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Federal authorities are investigating the phenomenon for retail that boosted shares in GameStop, AMC and other sharply shortened stocks during January, the Wall Street Journal reported Thursday, citing sources familiar with the matter.
Prosecutors and regulators are investigating whether the madness of day trading was a form of market manipulation or other illegal activities. The Department of Justice’s fraud and the U.S. law firm in San Francisco are seeking information from brokers and social media platforms that fueled the trading activity, the Journal reported.
According to the report, Robinhood Markets, the discount brokerage popular among the investors involved in the rallies, is being sued for its role in the event.
Shares of GameStop and other recently beloved companies skyrocketed last month when Wall Street Bets members piled the subreddit furiously in the shares. Reports encouraging more traders to buy stocks came at the top of Reddit’s ‘popular’ page, exposing even more novice investors to the trend as stocks rose higher.
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Reddit users also applauded the trade as a way to make big losses at short-selling hedge funds. Language on Wall Street Bets adopted a populist tone that established the everyday trader against Wall Street.
The Commodity Futures Trading Commission is investigating separately how the horde of informal investors aimed to offer silver by trading futures contracts and tracking an exchange-traded fund with silver, according to the report. Wall Street Bets traders switched to silver shortly after GameStop shares fell to earth. More recently, the crowd has been targeting cannabis stocks for their next bullish bets.
Proving that the GameStop phenomenon was a case of market manipulation requires authorities to enter a murky regulatory environment. Officials need to prove that investors use online forums to spread false information and charge stocks at an artificially high price. This type of manipulation is commonly known as a pump-and-shower scheme.
Decoding such a scheme becomes more difficult due to the anonymous nature of Reddit accounts. Jobs asking more traders to buy shares were also largely comical and enthusiastic in nature and had no claims over the underlying businesses. While some Wall Street Bets members were conspicuous for their exorbitant profits or popular memes, most enlisted in the army of faceless day traders.
Lawmakers have also shown interest in dissecting the event and how it exploded in the mainstream. The financial services committee will hear the case on February 18. Rep. California’s Maxine Waters said last week she wanted representatives of GameStop and Robinhood to testify along with Keith Gill, a Reddit user who allegedly earned millions from the GameStop rally.
The chairman of the Senate Banking Committee, Sherrod Brown, indicated last month that he also wants a trial.
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