• The Justice Department is looking into potential market manipulation regarding the rapid rise of GameStop’s stock price last month.
  • Over the course of a few weeks, Redditors on the WallStreetBets subreddit mobilized and drove the price of GameStop shares up more than 5,000%.
  • Redditors took advantage of the fact that hedge funds had unusually large short positions on GameStop shares.

The wild saga that saw Redditors pump up GameStop shares by more than 5,000% over the course of a few weeks is now the subject of a federal investigation, according to a new report from The Wall Street Journal.

News of the investigation comes a few days before representatives from Robinhood, Melvin Capital, and Citadel are set to appear before Congress. Melvin Capital, if you recall, was the billion-dollar hedge fund that almost went bankrupt due to its extreme short position on GameStop. Citadel, meanwhile, helped bail Melvin Capital out with a cash infusion totaling more than $1 billion. Another layer of complexity is that Robin Hood — which briefly prevented investors from buying GameStop shares as the stock soared — has an ongoing business relationship with Citadel.

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Put simply, the GameStop saga reeked of market manipulation from all angles, and that’s precisely what the Justice Department’s fraud division plans on looking into. According to the report, the Justice Department is actively seeking information via subpoenas from Robin Hood, several hedge funds, and Reddit.

The Journal adds:

Some commentators have said individuals coordinating on Reddit—largely in its WallStreetBets forum—openly engaged in a type of manipulation known as a pump and dump. In such a scheme, traders collude to inflate a stock’s price, usually by spreading false information, and then profit by selling their stakes to people duped by the fraud.

Proving market manipulation generally requires showing that traders schemed to create an artificial price and took action to accomplish it.

Interestingly, the investigation won’t solely focus on GameStop and will also include similar online behavior that saw wild fluctuations in the price of AMC shares.

Additionally, the Journal notes that the Commodity Futures Trading Commission is looking into curious trading patterns and potential misconduct involving “silver futures and the largest exchange-traded fund tied to silver, the iShares Silver Trust.”

One of the more interesting aspects about Redditors driving up the price of GameStop shares is that the behavior is arguably not all that different from what hedge funds have been doing for decades.

Highlighting the impact that short sellers can have on a company, Rick Smith detailed what happened to his own company years ago:

Some short sellers don’t just sit back and hope that a stock declines. Instead, they try to force it down. It’s Wall Street’s open secret: There are a class of short sellers who target companies to destroy value. They operate in the shadows, whisper in the ears of business reporters, file lawsuits, and even call up government regulators — all to bring a stock lower and profit from the decline.

I know this because I’ve lived it. In 2004, the stock price of my company rose dramatically — but that drew over $1 billion in short positions and led to a highly-coordinated public relations and legal campaign against our company. Within months, press that ignored us began assailing us. We were sued over 100 times, and a federal government investigation was triggered that alarmed both our shareholders and customers causing real damage.

Short sellers nearly destroyed our business, because doing so was lucrative for them. We survived by the skin of our teeth, and that experience showed me the lengths to which short sellers will go to influence the market — not just predict its moves.

The anecdote above is precisely why most people were cheering-on the WallStreetBets subreddit as it helped propel GameStop shares to an unprecedented high.

A life long Mac user and Apple enthusiast, Yoni Heisler has been writing about Apple and the tech industry at large for over 6 years. His writing has appeared in Edible Apple, Network World, MacLife, Macworld UK, and most recently, TUAW. When not writing about and analyzing the latest happenings with Apple, Yoni enjoys catching Improv shows in Chicago, playing soccer, and cultivating new TV show addictions, the most recent examples being The Walking Dead and Broad City.