Reddit is also routinely used to drive up penny stocks that, unlike GameStop, have ceased publishing financial results and don’t trade on regulated exchanges. In such instances, the SEC often cracks down not by going after those touting the shares but by suspending trading of the defunct companies or revoking their registrations, which prevents brokers from executing trades.
Such market dynamics are an issue that the SEC will have to increasingly deal with because Twitter and online message boards are allowing armchair stock analysts to spread their views like never before. There’s no question that such opinions are being devoured, in many cases by the army of investors who’ve taken up day trading during the coronavirus pandemic.
The SEC has shown it’s eager to go after frauds involving the hyping of shares, particularly instances of promoters touting securities without disclosing that they are being paid by companies. Among those the agency has accused of misconduct in recent years are actor Steven Seagal and boxer Floyd Mayweather, both of whom recommended initial coin offerings. If the SEC were to find that posters on Reddit were recommending stocks without disclosing compensation, then it could conceivably bring similar cases.
Plus, enforcement isn’t the SEC’s only tool to temper some of the mania that has engulfed markets over the past year. Last June, the SEC stopped Hertz Global Holdings Inc. from selling new shares that the bankrupt car-rental company described as potentially “worthless.” Hertz was seeking to take advantage of an almost tenfold increase in its stock and investors were eager to buy up the shares before the SEC stepped in.
The challenge for the SEC is that Hertz and other companies are quite receptive to demands from their regulator. The same can’t necessarily be said about traders who post commentary on Reddit message boards and Twitter.
—With assistance from Sarah Ponczek.
This article was provided by Bloomberg News.