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DOJ, State Prosecutors Probe GameStop Frenzy: Report

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Federal prosecutors are turning up the heat on the Reddit GameStop squeeze.

The Wall Street Journal reported Thursday that “the Justice Department’s fraud section and the San Francisco U.S. attorney’s office have sought information about the activity from brokers and social-media companies that were hubs for the trading frenzy.”

Federal prosecutors and regulators, the Journal reported, “are investigating whether market manipulation or other types of misconduct fueled the rapid rise last month in prices of stocks such as GameStop Corp. and AMC Entertainment Holdings Inc.”

Prosecutors, according to the Journal, have subpoenaed information from brokers such as Robinhood Markets Inc.

The WSJ also reported that the Commodity Futures Trading Commission “has opened a preliminary investigation into whether misconduct occurred as some Reddit traders targeted silver futures and the largest exchange-traded fund tied to silver, the iShares Silver Trust.”

Nicolas Morgan, partner at the global defense firm Paul Hastings, told ThinkAdvisor on Thursday in an email message that “given the amount of attention this issue is receiving, it is not surprising that criminal authorities are investigating. They will have a higher burden of proof than the SEC, which can only bring civil claims, and the criminal authorities and civil authorities will be working with the same evidence.”

The SEC showed today “that it is capable of suspending trading of a stock being touted on social media when there is evidence of violations of the federal securities laws” when it suspended trading of SepctraScience, Morgan said.

The SEC “cited ‘since late January 2021, certain social media accounts may be engaged in a coordinated attempt to artificially influence SCIE’s share price.’  We have seen no such allegation by the SEC about GameStop,” Morgan added.

SEC’s Lee Weighs In

Acting SEC Chair Allison Herren Lee said Feb. 1 on NPR that with respect to potential manipulation in the markets, the agency’s enforcement division is working “around the clock right now to figure that out.”

Added Lee: “This is our bread and butter at the SEC. We know how to do this. Now, this one has a little bit of a different spin to it. It’s going to be a little bit more challenging because of the nature of it, but our enforcement division will rise to that challenge.”

More State Probes

The attorneys general of Texas and New York moved on Feb. 1 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.”

‘Roaring Kitty’ Subpoenaed in Mass.

William Galvin, Massachusetts’ top securities regulator, has subpoenaed former MassMutual broker Keith Gill to testify about the Reddit GameStop squeeze.

A spokesperson for Galvin’s office confirmed to ThinkAdvisor on Thursday that Galvin’s office sent a subpoena to Gill late Monday.

The spokesperson added that “This is a standard review of Mr. Gill’s registration. I don’t have any further information on the investigation right now.”

Gill, known as “Roaring Kitty” on YouTube, played a key role in the trading frenzy surrounding video game retailer GameStop and other stock the week of Jan. 25.

He is supposed to testify on Feb. 26 before the Securities Division in Boston.

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