THE QUICK SHORT SQUEEZE: LEGAL ISSUES SURROUNDING THE GAMESTOP TRADING FRENZY
As online traders sent GameStop stock soaring and short sellers faced unprecedented losses, several online trading platforms, most notably Robinhood, restricted trading. Those trading restrictions sent lawyers scrambling to court, launching nearly 50 competing class action lawsuits, alleging a host of claims, but primarily market manipulation in violation of the Securities Exchange Act of 1934 and breach of contract. The restrictions also led to calls for investigations from members of Congress and state attorneys general. But were any laws broken, regulations violated, or agreements breached? The short answer is maybe.
First, with respect to short sellers, while short selling is banned in some countries, it is a widely accepted trading strategy in the US, regulated by the Securities and Exchange Commission (SEC). And while the SEC has temporarily halted some short selling at certain times, most notably during the 2008 financial crisis, it places few permanent restrictions on the practice. So, by almost any measure, the short position in GameStop was unremarkable: GameStop is a declining brick-and-mortar retail store operating in an industry that has been moving toward digital transactions, and its stock price had been in a steady decline for years.
Second, with respect to GameStop investors, those investors’ sudden interest in GameStop stock was surprising to many. As institutional investors holding short positions saw the potential for billions in losses, CNBC’s Jim Cramer declared, “The mechanics of the market are breaking down.”
Apr-Jun 2021 issue
Molo Lamken LLP