Headline: Shares and Shares Alike

Date: 1/30/2021

Body:  I was listening to an NPR Program on what happened to the GameStop stock.    People seem to be fairly (understandably) confused.   Let’s take stock, err…umm… I mean look at what happened.

The time was the go-go early 2000s, the place was the United States, thrilled with its new computer and gaming systems.  Young, jet-set high school students would go hang out at the mall, looking and being looked at as they perused the high-end clothing.  The nerds, we went to GameStop.

GameStop was an oasis: a cool drink of Wacky Water within the hot, dry parched wastes of the rest of the mall.    Here we could buy games, strategy guides and gaming consoles, and speak with other people who played games, IRL!!!  It was cool!!  (Radical, anybody??)  Whatever adjective you use, amongst a largish minority of people this store and others like it attracted like-minded young people (mostly men, not always) in their 20s and 30s even.  This would suggest a growing stock price… and you’d be wrong.  For most of the first 2 decades of the 2000s, their stock price was pretty flat.

A weird thing happened, though.   In 2021, there is a GIANT vertical move in stock price (as of this writing, the price per share is $325 when it is normally in the range of $15-$25 per share  (At its height, there was a time during 2014-15 when the share price was in the $40s, but for the past 5 years, the price has been steadily declining.)  So, what happened?  

For the last couple of years, investing gurus have looked around and determined that retail game sellers like these were on their last legs.  As a result, more than one hedge fund short-sold the stock.   “Short-selling” is something you can only, legally, do only on the stock market.   Short-selling is when you borrow shares from somebody, sell them to the market immediately, then after a short period (several months at most) you buy back the shares and return them to the donor.  In this case, you are hoping for the stock to decrease in price quickly because this is how you would make the most  money.

After there have been a few thousand stories about people getting rich “shorting” stocks, somebody on Reddit (a so-called Redditor) made an off-hand remark (likely a meme of some kind) using GameStop as an example.  Thousands of like-minded people read the same material, and all said, “wouldn’t it be funny if…”  Almost certainly on a lark, thousands of investors each bought an insignificant stake in GameStop.    At some point, the thousands of tiny orders began to aggregate the demand and the stock price went through the roof.   Then some other investors saw the trend, and wanted “in” so they invested… and the price went straight through to the exosphere.

Now, remember those short-sellers?   These people might have sold the stock at $40, and many probably assumed that the company would go quietly bankrupt, and no short cover would be necessary.   Instead, the stock price rocketed to rarefied air.   So, they sold the stock at $40 , and very recently, the stock was at just over $5 per share.   If they had covered there (bought the stock back) they would have pocketed the difference, $35 per share.   Not bad!!  But, the Redditors got involved and hugely pumped up the price.   The lucky ones heard the news as the stock hit $164 and ONLY lost $131 per share.   But wait, THERE’S MORE!!!

These investors (often hedge funds and other examples of private equity firms) went even further.    They are leveraged, that is, they were using money that didn’t belong to them in order to make a larger debt.   Some went into debt by 20% or more.    So, even if they are short-covering for only $164 per share, it’s really like $196 per share because they have to pay back the debt.  This is why there are so many loud voices claiming “stock manipulation.”

If it Walks like a Duck, and talks like a Duck, then, DUCK!!

So, the question is, is this stock manipulation?  I am not an attorney, but, I’ll just record my observations.  The definition seems to be working to artificially increase or decrease the share price of a security for personal gain.   Investopedia makes the point that this is an incredibly difficult thing to prove, and there are ways to hide your intentions.

I would like to point out 2 reasons I don’t think anybody will face charges of stock manipulation:

  1.  It is incredibly difficult to prove this, made even more so by the fact that the pool of people involved was so large.  Anybody can become a Redditor, and the number of people involved would be VERY difficult to even define, let alone prove.
  2. The definitions of manipulation generally revolve around the idea of “for personal gain.”  The comments written on Reddit would argue against this idea of personal gain being an over-arching objective.  (Go ahead, read the Comments yourself.   Decorum prevents me from recording them here.)  They could be lying, but this is difficult to prove (see #1) but I could also easily see the psychology behind this.   Before the vertical move, the stock was under $10 per share.  For less than $1,000 one could easily have had over 100 shares.   Not much movement there.   But, if thousands of Redidtors did this, THAT would run up the price to where it is.  Given the anger on the street ( The 2009 Great Recession, COVID  etc.) I could pretty easily see this happen.

The Verdict

Pump and Dump” is a scheme as old as time.   For generations now, boiler room operations have bubbled up (sorry) all over the country, only to disappear like vapor. (OK, I’ll stop).   In these operations, somebody buys thousands of shares of a very speculative stock.  Dozens of phone lines would be setup and young people would staff these lines, and talk up a certain stock to a carefully prepared list of potential investors.     When the price was bid up sufficiently, the original buyer would sell all of their shares and make a boatload of money.  Soon after, the boiler-room bosses would disappear.  They have been nearly impossible to find, let alone prosecute.

This seems to be a high-tech, social-media version of the pump and dump scenario, but for one thing: the dump seems to be missing.  There is almost nobody dumping the stock in any quantity.  So, there seems to be no provable crime here.  But, the people who got “caught out” have more than some political clout, so, it seems likely that the SEC will launch an investigation; If I had to guess, however, the very risk-averse SEC will likely not  take on any large-scale prosecutions.

I would make a further guess, too. Given the massive impact of social media, this will not be the last version of this story. The stock prices for many companies are still relatively low, and there seems more than enough “dry powder” in the market to artificially set off an explosion. While it can launch one’s portfolio VERY high, it can also set ablaze many years of patient saving and growth. Be very careful. If you see something “trending” do your own independent homework. If it’s truly worth its weight in gold, it will not turn to lead within a week.


Manipulation Definition (investopedia.com)

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

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