Attorneys who represent advisors and broker-dealers anticipate a probe by the Securities and Exchange Commission of the recent dramatic price run-ups and high trading volumes in heavily shorted stocks including the retailer GameStop and others promoted by a group on Reddit’s WallStreetBets board.
Over the past week, a wave of trading fueled by members of the Reddit group WallStreetBets pushed up the stock of video game retailer GameStop — a wave that has since spread to other stocks heavily shorted by hedge funds, including movie chain AMC and phonemaker BlackBerry.
The volume of GameStop shares surged to over 177 million on Monday and Tuesday, dropping to a still-high 91 million on Wednesday. Meanwhile, its stock has risen about 350% from late Friday, when it traded at about $65 per share, to $292 per share in after-hours trading Wednesday.
“The political pressure to investigate is intense, so I suspect an investigation is already under way,” Nicolas Morgan, a partner at the global legal defense firm Paul Hastings, told ThinkAdvisor on Wednesday in an email.
“However, identifying a violation of the federal securities laws will be challenging,” said Morgan, a former senior trial counsel in the SEC’s Enforcement Division.
Acting SEC Chair Allison Herren Lee said, in a joint statement released Wednesday afternoon with the head of the exam division and the acting director of trading and markets, that the securities regulator is ”aware of and actively monitoring the on-going market volatility in the options and equities markets and, consistent with our mission to protect investors and maintain fair, orderly, and efficient markets.”
The SEC, the statement said, is “working with our fellow regulators to assess the situation and review the activities of regulated entities, financial intermediaries, and other market participants.”
Jim Lundy, partner in Faegre Drinker’s Chicago office, said his law firm has “relayed information to several points of contact at the SEC” in the Washington headquarters and in a regional office “anonymously on behalf of clients.”