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Why GameStop Stock Hike May Not Be Criminal

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Credit: Sira Anamwong/Shutterstock.com Credit: Sira Anamwong/Shutterstock.com

Meme stocks — named for their popularity on Internet forums like Reddit —began to crumble  Thursday afternoon after reaching returns as high as 570% this week.

The market drama has already compelled retail investors to file at least four complaints against a brokerage firm in federal court. But some observers suggest it’ll be hard to prove wrongdoing.

Richard Joseph Gatz, an Illinois attorney who filed the pro se lawsuit against Robinhood Financial LLC, claimed irreparable harm when the defendant halted trading on its securities exchange platform of BlackBerry Limited, Nokia Corporation, and AMC Entertainment Holdings, Inc. for retail investors, but not for institutional investors.

A similar lawsuit was filed in New York federal court, claiming Robinhood’s trading halt violated Financial Industry Regulatory Authority rule 5310, which states in part that the brokerage must make “every effort to execute a marketable customer order that it receives promptly and fully.”

A trading halt is a temporary suspension of trading for a security due to a technical glitch, to correct an imbalance, or as a result of regulatory concerns.

And regulatory concerns are on the mind of securities and banking litigators — who do not hold positions in the related stocks — as to the potential legal implications arising from market manipulation.

For instance, should the Securities and Exchange Commission move from its position of “actively monitoring” to investigating regulatory concerns, it could justify a move from Robinhood to halt trading.

Stanley Langbein, a professor of law at the University of Miami School of Law, said volatility in these meme stocks is an example of a pump-and-dump scheme, which is the illegal act of a group of investors in promoting a stock they hold, and then selling once the stock price has risen following a surge in interest.

“What’s new about this is the use of social media platforms to rally people, but it’s manipulation,” Langbein said. “All rules guarding against stock manipulation are applicable.”

Langbein, who spoke over the phone while the share price for GameStop dropped from $350 to $253 near the end of the call, said while market manipulation is nothing new, enforcement is important because this new type of market manipulation could become an ongoing practice.

“It’s a very diverse group of people doing it, so it will be hard for the SEC to proceed against people individually,” Langbein said. “There are so many and it is hard to find who the ring leaders are.”

Read the New York federal lawsuit:

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‘Illicit Scheme’?

But Phara Guberman, a partner with law firm Paul Hastings in New York City, said despite the chatter on social media platforms, such as Reddit and Twitter, including the trending hashtag, #HoldTheLine, does not give rise to a crime.

“It is not any type of per se violation to talk about a stock, chat about a stock, an intent to purchase a stock and to share market views on a stock, or even to state your intention of holding a stock instead of selling it,” Guberman said. “Even if a group of individuals are talking about purchasing it at the same time.”

The hashtag encouraged traders to avoid selling these “fundamentally hated” stocks. The motive is to put financial pain on Wall Street hedge funds that made large bets that these companies would continue losing value.

“The idea is the regulators have to establish an illicit scheme to manipulate the market to set a misleading price or volume,” Guberman said. “It’s not enough for individuals just to have discussions.”