SEC and other regulators investigate online calls to buy GameStop shares

After online retail investors allegedly coordinated an artificial surge in GameStop’s stock price, the Securities and Exchange Commission investigated whether such actions constituted market manipulation and violated securities laws. Defenders of the investors contend that the promotion of GameStop stock was protected under the First Amendment. 

Key Players

Wall Street Bets is an online community on Reddit with 8.4 million members, according to The Washington Post. The community revolves around small investors who make aggressive — and often risky — investments. The initial posts about Gamestop’s perceived potential as a stock began on this forum.

Keith Gill is a YouTuber and folk hero among Wall Street Bets users. His early promotion of GameStop stock eventually drew a loyal online following that rallied around Gill and the venture, sending GameStop share prices soaring by as much as 1,700%, The New York Times reported. 

The Securities and Exchange Commission (SEC) is an independent agency of the U.S. government founded in 1934 in response to the Wall Street Crash of 1929. Its stated mission involves “protecting investors, maintaining fair, orderly and efficient markets, and facilitating capital formation,” according to its website.

Further Details

In 2020, Keith Gill began publishing posts on YouTube and Reddit saying that GameStop’s stock was grossly undervalued. When Gill began investing in GameStop in 2019, its price stood at about $5 a share, according to The Wall Street Journal. “People were doing a quick take, saying GameStop was the next Blockbuster,” Gill told The Journal. “It appeared many folks just weren’t digging in deeper. It was a gross misclassification of the opportunity.”

Gill’s posts on the Wall Street Bets subreddit page quickly drew a dedicated audience, the Financial Times reported, with many of the page’s 8.4 million users — disillusioned with Wall Street as a concept — openly discussing their next moves, having been motivated by Gill’s idea of making five-figure investments into the company

At a rate of nearly 400,000 comments a day, Redditors urged each other to continue to hold onto their shares. As the number of posts on Wall Street Bets increased, the channel began making Reddit’s front page, exposing more novice investors, who were drawn by the sudden price jumps, to the GameStop stock rally, according to the Financial Times. The movement gained even more momentum after venture capitalist Chamath Palihapitiya and Tesla CEO Elon Musk signaled their support through tweets and cable news appearances. 

Wall Street Bets also latched onto Blackberry and AMC stocks, increasing share prices for those companies by nearly 280% and 840%, respectively, said The Times.

The rally around GameStop stock and its subsequent surge saw hedge funds that had shorted GameStop shares lose millions of dollars practically overnight, The Times reported, with some of the hedge funds being forced to find rescue packages. Gill’s initial $53,000 investment in GameStop turned into $48 million at the stock’s height, The Enterprise reported.

GameStop stock prices briefly peaked at $483 a share, The Times reported, although its share price began to plummet after the initial weeklong surge.

On Jan. 29, 2021, the SEC issued a statement on the volatility of the prior week, declaring 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.”

Outcome

SEC investigates whether online calls to buy GameStop shares amount to market manipulation

On Feb. 3, 2021, Bloomberg reported that SEC investigators had launched a probe into social media and message board posts, while conducting a review of trading data to assess whether those posts were part of an effort to manipulate the market. Scholars consulted by the Financial Times argued that, absent intentional deception or misrepresentation of the stock or company, a manipulation case would be hard to prove. If investors did purposefully share incorrect information, and the price went up as a result, it would be regarded as a pump-and-dump scheme, according to Business Insider. 

Additionally, The Washington Post reported that SEC staff analyzed troves of comments to assess whether calls to invest in GameStop to drive up its value were the result of bad actors and bots. 

Treasury Secretary Janet Yellen convenes financial regulators to review the surge

On Feb. 4, 2021, Treasury Secretary Janet Yellen met with leaders from the SEC, the Commodity Futures Trading Commission, the Federal Reserve, and the Federal Reserve Bank of New York to discuss the volatility in the share price of GameStop and other stocks they viewed as having spiked because of internet excitement rather than stock “fundamentals,” according to The Times. No immediate regulatory action was taken after the meeting, even though the Treasury Department indicated in a statement that regulators “believe the core infrastructure was resilient during high volatility and heavy trading volume,” the Times reported.

Keith Gill is investigated

Before the Gamestop frenzy, Gill worked as a financial wellness education director with Boston-based insurance company MassMutual; as a credentialed financial advisor, Gill had a legal obligation to report his outside investing activities to his employer, according to The Times. Consequently, Gill’s online calls to invest in GameStop drew the attention of the Secretary of the Commonwealth of Massachusetts, which oversees a Securities Division that regulates all securities-related transactions and personnel within the state. 

As state regulators began looking into who was at fault, MassMutual contended it was unaware of Gill’s activities investing in or promoting GameStop shares, The Times reported, adding that it would have told Gill to stop or risk losing his job. Gill ended up giving his notice to MassMutual on Jan. 21, 2021, but his last day as an employee was a week later, in the midst of the GameStop ordeal, according to the Times. 

Gill was subsequently subpoenaed Feb. 8, 2021, by the office of the Secretary of the Commonwealth to testify on his GameStop investments and online advocacy, Reuters reported. As part of the subpoena, Gill was ordered to testify before the Massachusetts Securities Division on Feb. 26. 

Additionally, Gill testified before the U.S. House Financial Services Committee on Feb. 18; the committee had been holding hearings on investigating the market volatility spurred by GameStop and other stocks. During the hearing, Gill remarked that the idea he had manipulated the markets was preposterous, NPR reported. “My posts did not cause the movement of billions of dollars into GameStop shares,” Gill said. “It is tragic that some people lost money, and my heart goes out to them.”