Gamestop Frenzy Investigations

Financial press sources are reporting that the Justice Department’s fraud section and the U.S. attorney’s office are seeking information about the activity from brokers and social-media companies that were hubs for the trading frenzy.

Last week we posted that the SEC and prosecutors would open investigations into the trading in Gamestop and AMC, and now they have. Prosecutors have subpoenaed information from brokers such as Robinhood Markets Inc.

The WSJ is also reporting that the Commodity Futures Trading Commission “has opened a preliminary investigation into whether misconduct occurred as some Reddit traders targeted silver futures and the largest exchange-traded fund tied to silver, the iShares Silver Trust.”

Can Robinhood Stop Trading in A Particular Stock?

In the aftermath of the run-up in the price of Gamestop (GME) Robinhood removed GME from its trading platform. Yes, Robinhood simply removed a publicly traded security from its platform, preventing its users from buying, and presumably selling, the security.

While Robinhood claims that it has the right to do so in its customer agreement,  that may not be the case. Many commentators are claiming that Robinhood has the right to reject orders, which is certainly true - depending on the reason. And the reason for rejecting orders typically relates to the customer or the order itself.

There is there is nothing in Robinhood's customer that permits it to remove a publicly traded security from its platform, preventing customers from purchasing that security. 

Robinhood will undoubtedly attempt to rely on this sentence in the customer agreement:

I understand Robinhood may at any time, in its sole discretion and without prior notice to Me, prohibit or restrict My ability to trade securities.

It is doubtful that this provision, which is contained in a paragraph titled "Purchases" and discusses the customer's obligation to pay for stock purchases, will support a claim that it can be used by the firm to prevent ALL customers from purchasing a particular security. 

In addition, Robinhood defines the words "My" and "Me" in the agreement to refer to the owner of the account in question. It does not give Robinhood the authority to prevent all customers from trading a particular security.

Another interesting point is that Robinhood did not stop trading because of some altruistic motive, it did so to protect its own profits, according to BloombergLaw. According to Bloomberglaw, Robinhood Chief Executive Officer Vlad Tenev said that the company’s financial requirements, such as deposits to clearing houses, increase when there’s a lot of volatility in the market, so “to protect the firm and to protect our customers we temporarily disabled buying in these securities.”

So, Robinhood removed the stock from its trading platform so that it would not have to pay its clearing firm (which is affiliated with the entity that owns the trading platform) from increasing its security deposits.

Adding another twist to the story,  the day after it removed Gamestop from its platform, and after being hit with a number of lawsuits, it reinstated Gamestop.

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Mark J. Astarita is a national securities attorney who has represented investors and brokerage firms for over 30 years, in a wide array of disputes and investigations, including short squeezers and bear raids. For more information, contact him at 212-509-6544 or by email at mja@sallahlaw.com

Galvin (Mass.) Calls for Unheard of 30 Day Gamestop Trading Suspension

William Galvin, the Secretary of the Commonwealth of Massachusetts, and its chief securities regulator told Barron’s that the trading in Gamestop should be halted for 30 days.

Of course, Secretary Galvin has no authority to halt the trading in any publicly listed stock. He also doesn't explain how preventing investors from selling their holdings protects investors, rather claiming, according to MarketWatch “These small and unsophisticated investors are probably going to get hurt by this.”

Yes, unsophisticated investors who think they can out trade market professionals are going to get hurt. That is a given and proven day in and day out by newbie day traders. However, a 30 days suspension in the trading of any stock because of rumors or events having nothing to do with the company itself is unheard of, and damages the market, and all investors.

Gamestop Investigations?

 By now, all of our readers are aware of the dramatic rise in Gamestop's stock, after a short squeeze generated by the retail investors from Reddit. The question I am hearing most now, is, will the SEC do something about it.

Interesting question - but I have to answer with a question - Do something about what? About a group of investors sharing information about a massive short in a security, and discussing buying the stock because the shorts will ultimately have to buy back the stock? Nothing illegal there.

While the political pressure for an investigation will be significant, the real question is did the individuals buying Gamestop do anything illegal?

The answer is in the details. The real question is were there false statements made by the company or a group of individuals which were intended to create an artificial price for the stock, and if so, was that a concerted effort.

There will certainly be an SEC investigation, if it isn't already in the works. Internet posters are not immune from charges of manipulation. Way back in the year 2000 the SEC investigated and instituted proceedings against an Internet message poster who it accused of engaging in a scheme on the Internet in which he purchased large blocks of thinly traded microcap stocks and, within hours of making such purchases, sent numerous false and/or misleading messages, or "spam," over the Internet touting the stocks he had just purchased. Lebed then sold all of these shares, usually within 24 hours, profiting from the increased price his messages had caused.  https://www.seclaw.com/15messageposter92000/

So far, there is no evidence of such a scheme, and it appears that the discussions regarding Gamestop were held in public, with message posters discussing the short position, and suggesting, correctly, that the shorts will have to cover their position as some point in time.

However, if the SEC finds false or misleading information in those discussions, or in private discussions between those message posters, all bets are off.