictions. TradeZero then resumed allowing its customers to purchase GME, AMC, and KOSS equities.

TradeZero and Pipitone Misstated or Omitted Facts Regarding
TradeZero's Trading Restriction

7. After the trading restriction concluded, Pipitone and TradeZero, in certain
instances, publicly described TradeZero's resistance to the clearing broker's demand to restrict trading but omitted to state that TradeZero, in fact, complied for a short time and restricted trading to liquidating trades only.

8. TradeZero decided that Pipitone would conduct an "ask me anything" session
("AMA") on the Reddit community wallstreetbets. This community played a prominent role in the contemporaneous meme-stock phenomenon. TradeZero and Pipitone believed that the AMA was an opportunity to solicit customers to TradeZero and have those customers trade through TradeZero.

9. On January 29, 2021, Pipitone conducted the AMA on the wallstreetbets community. In this AMA, he emphasized TradeZero's resistance to the clearing broker's instruction to restrict purchases of the symbols, but omitted that TradeZero did comply with the
instruction for about ten minutes. For example, Pipitone said in the AMA "That some trading firms are blocking these symbols is disgusting, unprecedented. . . . Our clearing firm tried to make us block you and we refused. After three hours on the phone they backed down." Pipitone failed to disclose that TradeZero also blocked three symbols, and the clearing broker lifted the restrictions ten minutes after TradeZero complied with them. Similarly, Pipitone stated in the AMA that he told the clearing broker "theres [sic] NO WAY we are shutting these off." He failed to disclose that TradeZero did comply with the clearing broker's demands and shut off its customers' ability to purchase three securities in question for a period of time. Pipitone promised "A leadership team
that will go thermonuclear on clearing firms if they try to block your trades. Screw everyone that rolled over on this," while omitting that TradeZero also did comply with the clearing broker's instruction to restrict three symbols.

10. In addition to the AMA, on January 29, 2021, TradeZero issued a press release
promoting its resistance to the clearing broker's restrictions. The press release noted a tremendous increase in TradeZero's accounts. It quoted Pipitone as stating, "Word circulated on Thursday that TradeZero America retail clients were able to trade in stocks that had been restricted by. . . other retail-oriented brokers." The press release omitted, however, that TradeZero also restricted customers' ability to purchase certain securities for about ten minutes despite TradeZero's awareness that it did so. The purpose of this press release was to attract more customers and for those customers to trade with TradeZero.

11. Pipitone also discussed TradeZero's opposition to the clearing broker's restrictions
in several media interviews. In one Pipitone stated, "We are one of the few firms to not restrict these stocks," even though TradeZero did, in fact, restrict purchases of the stocks for about ten minutes. In a later interview, on February 3, 2021, Pipitone did acknowledge that TradeZero restricted customers' ability to purchase certain securities.

12. TradeZero experienced an influx of business in the wake of this marketing effort.
During the 36-hour period that included the halt, TradeZero's press release, and Pipitone's Reddit appearance of January 29, 2021, TradeZero's new account applications were more than two hundred times greater than its daily average for new applications over the prior year. 

13. At the time that Pipitone made these statements, he knew that TradeZero had restricted trading to liquidating trades for about ten minutes but did not disclose this restriction. 

14. Information regarding TradeZero's trading restrictions would have been material to investors because investors were concerned with trade restrictions. TradeZero's marketing strategy was to distinguish itself from brokers that had restricted trading and thereby influence investors' decisions about which broker to use. In various communications, new customers of TradeZero expressed that they valued TradeZero's purported refusal to comply with restrictions on the purchase of meme stocks. 

15. As a result of the conduct described above, Respondents violated Sections 17(a)(2) and (3) of the Securities Act. Proof of scienter is not required to establish a violation of Sections 17(a)(2) or 17(a)(3). Aaron v. SEC, 446 U.S. 680, 697 (1980).

Apparently, the SEC's ire was prompted by Pipitone saying that TradeZero "refused" to implement its clearing-firm's instruction to block trading despite the fact that the SEC also concedes that there was a trading block for about 10 minutes. 

I mean, seriously? 

Does anyone at the SEC have any idea as to how often trading platforms freeze, crash, or go offline  -- as in, ten minutes ain't all that much of a halt in trading or in being able to access your Level II screen or your margin availability. I'm not defending those down-times but merely noting (as an active day-trader) that a ten-minute trading "block" isn't more than a blink compared to the protracted blocks traders often routinely experience when trying to open their online trading screens.

When the meme-stock trading frenzy was in full bloom, I often noted that it would not end well, that there seemed to have been some manipulation behind the frenzy, and that it all seemed the stuff of a Covid market with too many newbie traders not realizing that they were being duped. As such, no, I am no friend of meme stocks and no apologist for meme stock trading. Frankly, as I have learned after some 40 years on the Street, the markets always teach foolish traders a painful lesson. This time was no different. 

On the other hand, did Pipitone's comments rise to what the SEC Press Release deemed an exploitation of market turbulence designed to deceive customers? Were the comments at issue something that required an SEC investigation and settlement discussions -- apparently from January 2021 through May 2022 (16 months)? 

Nah, I ain't buyin' any of that. 

At worst, Pipitone was likely venting his own frustration with the then-turbulent markets, the foot-dragging by many clearing firms to take any decisive action, the missing-in-action Wall Street regulators, and the angry traders demanding the right to trade the halted meme stocks. As such, I can empathize with Pipitone when he let it rip after the storm had passed and said that it was disgusting and unprecedented for some firms to block trading in some meme stocks. If you remember the time, that was a common sentiment. Mind you, I didn't actually give a crap because I fully expected that trading in meme stocks was going to prove a disaster. Then again, go back and read the contemporaneous news stories of the day -- the SEC was indecisive about whether some form of in loco parentis needed to be implemented to protect the meme traders from trading the meme stocks. If the moment demanded a halt in trading in overly-volatile stocks in over-heated markets, then why the hell was Wall Street's federal regulator sitting in the stands as a spectator rather than on the field as a ref -- blowing the whistle and halting trading?

Going back in time to the tumultuous days of the meme-stocks craze, the SEC Order offers this reminiscence in Paragraph 6:

On the morning of January 28, 2021, TradeZero's clearing broker instructed all of
its introducing brokers, including TradeZero, to halt all purchases in GME, AMC, and KOSS (sales of these tickers were not halted). TradeZero refused to implement this instruction for over two hours, allowing its customers to freely trade. Under increasing pressure from the clearing broker, TradeZero's Board of Directors, which included Pipitone, decided to implement the restriction. About ten minutes after implementing the instruction, a representative of the clearing broker called Pipitone to inform him that the clearing broker was lifting the restrictions. TradeZero then resumed allowing its customers to purchase GME, AMC, and KOSS equities.

Oh my!! Two hours of instructions to halt trading followed by ten minutes of implementation of a trading halt followed by the clearing broker lifting the trading restrictions. Talk about half-assed and half-hearted. As to Pipiton's frustration and anger, the SEC Order offers this recap in Paragraph 9:

[S]imilarly, Pipitone stated in the AMA that he told the clearing broker "theres [sic] NO WAY we are shutting these off." He failed to disclose that TradeZero did comply with the clearing broker's demands and shut off its customers' ability to purchase three securities in question for a period of time. Pipitone promised "A leadership team
that will go thermonuclear on clearing firms if they try to block your trades. Screw everyone that rolled over on this," while omitting that TradeZero also did comply with the clearing broker's instruction to restrict three symbols.

Clearly, TradeZone/Pipitone reacted negatively when first contacted by the clearing firm about halting trading. And the negativity lasted for "over two hours." One could easily imagine that Pipitone told the clearing that there was no way TradeZero would shut off trading. And then the clearing firm insisted. And then Pipitone added some more colorful language. And then the clearing firm insisted again. And then Pipitone told the clearing firm where it could shove the halt. And then the clearing firm insisted again but with a bit more insistence. And, well, you get the picture, right? And after some two hours of back-and-forth, well, omigod, the meme stocks were halted for "about ten minutes." 

After some 120 minutes of refusal, TradeZero caved in -- and then the clearing firm lifted the trading halt after 10 minutes. 

For whatever reasons, TradeZero and Pipitone entered into settlements with the SEC, so it's not my place to second guess that decision, and I won't. 

I will argue that the SEC is acting as a bully in this case, and that the regulator is hiding behind the pretense that it was somehow protecting the integrity of capital markets, which, long ago, lost much of their integrity. In reality, the SEC seems angered by the fact that TradeZero experienced a 200% increase in daily new account applications during the "36-hour period that included the halt, TradeZero's press release, and Pipitone's Reddit appearance of January 29, 2021. . . " How much staff were allocated, how many hours wasted, and how many dollars were spent by the SEC going after a broker-dealer and its co-founder because they said that they had refused to block trading (which they did for some two hours) and then caved in for about 10 minutes? That's what got the SEC to saddle up and take the old posse after the bad guys? TradeZero and Pipitone somehow made too big a deal of the fact that they fought their clearing firm tooth and nail over a trading halt? Where the hell was all this federal cavalry when Wells Fargo was opening fake accounts? Yeah, I know, it's not the same thing. Never is. That's the sad part.


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