Former SEC President Jay Clayton told CNBC on Friday that he did not believe the commercial frenzy caused by Reddit in GameStop shares was an illegal pumping and unloading system.
Clayton, who led the Securities and Exchange Commission under former President Donald Trump, made the comments in response to a question from CNBC’s Joe Kernen. Co-host Squawk Box asked if Clayton felt that the events of late January were a “modern pump” 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 joined his former law firm, Sullivan & Cromwell, after stepping down as top regulator in the United States.
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 of GameStop shares, which went from trading below $ 20 in early January to an intraday high. of $ 483 on January 28th. a gain of over 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 that have been designed to distort the market.
According to the SEC, a pumping and unloading system occurs when market participants push “false or misleading information” in order to unleash a buying frenzy. Once the share price has been increased, a trader will give up the shares they hold at the artificially high price.
Clayton said that from what he can tell, the people who traded GameStop shares were pretty clear about the motivation. “As you look at the overall turnout, it’s been pretty transparent what’s 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, attended the congressional meeting on Thursday, focusing on the events surrounding the short GameStop stress.
Gill has tried to defend his shares against the sharply shortened shares, saying he has a real belief that the shares are undervalued by the market and feels confident enough to share his investment thesis. In addition to posting on WallStreetBets as DeepF —— Value, Gill posts YouTube videos like Roaring Kitty.
A proposed class action lawsuit was filed against Gill in Massachusetts federal court. The lawsuit alleges that Gill did not disclose its financial experience and tricked individual investors into buying GameStop at unjustifiably high levels.
“I did not ask anyone to buy or sell the shares for their own profit. I did not belong to any group trying to create stock price movements,” Gill said in his prepared testimony, claiming that it was “clear that my channel had for educational purposes only. “
“The price of GameStop shares may have risen slightly before him in the last month, but they are as bullish as we have ever had with a possible change,” added Gill, who said he bought GameStop shares in 2019. In his latest Reddit post, Gill said he got $ 7.8 million from GameStop.
GameStop shares were one of the shortest on Wall Street in January. Missing sellers borrow shares of a stock and then sell them promptly in order to buy shares later at a lower price. Then he returns the borrowed shares and makes money from the difference. When the opposite happens, missing sellers can try to buy back the stock at the current higher price, in an attempt to minimize losses.
During the frenzy, GameStop shares faced upward pressure from two sides. There were missing sellers trying to cover and investors buying direct shares and call options.
Pressed by Kernen, how social media posts about GameStop were different from historical pumping and unloading schemes, such as Jordan Belfort’s “The Wolf of Wall Street,” Stratton Oakmont, Clayton responded, “I think, In the abstract, you argue that it is no different that a group of people decide they like it [same stock]. “
However, Clayton added: “Whether they all got together and did it together, as Stratton Oakmont did, knowing the final game here, I don’t think so.”
Disclosure: Jay Clayton is a CNBC contributor.