DOJ Investigating GameStop Stock Drama — Report

By Mariliana Fotopoulou Friday, February 12, 2021

US prosecutors and regulators have initiated an investigation to determine whether the recent rally in the GameStop stock, and others, was a result of market manipulation, according to a report in the Wall Street Journal.

A gavel on a desk.

Focus on Alleged Market Manipulation

The WSJ reports that the Department of Justice (DOJ) is looking to investigate the activities of brokers and social media companies that served as hubs for the rise in stocks. Reddit’s subforum “WallStreetBets” was in the center of attention as retail investors active on this forum aggressively bought the stock of GameStop, AMC Entertainment, and others, which were previously targeted by short-selling hedge funds.

The DOJ has reportedly sought information from brokers that a number of investors used and contributed to the massive jump in these stocks. The GameStop stock skyrocketed from around $20 per share to $483 per share in just two weeks. However, the stock closed significantly lower at $51.10 a share as of yesterday.

Robinhood, an online trading business platform that was used by retail investors to buy the GameStop stock, had to raise additional funds to boost its liquidity amid extremely high volatility.

Furthermore, the Commodity Futures Trading Commission (CFTC) has also opened a similar inquiry to find out whether the market manipulation happened as a result of some Reddit traders targeting silver futures.

Investigators are trying to figure out whether these investors, which mostly communicated to each other through the r/wallstreetbets subreddit, have been using a market manipulation method known as a “pump-and-dump.” The aim of this approach is to boost a stock’s price, typically by using false information and then capitalize by offloading the stakes to deceive individuals.

However, Michael Friedman, head of trading at LEX market, told the WSJ that it is unlikely that WallStreetBets investors were a part of such a scheme. Traders have rather used the opportunity to boost the GameStop stock and celebrated the fact that they have caused hedge funds to lose money.

If the prosecutors prove that the manipulation was led by a couple of individuals, that could support the case. However, charging hundreds of participants who made small trades and believed they were causing harm to hedge funds would not be viable, securities lawyers told the WSJ.

Summary

The DOJ and other market regulators have opened an investigation to find out whether the recent frenzy in the GameStop stock, and shares from some other companies, were a result of the market manipulation.

About the Author


Headshot for author Mariliana Fotopoulou

Mariliana has an MSC in consumer analytics and business strategy. She has a special interest in fast-moving industries and big data.

Related Articles