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Regulation and Compliance > Federal Regulation > SEC

States Move to Probe GameStop Trading, Brokerage Issues

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The attorneys general of Texas and New York have moved to investigate trading in GameStop shares, prompting one legal expert to predict further actions nationwide.

“Not surprisingly, state regulators have begun initiating investigations of all of the trading and any brokerage failures surrounding the Reddit insurrection, including New York and Texas, which unlike the [Securities and Exchange Commission and the Financial Industry Regulatory Authority], can utilize criminal investigative and prosecutorial authority,” said John Reed Stark, president of John Reed Stark Consulting in a recent LinkedIn post.

“Expect other states to follow New York and Texas’ lead,” added Stark, the former chief of the SEC’s Office of Internet Enforcement.

As to the SEC, Stark notes that “no doubt the SEC has initiated a dual track assault upon Robinhood: an investigation conducted by the SEC Enforcement Division and a ‘for cause’ examination conducted by the SEC Examinations Division.”

In fact, Stark continued, “the SEC has probably already dispatched an examination team to Robinhood and, as a registered entity, Robinhood must answer all questions and documentary demands. Delaying or refusing to respond will place Robinhood’s SEC registration at risk.”

The Texas and New York State investigations have “broad authority and can run parallel to the SEC investigations or forge their own path, whatever suits them best,” he pointed out.

See: GameStop Lawsuits Hit Schwab, TD Ameritrade Interactive Brokers

Details of State Actions

Texas Attorney General Ken Paxton on Friday issued 13 Civil Investigative Demands, or CIDs, to Robinhood Financial, Robinhood Markets, Robinhood Securities, Interactive Brokers, TD Ameritrade, TD Bank, E-Trade, WeBull Financial, Public Holdings, M1 Holdings, Citadel Financial, Apex Clearing Corp., and Discord related to the GameStop trading squeeze.

The CIDs ask for the brokerages documents regarding the prohibition of certain stock purchases, requiring higher margin reserves for trading certain companies, and suspending chat platform activity.

According to Paxton’s statement, the CIDs request “copies of all terms of service, policies related to content control and moderation, and communications between platforms and moderators of chat servers, including decisions to limit, control, or prevent access to the Discord [subreddit]/WallStreetBets server.”

New York Attorney General Letitia James said Thursday that her office is “reviewing” the GameStop trading incident. “We are aware of concerns raised regarding activity on the Robinhood app, including trading related to the GameStop stock. We are reviewing this matter,” James said.

Related: Schwab, TD Ameritrade Put Brakes on Some GameStop Trading


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