Soon, America will be subjected to congressional hearings on the GameStop saga, apparently featuring a colorful cast of characters that may or may not include Keith Gill (a.k.a., “Roaring Kitty”).
On Thursday, The New York Times cited Reddit CEO Steve Huffman in saying the company plans to participate. Ken Griffin might be there too.
Securities regulators in Massachusetts issued a subpoena this week for Kitty’s testimony. Officials are interested in his resignation from MassMutual, which said it was “unaware of Gill’s outside activities.” His last day at the insurer was January 28, the day GameStop peaked and brokers curtailed trading.
Late last month, with the obligatory caveat that I’m not (and never have been) an attorney, I repeatedly warned anyone caught up in this madness that it was probably a good idea to cash in and spend some of the windfall on a good attorney. That wasn’t to suggest that anyone had done anything illegal, and even if it was, my opinion is irrelevant because I’m neither a regulator nor a lawyer.
The point, rather, was simply that regulators would invariably have questions. And after that, so will tax authorities.
Sure enough, on Thursday afternoon, The Wall Street Journal said there are now multiple federal probes into the market mania that pushed GameStop into the stratosphere.
“Federal prosecutors and regulators are investigating whether market manipulation or other types of misconduct fueled the rapid rise last month in prices of stocks such as GameStop and AMC Entertainment,” the Journal reported, citing the ubiquitous “people familiar with the matter,” who said “the Justice Department’s fraud section and the San Francisco US attorney’s office have sought information about the activity from brokers and social-media companies that were hubs for the trading frenzy.” Prosecutors reportedly issued subpoenas for information from Robinhood and other brokers.
And that’s not the end of it. Some of the same sources said the CFTC has “opened a preliminary investigation into whether misconduct occurred as some Reddit traders targeted silver futures and the iShares Silver Trust.” That frenzy (in silver) fizzled out quickly, but it doesn’t matter now. It will live on at least for a week or so via “interested” regulators.
The Journal was keen to note that the burden of proof is lower in civil actions versus criminal proceedings. That could be good or bad for the folks involved, depending on how you want to look at things. While it was never likely that anyone would be hauled off to prison, regulators weren’t going to just let this episode pass — to let sleeping kitties lie, so to speak.
There’s some kind of culpability (although not necessarily of the legal variety) on all sides, unless you want to argue that GameStop’s pre-squeeze short interest made sense or that its rally was merely the product of markets behaving as markets should when it comes to doing away with “inefficiencies.”
Last weekend, I suggested that while some aspects of the GameStop saga were just “markets being markets” (where that means somebody pushes the envelope too far, somebody else notices, and fireworks ensue), I also noted the obvious, which is that while GameStop may indeed fit some folks’ description of a good “value” play, there is no universe in which what happened late last month can be even loosely tied to a “fundamentals”-based investment thesis. Just ask Michael Burry, who tagged SEC enforcement in a subsequently-deleted tweet.
Read more: GameStop And ‘The Value Of Nothing’
It’s true that hedge funds and big fish treat markets like a casino. It’s also true that they habitually bend the rules or, worse, make the rules via regulatory capture.
But that was never going to fly as an excuse if regulators ultimately find evidence they think constitutes blatant manipulation. And that’s to say nothing of the fact that some hedge funds made massive sums on the upside moves in GameStop and AMC, which undercuts the “populist” narrative, even as most retail investors certainly didn’t intend to bolster the fortunes of private equity and distressed-debt funds.
I have no idea who, if anyone, will ultimately come out of this situation staring down large fines or some manner of punitive action. Certainly the optics wouldn’t be great for America’s capital markets regulators if the only people who are penalized are day-traders. Indeed, it seems highly unlikely that the likes of Elizabeth Warren would countenance any kind of situation that involves placing a disproportionate share of the blame on retail investors, no matter how rich they may have briefly gotten.
That said, I think it’s fair to say that the days of WallStreetBets being a place where people can go to whip up coordinated offensives in broad daylight to target anything from beaten down video game retailers to silver ETFs are over.
On Wednesday, Kitty posted a picture (from a video game, appropriately enough) on Twitter featuring a Veyron lookalike cornered by military tanks and helicopters. GameStop, meanwhile, traded below $50 on Thursday.