Senator Elizabeth Warren (D-Mass.) wrote an open letter to the U.S. Securities and Exchange Commission imploring the regulatory body to investigate the actions leading up and into the GameStop Corp. (NYSE: GME) short squeeze fiasco.
Her letter is creating a debate among investors and legal experts questioning what role a government body should play in the stock market that is supposed to be free, open, and fair to all.
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According to Lisa Braganca, a former SEC branch chief, the government agency “should do something.”
SEC is a ‘thoughtful organization’
The question of whether the SEC should do something is clear as it has already confirmed an investigation. But what that “something” remains unclear, Braganca said Friday on CNBC’s “Fast Money.” At the minimum, the SEC will look at all the events going on “behind the scenes” and carefully examine a lot of the information that the general public is not aware of.
The SEC is a “thoughtful organization” and its personnel is dedicated to some “serious thinking” before establishing a course of action. Based on what the organization finds, it will determine if a case can be made that laws have been broken, especially market manipulation.
So, did market manipulation take place?
A typical case of stock manipulation consists of investors buying a stock, pumping it up through any means available, and then selling the stock at the expense of the victim. This does not at all appear to be the case in GameStop’s stock that was born out of Reddit forms.
Instead, the Reddit investors are “true believers” that there are genuine reasons to be concerned with the functionality of the market. The Redditors “put their own money on the line to make a statement,” the legal expert said.
The Redditors are not hiding behind closed doors and their game plan was open to the public to see since day one. By contrast, a bunch of hedge fund managers gathering together for a few drinks and “share ideas” would be a clear cut case of illegal collective action and market manipulation.
“Whether [the Reddit forms] could possibly be some kind of a collective action … it is a collection of a bunch of actions, but it’s not collective action,” she said.
Legal expert: difficult to prove manipulation
The SEC will face a tremendous uphill battle in proving textbook market manipulation took place in driving up GameStop’s stock, Columbia Law School Professor John Coffee told FOX Business. Granted, many of the Reddit investors are inexperienced and “don’t know anything about investing” but they wanted to be part of the GameStop crowd.
SEC investigators will likely need to uncover evidence of blast emails and other classic tactics synonyms with fraud to conclude there were legal wrongdoings.
“The problem is distinguishing the true believers who committed no crime from those people who are simply trying to push others to buy, to push the stock up because they want to squeeze the shorts,” he said.