United States Senator Elizabeth Warren (D-Mass.); a member of the Senate Committee on Banking, Housing, and Urban Affairs; today sent a letter to Acting Securities and Exchange Commission (SEC) Chair Allison Herren Lee requesting that the agency provide Congress and the public information on how they will address the dramatic swings in market valuation of GameStop and other companies.
Warren also asked Lee to respond to her questions about how the SEC will crack down on years of distortion in securities markets that have allowed the wealthy few to artificially inflate and deflate share prices and reap short-term profits while exacerbating wealth inequality.
"These wild fluctuations are just the latest indication that many private equity firms, hedge funds, and other investors, big and small, are treating the stock market like a casino, giving little consideration to the companies, communities, workers, and consumers that may be affected by these risky bets," Senator Warren wrote in her letter to the SEC. "The recent chaos reveals a clear distortion in securities markets, with benefits accruing to investors that do not clearly benefit the company's workers, consumers, or the broader economy."
In her letter, Senator Warren called on the SEC, which has a mandate to ensure the "fair, orderly, and efficient" function of the stock market, to review the recent trades and practices, fully and clearly define market manipulation rules and real enforcement standards, and relay to the public what the SEC will do to mitigate these unfair practices going forward.
"The Commission must review recent market activity affecting GameStop and other companies, and act to ensure that markets reflect real value, rather than the highly leveraged bets of wealthy traders or those who seek to inflict financial damage on those traders," Senator Warren wrote in her letter to the SEC. "To protect and restore public trust in sound securities regulation and enforcement, the Commission must identify gaps in existing securities laws and rules and ways in which the Commission can improve its enforcement capabilities."
Senator Warren asked the SEC to respond to her questions by February 5, 2021. Incoming Senate Banking Committee Chair Sherrrod Brown (D-Ohio) has announced that the Senate Banking Committee will be holding hearings on this matter.
Yesterday, Senator Warren appeared on CNBC to discuss the recent volatility and on Wednesday made the following statement:
"With stocks soaring while millions are out of work and struggling to pay bills, it's not news that the stock market doesn't reflect our actual economy. For years, the same hedge funds, private equity firms, and wealthy investors dismayed by the GameStop trades have treated the stock market like their own personal casino while everyone else pays the price. It's long past time for the SEC and other financial regulators to wake up and do their jobs - and with a new administration and Democrats running Congress, I intend to make sure they do."
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January 29, 2021
To: Allison Herren Lee, Acting Chair, U.S. Securities and Exchange Commission (SEC), 100 F Street NE, Washington, DC 20549
Dear Acting Chair Lee:
I am writing regarding the recent surge in share prices for the video game retailer GameStop, whose stocks are "up 1,700 percent this month, including Wednesday's climb of 135 percent" - driven by what one expert called a "flash mob with money."/1 These wild swings in value of GameStop and other companies that are subject to similar bets by traders are "detached from the factors that traditionally help establish a company's value to investors,"/2 I am deeply concerned that these casino-like swings in the value of GameStop and other company shares are yet another example of the gamesmanship that interferes with the "fair, orderly, and efficient" function of the market,/3 raising obvious questions about public confidence in the market and those trading in it. I am writing to seek information on how the SEC intends to address these concerns and prevent these and future incidents of potential market manipulation.
Hedge funds, such as Melvin Capital Management, have bet that GameStop's shares would fall in the hopes of reaping substantial profits./4 In recent weeks, however, share prices for GameStop began to rise, with a dramatic surge in recent days fueled not by any changes in the company's economic fundamentals but by anonymous traders on the Reddit forum r/WallStreetBets./5 News reports state that these traders moved quickly to buy options contracts in an apparent attempt to target large investors./6 This "epic contest between Wall Street traders who bet against stocks and legions of small-scale investors"/7 has fueled a level of speculation "not seen since the tail-end of the dot-com boom two decades ago."/8 These shifts also raise questions about broader instabilities in the market and financial system, as "[n]o one knows how this ends" and "the intense activity could eventually prompt a wider sell-off in the market by forcing hedge funds on the losing side of these trades to sell parts of their portfolios to raise cash to cover their losses."/9 In addition to GameStop, several other publicly traded companies, including AMC; BlackBerry; Bed, Bath, and Beyond; Nokia; and Tootsie Roll Industries,/10 have seen huge shifts in their share price driven by similar internet trading schemes. These wild fluctuations are just the latest indication that many private equity firms, hedge funds, and other investors, big and small, are treating the stock market like a casino, giving little consideration to the companies, communities, workers, and consumers that may be affected by these risky bets. The recent chaos reveals a clear distortion in securities markets, with benefits accruing to investors that do not clearly benefit the company's workers, consumers, or the broader economy.
Although "[f]ederal securities law prohibits market participants from misrepresenting a company's prospects to artificially affect its share price," there is a troubling lack of clarity regarding who the major market participants are in this case and the degree to which their activities may be coordinated./11 With many of these traders "cloaked in anonymity, there is no way of knowing whether messages touting GameStop come from average Joes - or scam artists executing a 'pump-and-dump' stock scheme."/12
The manipulation of share prices may exacerbate inequality and the impacts of the ongoing pandemic-related economic collapse. While investors work to outmaneuver each other in search of short-term profits, working families continue to suffer, underscoring the growing disconnect between the stock market and the real economy. For example, millions of workers have lost their jobs or left the workforce altogether amid the pandemic and economic collapse,/13 but "America's 614 billionaires grew their net worth by a collective $931 billion" in the roughly seven months following the beginning of the pandemic./14 The rapid growth of economic inequality is, in large part, due to the disproportionate impacts of surges in the stock market,/15 which has rebounded dramatically since the onset of the public health emergency./16 The stock market is not reflective of real economic conditions felt by communities across the country, and traders treating securities markets as casinos exploit these growing disparities and the companies and workers that underlie their gambles.
The SEC has a mandate to "protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation," and "promote a market environment that is worthy of the public's trust."/17 The Commission must review recent market activity affecting GameStop and other companies, and act to ensure that markets reflect real value, rather than the highly leveraged bets of wealthy traders or those who seek to inflict financial damage on those traders. To protect and restore public trust in sound securities regulation and enforcement, the Commission must identify gaps in existing securities laws and rules and ways in which the Commission can improve its enforcement capabilities.
While "U.S. law bars the dissemination of false or misleading information with the aim of manipulating investors into buying or selling securities,"/18 SEC's standards and enforcement of market manipulation, remain woefully unclear./19 The public deserves clear answers about how federal regulators define market manipulation, how investors may have profited from potential manipulation, and what the SEC will do to mitigate these practices. This means that the Commission must work quickly to issue rules outlining what it means for traders to manipulate securities prices in violation of the law and to offer guidance for market participants.
While recent market volatility shows rapidly fluctuating prices for GameStop not tied to "any fundamental changes in the company's finances or prospects," these speculative practices are not new./20 In fact, "[f]or almost a year now, investors have been bidding up shares in companies like Tesla, Shopify, and Snap to prices that bear little relation to the actual earnings prospects of the underlying companies"/21 and the "frenzy also stirs memories of the 1990s dot-com boom, when a surge in day trading contributed to the inflation of an epic market bubble."22 It is long beyond time for the SEC to act.
In order to better understand how the Commission plans to address the dramatic price fluctuations of certain shares in recent days and to ensure the integrity of our capital markets, I ask that you respond to the following questions by Friday, February 5, 2021.
1. What were the causes of the recent dramatic shifts in GameStop share prices? Did these shifts represent a "fair, orderly, and efficient" market function?
a. Did the sharp rise in GameStop's share reflect changes in the company's fundamental value? If not, what drove these changes of GameStop share prices?
i. To what extent did large investors, such as hedge funds like Melvin Capital Management, and their short positions impact the fluctuation of GameStop's share prices? Did any of these practices violate existing securities laws?
ii. To what extent did online message boards, such those on Reddit, or broader social media amplification impact the fluctuation of GameStop's prices? Did any of these practices violate existing securities laws?
2. Do the wild swings in value of GameStop and other companies affected by similar trading schemes present any systemic concerns for financial systems or the stock market?
3. What steps will the SEC take to ensure that securities markets better reflect prices that are in line with the intrinsic and fundamental value of underlying companies?
a. Please describe the impacts of disorderly, inefficient, and unfair prices in securities markets on communities, consumers, workers, and investors.
4. What steps will the SEC take to update and implement rules defining market manipulation? Please provide a detailed timeline.
a. Please describe any gaps in the SEC's current regulatory regime in addressing market manipulation.
b. Please describe any gaps in the SEC's current enforcement practices or capabilities to address market manipulation.
Thank you for your consideration of this important matter, and I look forward to your response.
Elizabeth Warren, United States Senator