GameStop Hysteria: Why Potential Claims of Market Manipulation Leave Reddit Unfazed
For many of us, GameStop has been out of sight, out of mind for quite some time. The brick-and-mortar video game retailer has been unable to adapt as a growing number of video games are purchased digitally on platforms such as Xbox Live and the PlayStation Store.1 GameStop has not posted a profit since 2017 and has closed over 1,000 stores in the last several years.2 In 2020, digital game sales outnumbered physical sales, an unwelcome sign for the brick and mortar retailer.3
Despite the dreary outlook for GameStop, the company’s stock rose more than 3,000% in January 2021.4 GameStop was in the national spotlight in what seemed like a bizarre adaptation of The Big Short. Reddit users on the discussion forum “wallstreetbets” banded together to send the stock price of GameStop soaring.5 Led by active Reddit users, including one named “Roaring Kitty”, the group effectively undermined short positions taken by Wall Street hedge funds.6 Without getting into the nitty-gritty of finance, hedge funds had taken positions where they stood to make money if GameStop’s stock price declined but stood to lose money if the stock price went up.7 The latter is what occurred and funds such as Melvin Capital lost billions.8 Essentially, a massive, coordinated group of “Redditors” bought large amounts of GameStop stock, substantially raising the price and forcing institutional investors to buy back their short positions.9
The GameStop hysteria has died down, however, the wallstreetbets Reddit feed lives on. As of this posts’ writing, March 4, 2021, the Reddit page still has an active following and lively discussion thread.10 One thread titled “What Are Your Moves Tomorrow, March 05, 2021” is filled with an eclectic mix of posts both making crude jokes and discussing the stock market.11 While seemingly innocent, some have compared the Reddit day trading community to “stock pools” developed during the 1920s.12 In “stock pool” schemes, groups of investors would pool their money then manipulate individual stocks.13
As some securities experts have noted, the GameStop incident raises several questions of legal liability. Mainly, was this market manipulation? Federal prosecutors are investigating this very question.14 However, as noted by securities lawyer Joshua F. Batz, to be held liable for market manipulation one must intend to “deceive, manipulate or defraud.”15 Here, there appears to be no “illicit intent.”16 Regardless, many have characterized the activity of Reddit users as “skirting the line of market manipulation.”17
With all of this activity facilitated on Reddit’s website, shouldn’t they be concerned about their own potential liability? The short answer is no. Under Section 230 of the Communications Decency Act of 1996, online platforms cannot be held liable for the posts of third-party users.18 This means even if the activity of Reddit users fell within the realm of market manipulation, Reddit would not be held liable.19 This is likely the reason why Reddit has not taken down the wallstreetbets thread.
However, should Reddit really have no duty to monitor posts on its forums? What if in the future the platform is used for more blatant and sinister market manipulation? These are questions that do not have a clear answer. On one hand, freedom of speech and mass communication is what has helped the modern internet grow.20 Additionally, requiring more monitoring on online forums might impose a greater burden on internet platforms. On the other hand, the potential for large-scale market manipulation is not something which should be taken lightly.
While the GameStop incident was certainly unique, online communities and social media platforms have played roles in many other market shifts. For example, on August 7, 2018, Elon Musk tweeted he was considering taking Tesla private, a statement which sent the company’s stock price soaring.21 With a following of 22.3 million people, Musk’s tweet reached millions of investors and news outlets in real time.22
Ultimately, this raises the questions of where online platforms should go from here. Although online platforms have no legal obligation to moderate content, it would be sound policy to ensure they do not host content which seeks to actively defraud or manipulate investors. While the GameStop stock run was facilitated by seemingly well-meaning individuals, there is always the question of whether things will go too far next time.
Abha Bhattarai & Taylor Telford, Despite Record Stock Surge, GameStop is Still Struggling to Stay Afloat, Wash. Post (Feb. 1, 2021), https://www.washingtonpost.com/business/2021/02/01/gamestop-retail-stores/ [https://perma.cc/MU7X-9E5E].↩
Dylan Warman, For the First Time, Digital Game Sales Outnumber Physical Sales, Screen Rant (Aug. 12, 2020), https://screenrant.com/digital-game-sales-consoles-outnumber-physical-first-time/ [https://perma.cc/83ZH-22RJ].↩
Taylor Tepper, What’s the Endgame for GameStop?, Forbes (Jan. 27, 2021), https://www.forbes.com/advisor/investing/gamestop-stock-what-is-happening/ [https://perma.cc/N4FM-KRKW].↩
Jonathan Ponciano, Reddit Trader Roaring Kitty Accused of Fraud in the Latest Wild Lawsuit Coming Out of GameStop Saga, Forbes (Feb. 17, 2021), https://www.forbes.com/sites/jonathanponciano/2021/02/17/gamestop-saga-reddit-trader-roaring-kitty-accused-of-fraud-in-the-latest-wild-lawsuit/?sh=83d066a7841b [https://perma.cc/ZG4Y-V3XN] (describing username Roaring Kitty as “[o]ne of the most outspoken traders on Reddit’s WallStreetBets discussion board”).↩
For a more detailed explanation of short selling, see Brian Beers, How an Investor Makes Money Short Selling Stocks, Investopedia (Jan. 28, 2021), https://www.investopedia.com/ask/answers/how-does-one-make-money-short-selling/ [https://perma.cc/M25X-8VKG].↩
Svea Herbst-Bayliss, Melvin Capital Ends Month with over $8 Billion in Assets after Investors Added Cash: Source, Reuters (Jan. 31, 2021), https://www.reuters.com/article/us-retail-trading-melvin/melvin-capital-ends-month-with-over-8-billion-in-assets-after-investors-added-cash-source-idUSKBN2A00KW [https://perma.cc/VGV6-79RD].↩
See What Are Your Moves Tomorrow, March 05, 2021, Reddit (Mar. 4, 2021) https://www.reddit.com/r/wallstreetbets/comments/lxva6s/what_are_your_moves_tomorrow_march_05_2021/[https://perma.cc/95Y6-BQYT].↩
Janet Nguyen, Why Is GameStop Stock Going Wild Right Now?, Mkt. Place (Jan. 27, 2021), https://www.marketplace.org/2021/01/27/why-is-gamestop-stock-going-wild-right-now/ [https://perma.cc/9NSS-LULV].↩
Dave Michaels, GameStop Mania Is Focus of Federal Probes into Possible Manipulation, Wall St. J. (Feb. 11, 2021), https://www.wsj.com/articles/gamestop-mania-is-focus-of-federal-probes-into-possible-manipulation-11613066950 [https://perma.cc/4PQD-TC45].↩
Joshua F. Batz, What Is the SEC Going to Do about GameStop?, N.Y. State Bar Ass’n (Feb. 2, 2021), https://nysba.org/what-is-the-sec-going-to-do-about-gamestop/ [https://perma.cc/22GG-EUTU].↩
Matt Phillips & Taylor Lorenz, ‘Dumb Money’ Is on GameStop, and It’s Beating Wall Street at Its Own Game, N.Y. Times (Feb. 25, 2021), https://www.nytimes.com/2021/01/27/business/gamestop-wall-street-bets.html [https://perma.cc/4K9Q-TK3Q].↩
See 47 U.S.C. § 230.↩
Zeran v. American Online, Inc., 129 F. 3d 327, 330 (4th Cir. 1997) (“The purpose of this statutory immunity [§ 230 of the Communications Decency Act] is not difficult to discern. Congress recognized the threat that tort-based lawsuits pose to freedom of speech in the new and burgeoning Internet medium”).↩
Graham Rapier, Elon Musk’s Infamous Tweet Declaring He Had ‘Funding Secured’ at $420 per Share to Take Tesla Private Was Sent One Year Ago Today. Here’s Everything the Company’s Faced in the Year Since, Bus. Insider (Aug. 7, 2019), https://www.businessinsider.com/elon-musk-tesla-private-one-year-anniversary-2019-8 [https://perma.cc/9UT9-6BJN].↩
See Megan Rose Dickey, Elon Musk Tweets He’s Thinking about Taking Tesla Private, Tech Crunch (Aug. 7, 2018), https://techcrunch.com/2018/08/07/elon-musk-tesla-private-tweet/?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAC_KKbCiRmAf7DRKFmiXD1K05zGRDXVpaDdJcIQ9I2JH9IMzjL03rSQ7_1L4nO3uCG7fTUZ21JLliJpasGcEUz2Eapa5HK_31oshW5VO8FD_sUA3yM4-RiO3Z4QVMHodZhfB48klWNg7n_nZRKinwAHoWetMCjbliFjPpTjyw4_c [https://perma.cc/7XT5-CHTR].↩