Will the Sheriff of Nottingham Strike Back?

It seems that I actually do have a Reddit account, though I don’t recall that I’ve ever used it. Apparently, it’s a message board where users post comments and links.What distinguishes it from Twitter is that the content stream is curated and essentially regulated through the upvotes and downvotes that users are able to give each post. The more popular a post, the higher its position, which makes it more visible to other users. Any link in the post will likely receive a correlative amount of clicks; and the corresponding website will receive a corresponding number of visitors. The recency of a post is also a factor by which the site’s algorithm determines its position; the newer ones are heavily favored, but can be overcome through sheer votes. Within the platform there are channels known as subreddits; and content from the most popular ones occupies the site’s home page. New users are automatically subscribed to them. And as a user subscribes to a subreddit, its more popular posts will automatically appear in the user’s front page. These days, among the most popular subreddits is a forum called WallStreetBets (WSB), whose subscribers, a legion of small investors, have been beating their wealthier counterparts at their own game.

A group of regular Joes and Jills, WSB’ers have been utilizing the low-cost stock trading app, Robinhood, to throw a King-Kong-sized monkey wrench into the expectations of investment managers who’d been betting on share prices to plummet for certain brick-and-mortar retail companies, most notably GameStop, which they did not expect to turn a profit until 2023. WSB’ers convinced each other to purchase GameStop stock in collectively copious amounts, which rocketed the share price skyward, and tore shirts off the backs of several hedge funds. But while these working class wallets have thickened (at least on paper), there has been some grumbling for federal authorities to take action against the amateur traders.

Section 78j of Title 15 of the United States Code reads, “It shall be unlawful… (t)o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange… any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the (SEC) may prescribe as necessary or appropriate in the public interest or for the protection of investors.” There appears to have been little or nothing deceptive about WSB, as anyone with internet access was able to view or even join the investors’ discussions. But was it manipulative?

FOX Business Network correspondent Charles Gasparino tweets, “Regulatory sources… expect SEC to ask for Robinhood’s… trading data, and try to match it up with suspicious comments on Reddit.” But he continues, “Cases next to impossible to prove… According to (one) person involved in the matter: ‘When was the last time SEC brought a manipulation case? I think the answer is “never.”’

Attorney Daniel Hawke, though, is a former chief of the SEC’s market abuse unit, and he opines, “If they are all egging each other on using a social-media platform, they are effectively engaged in a crowdsourced pump-and-dump schememaking no effort to conceal their apparent intent to manipulate the price of the stock.”

In 2018 Duke University Law School published an article by Gina-Gail S. Fletcher titled, “LEGITIMATE YET MANIPULATIVE: THE CONUNDRUM OF OPEN-MARKET MANIPULATION”. She explains that the approach taken by the SEC and the Commodity Futures Trading Commission is that open-market manipulation is achieved through transactions that would are perfectly legal when the trader has no intention to manipulate the market, but that the addition of that intention makes it a crime. Professor Fletcher argues that this standard is too vague to provide guidance to traders, and that there ought to be prosecution only when the intent to manipulate results in actual harm to the market, which she defines as impediment to market efficiency or the undermining of market integrity. By this standard, prosecutors could argue manipulative intent in that the WSB crowd bought GameStop stock for the primary purpose of boosting its value; and they could argue harm by pointing out the losses sustained by the hedge funds.

WSB investors have been buying up GameStop shares since September of 2020, if not a year before then. Legal retaliation against the insurrection that took place on January 6th is an obvious necessity. But if the SEC takes action against WSB members, it will be the second time in mere weeks that federal authorities were late to the party, having allowed something to play out for several months online in plain sight, and then opposing it only after the fact, a reality that will no doubt stoke the debate around the extent to which online tech giant platforms like Twitter and Reddit should be monitored, regulated and/or held responsible for the content posted by their users. The right’s instinct against financial regulation and the left’s tendency to favor David over Goliath lead me to expect that there will be no governmental action against the WSBers.

Time will tell.