The SEC Is Apparently Looking For Evidence Of Fraud Around GameStop Stocks

The regulator is looking for signs of market manipulation on Reddit and other social networks.

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After a tumultuous week that saw GameStop's previously flagging stock rise to prices of over $400 per share, sources cited by Bloomberg claim the SEC is looking over social media and forum posts for evidence of market manipulation. The investigation will also look into other companies caught up in the surge, including AMC Entertainment Holdings, which was thrown a much-needed lifeline by the sudden increase in investor interest.

The tumultuous week for GameStop stock has been attributed mostly to retail traders from subreddit WallStreetBets, where GameStop stock was popularized as a "meme stock," according to one of the subreddit's moderators. Allegations by some in the industry, including notorious short-seller Carson Block, claim that the short squeezes may have been orchestrated by professional investors who either took advantage of the Reddit hype or helped to build it.

The SEC's acting chair Allison Herren Lee said the agency was looking at "compliance with regulatory obligations, adequate and consistent risk disclosure, and determining if any fraudulent or manipulative behavior has occurred." The GameStop situation was big enough to gain attention from the White House and high-level public figures, making investigations into the event a much higher priority.

Any investigation will look at both trading data and social media posts, to try and detect purposeful examples of driving up share prices. In the past, the SEC detected a case involving a 15-year-old who was buying microcap stocks, then hyping up the stocks and selling them for a profit. Suspiciously well-timed trades will be scrutinized against matched posts on social media in an effort to see if a similar type of market manipulation was in play with GameStop's stock.

Some have also raised concerns about the role bots have played in the whole debacle, with a mod for WallStreetBets telling CBS News "we've detected a large amount of bot activity in the subreddit. We can't speak to the source, but we have seen our automoderator block a lot of posts recently that were very similar in content."

While the official spokesperson for WallStreetBets declined to speculate on the bots' source, a common sentiment among users of the subreddit is that the bots are on the side of the hedge funds--either trying to drum up interest in stocks like AMC and NOK to distract from GME, or simply trying to erode Reddit investors' faith in the value of buying GME.

A lawyer quoted by Bloomberg says that such cases aren't easy to litigate or find evidence for. "It's no crime to go on a website and say, 'I think the stock's going to go up,'" said Brad Bennett, a former enforcement chief for the Financial Industry Regulatory Authority. "If people choose to follow you, none of that’s a violation or a crime either."

Posters on WallStreetBets are well aware that their behavior may be considered market manipulation by outsiders, with a number of the subreddit's internal memes echoing disclaimer-like language such as "this is not financial advice," "I don't know what I'm doing," or "I just like the stock."

While the SEC doesn't seem to be investigating hedge funds at this point, it will also be looking into how brokerages handled the situation, and whether all rules were complied with when trades on certain stocks were restricted or stopped altogether.

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