Former SEC chairman Jay Clayton told CNBC on Friday that he does not believe that the frenzy of GameStop shares triggered by Reddit represented an illegal pump-and-dump scheme.
Clayton, who led the Securities and Exchange Commission under former President Donald Trump, made the comments in response to a question from CNBC’s Joe Kernen. The “Squawk Box” co-host asked if Clayton thought the events in late January were a “modern day bomb and eviction using social media”.
“The quick answer is no. I don’t think so, based on what I saw,” said Clayton, who recently returned to his former law firm, Sullivan & Cromwell, after leaving the position of chief securities regulator at US
Earlier this month, Bloomberg reported that the SEC is investigating social media posts to determine whether fraud was a factor in the meteoric rise of GameStop shares, which went from trading below $ 20 in early January to an intraday high. of $ 483 on January 28. a gain of more than 2,300%. However, shares have fallen sharply since then, closing Thursday’s session at $ 40.69 a share. According to Bloomberg, the SEC, in particular, is looking for incorrect information that was designed to distort the market.
A pump-and-dump scheme, according to the SEC, occurs when market participants disclose “false or misleading information” in order to trigger a buying frenzy. After the stock price is inflated, the broker will dispose of the shares he owns at the artificially high price.
Clayton said that, as far as he can see, the people who were trading GameStop shares were quite clearly motivated. “Looking at the overall participation in that, it was quite transparent what was going on here,” he said. “People were very transparent about what they were doing and why they were doing it, which was very interesting.”
Reddit’s WallStreetBets forum was a place where retailers gathered to post about GameStop. Keith Gill, a prominent member of the online community, attended the congressional hearing on Thursday focused on events related to GameStop’s short tightening.
Gill sought to defend his shares against heavily shorted shares, saying he had a genuine belief that the shares were undervalued by the market and felt confident enough to share his investment thesis. In addition to posting on WallStreetBets under the name DeepF —— Value, Gill publishes YouTube videos as Roaring Kitty.
A proposed class action was brought against Gill in a federal court in Massachusetts. The lawsuit alleges that Gill did not reveal his financial background and tricked individual investors into buying GameStop at excessively high levels.
“I didn’t ask anyone to buy or sell the shares for my own profit. I didn’t belong to any group trying to create movements in the share price,” said Gill in his prepared statement, arguing that it was “quite clear that my channel was only for educational purposes. “
“The GameStop stock price may have been a little ahead of itself last month, but I am more optimistic than ever in a possible recovery,” added Gill, who said he bought GameStop shares for the first time in 2019. In his last Reddit post, Gill said he won $ 7.8 million with GameStop.
GameStop shares were one of the best-selling shares on Wall Street in January. Short sellers borrow shares in a stock and sell them promptly, with the aim of repurchasing the shares at a lower price later. They then return the borrowed shares and make money from the difference. When the opposite occurs, short sellers may try to repurchase the shares at their current highest price, in an attempt to minimize losses.
During the frenzy, GameStop’s stock faced upward pressure from two sides. There were short sellers who tried to cover and investors who bought the shares immediately and call options.
Pressed by Kernen as the social media posts on GameStop were different from historical pumping and dumping schemes, like Jordan Belfort’s “Wolf of Wall Street” Stratton Oakmont, Clayton replied, “I think, in the abstract, you have a good argument for which is no different because a group of people decide they like it [same stock]. “
However, Clayton added: “If they got together and did it together like Stratton Oakmont did, knowing the final game here, I don’t think so.”
Disclosure: Jay Clayton is a CNBC contributor.