Stop the Game!: How To Chill Bubbles Sensibly
John C. Coffee Jr., 17 March 2021
Much of the excited journalism on GameStop has focused on its asserted “Democratization” of the markets or the new “populism” sweeping Wall Street. This sort of commentary is the product of journalists being on tight publication deadlines and willing to generalize based on a data sample of one. Those of us who take a longer-term view see it differently: Bubbles are bad; GameStop was a bubble; and the influences that caused it (which were indeed new and novel) need to be chilled. Those who disagree with the last sentence should probably stop reading here.
But how you chill a bubble is not a simple question. Many commentators have unrealistic solutions: (1) Prosecute everyone (or at least those on Reddit) for manipulation; and (2) subject websites to tight regulatory controls. Such solutions, proposed by those who can reach legal conclusions faster than the average knee can jerk, face formidable obstacles. First, manipulation is a crime of intent that requires the actor to attempt willfully to move a stock price (up or down) to an “artificial” price that the actor knows is different than that which would be reached by the normal intersection of supply and demand in a fully informed market. Currently, the circuits are split, but both the U.S. Courts of Appeals for the Second Circuit and D.C. Circuit insist that the defendant must intentionally send a false pricing signal (such as a wash sale or a factually false statement). See Fezzandi v. Bear Stearns & Co., 777 F.3d 566 (2d Cir. 2015); Koch v. SEC, 793 F.3d 147 (D.C. Cir. 2015). Second, the First Amendment largely precludes any attempt to shut down social media. In addition, §230 of the Communications Decency Act gives immunity to websites, such as Reddit, for what their users say on them. Beyond that, mere statements of opinion—even manic opinions—are not fraudulent. Most of the lost souls on WallStreetBets sound like true believers, not cynical manipulators, and their prediction that GameStop was “going to the moon” were silly, but not fraudulent. According to Motley Fool, the average investor in a Robinhood account had an account balance (in 2020) between $1,000 and $5,000. A colleague tells me that his account balance on Draft Kings (a different betting venue) is greater than that. In short, Robinhood’s investors are not big-time and are probably feeling their losses keenly at this point.
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The Dark Money Secretly Bankrolling Activist Short-Sellers — and the Insiders Trying to Expose It
Institutional Investor, 30 November 2020
More than a dozen short-sellers interviewed by Institutional Investor in an effort to penetrate this murky terrain say there are numerous players and various permutations of the model that may involve the sharing of ideas and research along with either a cut of the gains on the short trade or a set fee. In fact, some short-sellers believe that almost all of the activists have such backing — even those running small hedge funds themselves.
Short-sellers need more transparency, says former SEC commissioner
Ben Ashwell, Corporate Secretary, 26 June 2020
Robert Jackson discusses short-selling, fraud and the role of the commission
Former SEC commissioner Robert Jackson says he is troubled by the ‘increasing evidence of manipulation through short-selling’, and calls on his former colleagues at the SEC to consider a proposal for greater transparency for short-sellers.
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Short Selling and the New Market Manipulation
John C. Coffee, Jr. and Joshua Mitts, 18 March 2019
Stock market manipulation has been around since shortly after stock markets were invented. Everyone is familiar with the methodology in the standard “pump and dump” scheme: False rumors are circulated, the stock is bid up by the manipulators, supply might be constrained, and, once the public’s appetite is aroused, the stock is dumped by the manipulators.
But the internet has changed all that. No need exists today for the boiler shop or its battery of phones or even carefully assembled lists of suckers. All that one needs today is to put one’s message (written under a pseudonym) on a blog that features hot news about individual stocks. Of these sites, the best known and most watched is Seeking Alpha, whose “Short Ideas” column contains numerous posts recommending that specific stocks be shorted. Reversing the old pattern, the focus is no longer on touting stocks for an immediate rise, but rather on suggesting a dark downside. Once the professional media may have played a gatekeeper role, refusing to publish wild and unsubstantiated reports. But on the blogs, it is the Wild West today. Continue reading “Article: Short Selling and the New Market Manipulation”
The Astonishing Return Of Steven Cohen
RONALD OROL, 26 September 2017
In 2013, an insider-trading scandal took apart billionaire Steve Cohen’s otherwise incredibly successful hedge fund.
But surprising, perhaps shockingly, at least for those who haven’t followed the situation closely, Cohen is back. A 2016 settlement with the Securities and Exchange Commission will allow the beleaguered money-manager to accept outside money starting in January. Cohen hasn’t said whether he wants to take on other investors, but the consensus opinion is that he will the second he’s permitted. Expect to find lots of willing investors ready to allocate capital to his funds – and the intense glare of the nation’s securities regulator watching his every move. Continue reading “Article: The Astonishing Return Of Steven Cohen”
Judge Rejects Settlement Over Merrill Bonuses
New York Times, 14 September 2009
As President Obama traveled to Wall Street on Monday and chided bankers for their recklessness, across town a federal judge issued a far sharper rebuke, not just for some of the financiers but for their regulators in Washington as well.
Giving voice to the anger and frustration of many ordinary Americans, Judge Jed S. Rakoff issued a scathing ruling on one of the watershed moments of the financial crisis: the star-crossed takeover of Merrill Lynch by the now-struggling Bank of America.
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SEC reins in ‘naked’ short selling, will check recent trades
abc, 18 September 2008
Reacting to concerns that many financial stocks were losing value at an alarming rate due to aggressive bets by short sellers who profit when prices fall, federal regulators on Wednesday acted to stem the abusive practice known as “naked short selling.”
In an ordinary short sale, a short seller borrows stock and sells it, with the hope of buying it back later at a lower price to replace the borrowed shares.
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