Gaming the Market with GameStop: Is This a Pump and Dump?

Will There Be Legal Repercussions For Driving Stock Price Up?

One may have expected that the biggest story of the financial world shortly after a new presidential administration takes office would be the confirmation of the administration’s choice for Secretary of the Treasury, the choice to run the Consumer Financial Protection Bureau, or even the basic priorities of the administration. However, the story currently dominating the headlines comes from a place that no one could have expected: Reddit.

Posters on the popular message board have spent the last few weeks pumping stocks like GameStop, Nokia, and Blackberry. The motivation appears to be to target institutional investors who have taken short positions (a short position is essentially a bet that a stock would lose money) by forcing the price of the stock ever higher and then selling the inflated stock to the institutional investors, who are forced to buy up to cover their short position. GameStop has emerged as the primary target of this collective action, with 10-day volatility exceeding 300%. On January 28, 2021, the popular trading platform Robin Hood halted most trading of GameStop and other stocks.

The question of liability

The drama in recent days has created numerous interesting legal questions, including whether anyone or any entity could be criminally or civilly liable for participating in the initial pump of the stock, for engaging in “hostage” sales, or for stopping trading. This article will focus on the first question.

A “pump-and-dump” is a common scheme in which an investor purchases a stake and then convinces other investors to purchase stakes under false pretenses, and then sells his/her own stake at an inflated price. Later arriving investors then experience a loss when the falsity of the scheme becomes known.

The typical pump-and-dump involves one or a few nefarious actors who identify a stock, make their investment, and then target specific investors, though it can be conducted on the open market as well. Liability is found under the Commodity Exchange Act (“CEA”):

The CEA prohibits any person from ‘manipulating or attempting to manipulate the price of any commodity.’ While the CEA itself does not define the term, a court will find manipulation where: (1) Defendants possessed an ability to influence market prices; (2) an artificial price existed; (3) Defendants caused the artificial prices; and (4) Defendants specifically intended to cause the artificial price.

Beatty v. JP Morgan Chase & Co. (In re Commodity Exch., Inc. Silver Futures & Options Trading Litig.), 560 F. App’x 84, 86 (2d Cir. 2014), citing 7 U.S.C. § 13(a)(2).

Is it fraud?

While it appears that the GameStop case appears to meet all four elements, the influence of the artificial price by the originators of the GameStop pump does not appear to be built on any false pretense, which is the classic hallmark of a pump-and-dump. However, for liability under the CEA to attach, the “pumper” need not actually utter a falsity. The “pumper” must merely have “acted (or failed to act) with the purpose or conscious object of causing or affecting a price or price trend in the market that did not reflect the legitimate forces of supply and demand.” Id. (emphasis in the original).

This begs the question: if the investors hyping a stock are transparent about the reason for their hype, should they be liable? Furthermore, in a crowd-sourced pump-and-dump when numerous reasons for purchasing the stock are given, including merely because it’s fun, is it possible to find that a single poster possessed the ability to influence the market? Or is it possible to pick and choose certain posters for liability when other posters may have had different motivations?

Whether the Securities and Exchange Commission decides to get involved will be a fascinating question and one that we will follow closely. We have substantial experience in helping investors pursue their claims of fraud, but we certainly have never seen an internet meme become the dominant topic of the market for such an extended period of time.

Pittsburgh Investment Fraud Attorneys

In the meantime, if you suspect that you have been defrauded in your investment activities, please do not hesitate to give us a call. David C. Weber handles a variety of litigation matters, including antitrust and securities law matters, construction, insurance bad faith litigation, and employment issues. He can be reached at (724) 776-8000 or

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