Former SEC Chairman Jay Clayton told CNBC on Friday that he does not believe the Reddit-fueled trading frenzy in GameStop stock represented an illegal pump-and-dump scheme.
Clayton, who headed 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 believed the events of late January were a “modern pump and dump using social media.”
“The quick answer to that is no. I don’t think so, based on what I’ve seen,” said Clayton, who recently rejoined his old law firm Sullivan & Cromwell after stepping down as the chief securities regulator in the US.
Earlier this month, Bloomberg reported that the SEC is investigating social media posts to determine if fraud was a factor in the rapid rise in GameStop stock, moving from trading below $ 20 in early January to an intraday high of $ 483 on January 28. used to go. a profit of more than 2,300%. However, the stock has fallen sharply since then, closing Thursday’s session at $ 40.69 a share. According to Bloomberg, the SEC in particular is on the lookout for bits of misinformation designed to skew the market.
According to the SEC, a pump-and-dump scheme occurs when market participants push out “false or misleading information” with the aim of sparking a shopping frenzy. After the stock price is pumped up, a trader dumps the stock he owns at the artificially high price.
Clayton said that as far as he can tell, people trading GameStop stock were pretty clear about the motivation. “When you look at the general participation in this, 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 quite interesting.”
Reddit’s WallStreetBets forum was a place where retailers gathered to post about GameStop. Keith Gill, a prominent member of the online community, took part in the congressional hearing on the events surrounding the GameStop short squeeze on Thursday.
Gill tried to defend his actions regarding the heavily shorted stocks, saying that he had a genuine belief that stocks were undervalued by the market and that he was 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 lawsuit has been filed against Gill in federal court in Massachusetts. The lawsuit alleges that Gill failed to disclose his financial background and tricked individual investors into buying GameStop at unreasonably high levels.
“I didn’t ask anyone to buy or sell the stock for my own profit. I wasn’t part of a group trying to create movements in the stock price,” said Gill in his prepared testimony, arguing that he “was blatantly clear that my channel was for educational purposes only. “
“GameStop’s stock price may have been a little ahead of itself last month, but I’m as optimistic as ever of a possible turnaround,” added Gill, who said he first bought GameStop shares in 2019. In his latest Reddit post, Gill said he made $ 7.8 million on GameStop.
GameStop stock was one of the most shorted on Wall Street in January. Short sellers borrow shares of a stock and then immediately sell them, with the aim of later buying back shares at a lower price. They then return the borrowed shares and make money off the difference. When the opposite happens, short sellers can try to buy back the stock at the current higher price in an effort to minimize losses.
During the frenzy, GameStop stocks received upward pressure from both sides. There were short sellers who tried to take cover and investors who bought the stock directly and call options.
Under pressure from Kerns how social media posts about GameStop were different from historical pump-and-dump schemes like ‘Wolf of Wall Street’ Jordan Belfort’s Stratton Oakmont, Clayton replied, ‘I think you’re making a good argument in an abstract sense that it is no different because a group of people decide they like this [same stock]
However, Clayton added, “Whether they all got together and did it together like the Stratton Oakmont did, knowing the endgame here, I don’t think so.”
Disclosure: Jay Clayton is a CNBC contributor.