Former SEC chairman Jay Clayton told CNBC on Friday that he did not believe the Reddit scam in GameStop shares was an illegal pump-and-dump scheme.
Clayton, who headed the Securities and Exchange Commission under former President Donald Trump, commented in response to a question from CNBC’s Joe Kernen. The co-host of the “Squawk Box” asked if Clayton was of the opinion that the events at the end of January were a ‘modern pump-and-dump using social media’.
“The quick answer to that is no. I do not think so, based on what I have seen,” said Clayton, who recently rejoined his old law firm, Sullivan & Cromwell, after becoming the largest security regulator in the United States.
Earlier this month, Bloomberg reported that the SEC was investigating social media posts to determine if fraud was a factor in the meteoric rise in GameStop shares, which traded below $ 20 in early January to an intraday high of $ 483 on 28 January. a profit of more than 2 300%. However, the stock has fallen sharply since then, closing Thursday’s session at $ 40.69 a share. According to Bloomberg, the SEC in particular is looking for misinformation designed to skew the market.
According to the SEC, a pump-and-shower scheme occurs when market participants emit “false or misleading information” with the intent to unleash a shopping cart. After the share price is inflated, a trader will dump the shares they own at the artificially high price.
According to Clayton, people who trade GameStop shares were pretty clear about the motivation. “If you look at the overall participation in this, it was pretty transparent what was going on here,” he argued. “People were very transparent about what they were doing and why they were doing it, which was pretty interesting.”
Reddit’s WallStreetBets forum was one place where retailers flocked to post about GameStop. Keith Gill, a prominent member of the online community, took part in the congressional hearing on Thursday and focused on the events surrounding the GameStop short print.
Gill tried to defend his actions regarding the severe short circuit, saying that he is convinced that stocks are undervalued by the market and that he feels confident in sharing his investment thesis. In addition to posting on WallStreetBets under the name DeepF —— Value, Gill also publishes YouTube videos as Roaring Kitty.
A proposed class action lawsuit has been filed against Gill in federal court in Massachusetts. In the case, it is alleged that Gill did not disclose his financial background and misled individual investors into buying GameStop at unreasonably high levels.
“I did not ask anyone to buy or sell the stock for my own profit. I did not belong to any groups that tried to bring about movements in the share price,” Gill said in his prepared testimony, claiming that he “it was very clear that my channel was for educational purposes only.”
“GameStop’s share price may have gone up a bit last month, but I’m just as strong as I’ve ever had a possible turnaround,” added Gill, who said he bought GameStop shares for the first time in 2019. . In his latest Reddit Gill said he earns $ 7.8 million from GameStop.
GameStop shares were one of the shortest on Wall Street in January. Short sellers borrow shares of a stock and then sell them immediately, with the aim of buying back shares at a lower price later. They then return the borrowed shares and earn the difference. If the opposite happens, short sellers may try to buy back the stock at the current higher price in an effort to limit losses.
During the frenzy, GameStop shares came under pressure from two sides. There were short sellers trying to cover, and investors buying the shares straight and call options.
Printed by Kernen on how social media messages about GameStop were different from historical pump-and-dump schemes, such as’ Wolf of Wall Street ‘, Jordan Belfort’s Stratton Oakmont, Clayton replied:’ I think in the summary you are doing a good argument that it’s not different because a group of people decide they like it [same stock]. “
However, Clayton added: “Whether they all got together and did it like the Stratton Oakmont, knowing the final here, I do not think.”
Disclosure: Jay Clayton is a contributor to CNBC.