Former SEC Chairman Jay Clayton told CNBC on Friday that he does not believe Reddit’s negative trading frenzy in GameStop shares represented an illegal pumping and unloading scheme.
Clayton, who chaired former President Donald Trump’s Securities and Exchange Commission, made the comments in response to a question from CNBC’s Joe Kernen. The co-host of “Squawk Box” asked if Clayton considered the late January events to be a “current bomb 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 former law firm, Sullivan & Cromwell, after ceasing to be the maximum regulator of values of the US
Earlier this month, Bloomberg reported that the SEC is investigating social media posts to determine if the fraud was a factor in the meteoric rise in GameStop shares, which went from trading below $ 20 in early from January to a maximum intraday of $ 483 on January 28th. a gain of more than 2,300%. However, shares have fallen sharply since then, closing Thursday’s session at $ 40.69 per share. According to Bloomberg, the SEC, in particular, is looking for pieces of misinformation designed to distort the market.
According to the SEC, a pumping and discharging scheme takes place when market participants expel “false or misleading information” with the goal of triggering a buying frenzy. Once the share price has risen, a trader will leave the shares they own at an artificially high price.
Clayton said that from what he can tell, the people who traded GameStop shares had pretty clear motivation. “As you look at the overall participation in this, it was pretty transparent what was going on here,” he stated. “People were very transparent about what he was doing and why he was doing it, which was pretty interesting.”
The Reddit WallStreetBets forum was a place where retailers went to post about GameStop. Keith Gill, a prominent member of the online community, participated Thursday in the congressional hearing focused on the events surrounding GameStop’s small compression.
Gill tried to defend his shares with respect to very short stocks, saying he had a genuine conviction that the shares were undervalued by the market and he felt confident enough to share his investment thesis. In addition to posting on WallStreetBets as DeepF —— Value, Gill posts YouTube videos as Roaring Kitty.
A class action lawsuit has been filed against Gill in a federal court in Massachusetts. The lawsuit alleges that Gill did not disclose his financial background and tricked individual investors into buying GameStop at excessively high levels.
“I did not ask anyone to buy or sell the shares for my own benefit. I did not belong to any group that tried to create movements in the share price,” Gill said in his prepared testimony, stating that he has had ” very clear that my channel was for educational purposes only “.
“The price of GameStop shares may have gone up a bit last month, but I’m as bullish as I’ve ever had a possible change,” added Gill, who said he bought GameStop shares for the first time. in 2019. In his latest Reddit Gill said he earned $ 7.8 million on GameStop.
GameStop shares had been among the shortest on Wall Street in January. Short sellers borrow shares of a stock and sell them quickly, with the goal of buying shares later at a lower price. Then they return the borrowed shares and make money with the difference. When the opposite happens, short sellers may try to recoup the shares at their current higher price to try to minimize losses.
During the frenzy, GameStop shares faced rising pressure from both sides. There were short sellers trying to hedge and investors buying stocks directly and buying options.
Pressed by Kernen about how social media posts about GameStop were different from historical pumping and unloading schemes, such as Jordan Belfort’s “Wall Street Wolf” Stratton Oakmont, Clayton responded: good argument that is is no different for a group of people to decide that they like this [same stock]. “
However, Clayton added: “Whether they all got together or did it together like the Stratton Oakmonts did, knowing the final game here, I don’t think so.”
Outreach: Jay Clayton is a CNBC contributor.