United States federal prosecutors and regulators are investigating whether market manipulation or other types of criminal misconduct led to a meteoric rise in shares of companies such as video-game retailer GameStop and theatre chain AMC, according to the Wall Street Journal newspaper.
Citing people familiar with the matter, the Journal said the Department of Justice’s fraud section and the San Francisco US attorney’s office have sought information about the activity from brokers and social-media companies that were hubs for the trading frenzy.
Prosecutors have subpoenaed information from brokers that many individual investors used to trade GameStop and other shares, the newspaper reported.
Additionally, the Commodity Futures Trading Commission (CFTC) has opened a preliminary investigation into whether misconduct occurred as some Reddit traders targeted silver futures, the Journal said.
A Department of Justice spokesperson did not immediately respond to a request by the Reuters news agency for comment.
GameStop shares surged from about $20 to $483 over a period of two weeks in January. The stock has since fallen to about $51.
The rally was fuelled by an army of bullish individual traders urging one another on Reddit to buy the shares and squeeze hedge funds that bet the price would fall. Traders who bet stock prices will decline are known as short sellers.
The Wall Street Journal has previously reported that the Securities and Exchange Commission (SEC) is also reviewing the trading frenzy. The SEC and CFTC are civil regulators. The burden of proof in a so-called regulatory enforcement action is lower than in a criminal case, which the Department of Justice would bring.
Pumped and dumped?
Some commentators have said individuals coordinating on Reddit – largely in its WallStreetBets forum – openly engaged in a type of manipulation known as a pump and dump. In such a scheme, traders collude to inflate a stock’s price, usually by spreading false information, and then profit by selling their stakes to people duped by the fraud.
Proving market manipulation generally requires showing that traders conspired to create an artificial price and took action to accomplish it.
There does not appear to be evidence yet that traders on WallStreetBets were involved in such a scheme, Michael Friedman, the head of trading at real-estate securities trading company LEX Markets, told the Wall Street Journal.
Instead, they appear to have seized an opportunity to drive up shares of GameStop, and revelled in causing losses for hedge funds that had sold the shares short. Other hedge funds that believed GameStop shares were undervalued and would rebound profited from the sudden momentum, Friedman said.
Regulators and prosecutors can find out who bought and sold shares, relying on data known as blue sheets, which brokers use to identify individuals behind trades, the Journal said. Tying the trades to public statements is more difficult; most people who talked about GameStop on websites such as Reddit did so anonymously.
If an investigation were to show that a few key individuals instigated the whole effort, that could buttress a manipulation case, according to securities lawyers interviewed by the paper. However, charging hundreds of defendants who traded in small increments and believed they were warring with hedge funds would not be viable, the lawyers said.