Wall Street Regulators Adjusting After GameStop Frenzy

by James DiGeorgia | 02/15/2021 2:57 PM
Wall Street Regulators Adjusting After GameStop Frenzy

The wild frenzy of ups and downs driven by social media in GameStop (GME- NYSE) has prompted the Biden administration to take action to prevent it from happening again, or at the very least dial down the volatility. Regulators and federal prosecutors at the Biden administration’s direction are probing potential misconduct, and the Securities and Exchange Commission is moving to restore harsher penalties on wrongdoers.


There’s nothing like a massive trading scandal on Wall Street to being out to the U.S. Justice Department’s attorneys. This week the criminal division of the DOJ is launching a wide-ranging investigation into possible market manipulation that took place in GameStop (GME- NYSE) by issuing a subpoena to Robinhood, according to the acting chairwoman of the SEC. She says the investigation is in its very early stages.

During a radio interview last week, SEC acting chair Allison Herren Lee acknowledged her agency is investigating the matter, saying…

 “From a number of different angles, and they’re very significant.”

SEC Chairwoman Allison Herren Lee specifically said the agency is looking into whether brokers such as Robinhood complied with regulations when they limited trading in certain so-called “meme stocks.” She also said the agency is…

“… looking for signs of market manipulation amid the trading mania.”

Lee asserted that during the interview last Thursday, the SEC is reversing a policy that existed during the Trump Presidency that shielded financial firms settling charges from further punishment. During the Trump Administration, the SEC had a policy that allowed bundling settlement agreements with waivers that allowed the targeted companies to continue raising money in public markets, even if they committed serious violations.

Acting Chairwoman Lee said in a statement this new policy shift marks a “return to the division’s long-standing practice” that existed before President Trump’s administration that ensures…

 “… That the consideration of waivers is forward-looking and focused on protecting investors, the market, and market participants from those who fail to comply with the law.”

On the same day, the SEC Chairwoman announced the agency’s return to the prior policy; it also suspended trading in SpectraScience Inc. (OTCM: SCIE), a literally defunct company that had seen its stock zoom amid social media chatter.

The SEC released a statement saying…

 “Certain social media accounts may be engaged in a coordinated attempt” to boost the share price of the company, a Minnesota-based business that had not filed any reports since 2017.”

The suspension of trading by the SEC was unremarkable and nothing new. The SEC has done the exact same thing more than 100 times in 2020. But the SEC used the suspension of trading in OTCM as an opportunity to remind investors they should, according to Melissa Hodgman, the SEC acting head enforcement division saying in her statement…

 “exercise tremendous caution when investing based on social media or a sudden surge of enthusiasm for a particular security, especially where that interest does not appear tied to any news about the company or industry.”

Philip Moustakis, a former senior counsel in the SEC’s enforcement division now with Seward & Kissel, is quoted as saying the SEC is clearly indicating there has been a…

 “Changing of the guard.”  

Moustakis pointed out that despite invoking the GameStop frenzy in its announcement of its latest trading suspension, the agency did not halt trading in GameStop itself.

Philip Moustakis said that signals the agency has…

  “…made an initial determination that the facts and circumstances here don’t give rise to sufficient concerns about manipulation to warrant a suspension of trading in the stock that saw dramatic run-ups thanks to the attention they attracted from amateur investors.”

The GameStop (GME- NYSE) frenzy driven by amateur investors and social media is poised to get more examination in the coming week. The House Financial Services Committee will convene Thursday and hold a hearing on the event.

The House Committee has identified a witness list that includes Robinhood CEO Vlad Tenev, Citadel CEO Ken Griffin, and Melvin Capital CEO Gabriel Plotkin, Reddit co-founder Steve Huffman, and Keith Gill, a trader with a huge online following who helped set off the GameStop frenzy.


               Robinhood Melvin and Citadel execs expected to testify on GameStop




[Strategic Investment: The Post WWII World Order is About to Collapse]


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