Pressure is mounting on the SEC to determine whether there have been manipulation efforts to drive up GameStop`s stock prices. Howard Fischer of Moses & Singer and former SEC attorney explores theories of potential liability and whether traders have developed a roadmap for a new era of pumping and emptying systems. If you, a plaintiff`s attorney, or the Securities and Exchange Commission were to ask Ryan Cohen (and the Wall Street Journal reliably informs that Cohen hasn`t asked him yet), the GameStop president and meme stock hero would no doubt tell you it happened on August 16 — crucially that day after his routine 13D filing. which shows, that he hadn`t traded Bed Bath & Beyond shares for two months – he had changed his mind about the art of cooking and the curtain rod emporium. Of course, he should: because some time after this deposit, but before the market closed, he traded a lot, and by the end of the next day he had done everything regarding his almost 12% stake in BBBY. Because if he had already decided to leave the failing retailer before it was modified – and, as Whitney Tilson points out, completely useless – 13D, he should have said so in said modified 13D, which he did not do and who, with the news that he had bought a whole bunch of calls out of the money on BBBY the day before, had pulled Bed Bath`s shares to the moon over the company despite everything else. And it would look like a nice pumping and emptying system cut and dried, which is exactly what Tilson thinks. Pump-and-dump is a manipulative ploy that attempts to increase the price of a stock or security through false recommendations. These recommendations are based on false, misleading or grossly exaggerated statements. The authors of a pumping and emptying system already have an established position in the company`s shares and will sell their positions after the hype led to a rise in the share price. A pump-and-dump is a common system in which an investor acquires a stake, then convinces other investors to buy shares under false pretenses, and then sells his own stock at an inflated price. Investors who arrive later suffer a loss when the falsity of the system is known. The pumping and emptying system was the central theme of two popular movies: « Boiler Room » and « The Wolf of Wall Street. » Both films featured a camp full of telemarketing brokers throwing penny stocks.
In any case, the brokerage firm was a market maker and held a large volume of shares of companies with very dubious prospects. Company executives offered incentives to their brokers with high commissions and bonuses to place the shares in as many client accounts as possible. Brokers drove up the price thanks to huge sales volumes. The typical pump-and-dump involves one or a few harmful actors identifying a stock, making their investment, and then targeting specific investors, although this can also be done in the open market. Liability is provided for in the Commodity Exchange Act (« CEA »): The drama of recent days has raised many interesting legal questions, including whether a person or company could be held criminally or civilly liable if it participated in the first pomp of the action, engaged in « hostage » sales or stopped trading. This article focuses on the first question. This news usually claims to have inside information about an upcoming development that will lead to a dramatic rise in the share price. As soon as the buyers enter and the stock has increased significantly, the authors of the pumping and emptying system sell their shares. In these cases, the sales volume of these shares is usually large, resulting in a dramatic drop in the share price. In the end, many investors suffer huge losses. This morning, I did something I`d never done before: I reported Cohen`s actions to the SEC via their website to « report fraud or suspected securities misconduct » and checked the boxes « manipulation of a security » and « pump-and-dump system. » I hope the SEC will investigate. Again, nothing in the above is necessarily illegal.
However, the SEC will likely investigate whether any of the investors who held the stock long-term or who attempted to short sell the stock manipulated investors. We may have entered a new era of fraud without realizing it, especially as retailers account for a growing share of stock transaction volume. Have fraudsters developed a roadmap for transferring pumping and emptying systems to more widely traded securities? And if so, is the SEC, along with other regulators, prepared to follow them down this path? Or have they already lost their way? A 2018 study examined the prevalence of pumping and emptying systems in the cryptocurrency market. The researchers identified more than 3,400 such systems in just six months and observed two group messaging platforms popular with cryptocurrency investors. The SEC generally charges fees for pumping and emptying systems under the anti-fraud sections of the Securities Act and the Securities Exchange Act. However, one difficulty with meme stick poisoning is identifying who the accused would be. What does that mean? A salon investor who read something on Reddit and then bought GameStop stock on Robinhood is unlikely to run into legal trouble. However, if you intentionally interfered with the market price by spreading false or misleading claims on Reddit, you may be investigated.
This practice is illegal under securities laws and can result in hefty fines. The growing popularity of cryptocurrencies has led to the proliferation of pumping and emptying systems in the industry. Often, social media posts are used to promote the stock and get investors excited about its prospects and potential returns. Often, conspirators buy and sell each other`s shares at inflated prices to create the illusion of a flourishing stock market and to drive up the price. Although it seems that the GameStop case seems to fulfill all four elements, the influence of the artificial price by the creators of the GameStop pump does not seem to rest on a false pretext, which is the classic mark of a pump-and-dump. However, for liability under the CEA to be attached, the « pumper » need not express a lie. The « pumper » must simply have « acted (or not exchanged) for the purpose or purpose of provoking or influencing a price or price movement in the market that does not reflect the legitimate forces of supply and demand. » The cryptocurrency market has become the newest area for pumping and emptying systems. The massive gains of Bitcoin and Ethereum have sparked huge interest in cryptocurrencies of all stripes. Unfortunately, cryptocurrencies are particularly well suited to pumping and emptying systems due to the lack of regulation in the cryptocurrency market, their opacity, and the technical complexity of cryptocurrencies. This begs the question: If investors who hype a stock are transparent about why it is hype, should they be held accountable? Also, is it in a participatory pumping when many reasons to buy the stock are given, including the simple fact that it`s fun to find that a single poster has the ability to influence the market? Or is it possible to choose some posters for responsibility if other posters had different motivations? Penny stock pump-and-dumps on the popular social media platform? Who could have predicted such a thing! Posters on the popular forum have spent the last few weeks pumping stocks like GameStop, Nokia and Blackberry.
