Over the past few weeks, the internet has been awash with news of a wild rise in the stock prices of publicly traded companies, most notably GameStop and AMC Theaters.  Given the impact of the COVID-19 pandemic on the market for securities, one might suspect that this increase was a product of the ongoing volatility of the market.  However, the rise of these two stocks is allegedly the result of a coordinated effort by traders in a Reddit subgroup called “WallStreetBets.”  The rapid rise has been described as a battle between small investors and Wall Street, but the true nature of the events may have its origins in a simple effort to make a little profit from the stock of a beloved retailer that many believed to be undervalued.

GameStop is a video game retailer that buys and sells used video games, consoles, and other consumer electronics.  It holds a special place in the hearts of many millennials and members of Generation Z who frequented the stores during their childhood.  Despite the nostalgia, GameStop’s profitability had seen a decline over a number of years.  Many consumers had begun to purchase digital versions of video games downloaded directly onto their consoles, and sales of physical products were met with competition from Amazon, which offered free shipping on products.  Compounding the issues was the COVID-19 pandemic, which saw many of the retailer’s storefronts closed during lockdown efforts.  This created a perception that GameStop was doomed to bankruptcy.

Because of the perceived imminent demise of GameStop, it became one of the most shorted stocks on the market.  Hedge funds and other institutional investors believed that the stock was a great opportunity to profit from its impending closure.  Enter WallStreetBets.  Members of the Reddit group believed that Wall Street had bet too heavily against GameStop and was taking on too much risk in shorting the stock.  Recent sales of next generation gaming consoles and a partnership with Microsoft gave investors a reason to be optimistic about the upside of the company.  Investors then began buying the stock, which sent the price of GameStop up.  That is the point at which events escalated.

It is unclear at this point when a strategy arose or who was behind it, but members of WallStreetBets allegedly began to see GameStop, AMC, and other stocks as an opportunity to punish Wall Street for betting on the failure of the companies.  Members of the group began to buy up GameStop and AMC stock in large quantities.  This sent the stock price up.  Hedge funds and institutional investors then were forced to buy up stock in order to cover their losses from their short positions.  Those purchases sent the price up even further, spurring others with short positions to buy stock to cover their positions.  The quick rise attracted the attention of news outlets and social media.  The rise in the stock prices enticed individual investors with no ties to WallStreetBets to invest in the stocks, sending the prices even higher. The trading volume and wild volatility led exchanges and trading platform Robinhood to halt trading of the stocks.  Many made millions off the stock, and institutional investors are reported to have lost billions from their short positions in the stocks.

The massive profits and losses bring with them scrutiny from regulators, most notably, the SEC.  In a recent statement, the SEC announced that it would “act to protect retail investors when the facts demonstrate abusive or manipulative trading activity that is prohibited by the federal securities laws.” The SEC can regulate market manipulation under both §§ 9(a) and 10(b) of the Securities and Exchange Act.  Given the conduct involved, SEC is most likely to pursue any wrongdoing under § 9(a).  Under § 9(a)(2) – codified as 15 U.S.C. § 78i – it is unlawful to engage in transactions designed to create actual or apparent trading of a security “for the purpose of inducing the purchase or sale of such security by others.”  Based on the language of the statute, the SEC may have difficulty bringing enforcement actions against members of the WallStreetBets group who traded in the stocks of GameStop and AMC initially and against individual investors who bought and sold the stock.  Those individuals would have a strong argument that their trades were based on publicly available information that led them to seek a profit from buying and selling the stock.  

The individuals most likely to face enforcement actions from the SEC are members of the WallStreetBets group that allegedly targeted short sellers in an effort to force them to sell to cover their losses.  SEC is likely to review postings in the WallStreetBets group and communications involving any individuals that created posts indicating their desire to induce institutional investors to sell their stock at a loss.  Given the billions of dollars lost on the stock, this investigation is likely to receive much press coverage, and the Biden administration may see this as an opportunity to flex its muscle with an SEC that brought comparatively few enforcement actions under President Trump.  Because the information posted to Reddit is freely accessible, SEC is likely to move quickly in bringing enforcement actions against individuals that allegedly manipulated the price of stocks.  Time will tell how many individuals face scrutiny for their actions and how many are able to avoid enforcement actions because they were only trying to make a quick buck.

The attorneys at Chilivis Grubman represent clients of all types and sizes in connection with SEC investigations and related securities litigation.  If you need assistance with such a matter, please contact us today.