Tag: news

The price of GameStop’s stock has been sent soaring by rocket emojis in the Reddit forum r/wallstreetbets. The rally has captured the attention of the world, including regulators and the White House. At the market’s close on January 28, GameStop shares were worth about $198, up about 400 percent from a week ago, but down from their meteoric height of over $400. Everyone from Bernie Sanders to Jon Stewart is saying that this is evidence that Wall Street is broken or rigged. What’s really going on?

Stocks go up and down all the time. Why is the GameStop rally different?

A lot of Wall Street hedge fund money was tied up in betting that GameStop, which has suffered as consumers increasingly make purchases online, would continue to decline. 

There are a number of ways to bet against a company’s success, but a popular strategy is to “short sell.” The mechanics of a short sale are a bit complicated: A trader doesn’t actually own the stock, but “borrows” it for a specified amount of time and then sells it when either the agreed-upon price is reached or the time period expires. But this is risky. A short sale executed without a hedge could expose a trader to unlimited losses.  

The underlying risk in short sales is what retail investors turned into an opportunity. Unlike traditional stock rallies, GameStop’s rise (and the rise of other stocks caught up in the moment, like AMC) grew from the actions of individual retail investors who have recently gained greater market access through the availability of low-cost trading apps. 

Because retail traders are not a monolith, it’s often difficult to discern their exact motivation. Some hypothesize that GameStop’s rise began by identifying an undervalued stock. Others hypothesize that retail traders were exercising their muscle, seeing how much they could move the market. And others, in what is becoming the dominant narrative, hypothesize that traders identified GameStop specifically to target Wall Street’s short positions. 

Regardless of the motivation, by executing trades in GameStop, these retail investors created what is known as a “short squeeze,” where the fast-rising price of the stock caused the holders of short positions to buy the stock in order to limit their losses––pushing the stock price even higher, creating a type of feedback loop. This left a number of hedge funds high and dry, possibly causing billions in losses. 

Because a lot of the trading was in options, there was also a “gamma squeeze,” which created another feedback loop. Market makers who sell call options (bets that the stock price will rise) often buy some underlying stock to hedge their exposure, pushing the price up even further.

As more investors jumped on the bandwagon, whether retail or institutional, the price continued to soar to new heights. GameStop’s price has stabilized some on Thursday after online trading platforms limited investors’ abilities to open new trading positions. 

So what’s the problem?

There may be no problem at all. Markets and bubbles go together. The Dutch tulip craze of the 1600s is just one example of the time-honored tradition of bubbles. 

Retail traders riding the rally would tend to agree that there’s no problem. For Main Street, this is a success story, albeit one that may have a sad ending for those taking losses when the stock price inevitably descends. It illustrates the power of retail investors and sends a shot across the bow of Wall Street, who often calls them “dumb money.” 

Wall Street, on the other hand, is shaken. Short selling is a textbook trading strategy. Indeed, despite those who argue it is morally unacceptable to bet against a company’s success, short selling generally improves market efficiency by helping to guide price discovery and capital allocation. Although it’s not unusual for short sellers to lose big, few would have predicted a short squeeze coming from retail traders. 

Given the attention GameStop trading has received, regulators undoubtedly will try to ascertain whether there are any legal problems. The most common question is whether the retail traders manipulated the market. They seem to have acted with some degree of concert to change the stock’s price. But that’s not the definition of illegal market manipulation. In fact, most of us hope others will follow suit when we buy a stock, pushing the price higher. There are even legitimate investment strategies aimed at helping to push the stock in your favor. 

For there to be illegal market manipulation, there generally needs to be some sort of fraud or deception. But here, little suggests that investors were being misled. The online forum was refreshingly (if vulgarly) transparent. Making a market manipulation case here may prove to be challenging.

Does this prove markets are broken?

There’s no shortage of criticism about the current situation. While Wall Street searches for solutions to protect its own bets from what it views as the unpredictable “retail horde,” retail traders decry online trading platforms’ decisions to halt trading as being in cahoots with the hedge funds. But it’s not a stretch to see GameStop as part of the normal functioning of markets. The brokerages’ decisions to limit trading reportedly stemmed requirements imposed by parts of the market infrastructure, which left brokerages scrambling to find the capital to keep trading open. When viewed through the lens of the extensive regulation of brokerages’ financial operations, a trading halt is not a surprising outcome.

The fact that GameStop is now trading far above fair estimates of the company’s value is not an incontrovertible sign that the market is broken. Stock prices move in and out of alignment all the time. It’s likely that GameStop is due for a correction, but some stocks (like Tesla) have remained overvalued, according to conventional metrics, for extended periods. 

With the huge trading volume and increase in value, it’s easy to forget that GameStop remains a very small part of the market as a whole. GameStop’s trading is an extreme example, but standing alone––or even with the few other stocks that have been driven up during this time––it is not enough to show that the theories underlying market operation have failed.

Do we need new regulations?

A viral story like this may catch attention, but newsworthy headlines themselves do not justify new regulations. Easy access to the markets for retail investors is a good thing. It allows those traditionally left out, like the young or those with modest savings, to find opportunities to grow their wealth. While the GameStop trading is not what anyone would suggest as a prudent path to building long-term wealth, the expanded market access opportunities that helped fuel this rally are exactly those that we should be excited to support for retail investors.

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The Justice Department has rolled back a Trump-era memo that directed federal prosecutors to seek the harshest charges and sentences available to them.

In a memorandum released today, reported by HuffPost, acting Attorney General Monty Wilkinson rescinded a 2017 memo that ordered federal prosecutors to seek the toughest charges and maximum possible sentences on the books.

“The goal of this interim step is to ensure that decisions about charging, plea agreements, and advocacy at sentencing are based on the merits of each case and reflect an individualized assessment of relevant facts while longer-term policy is formulated,” Wilkinson wrote in the memo.

In 2013, former Attorney General Eric Holder ordered federal prosecutors to avoid charging certain low-level offenders with drug charges that triggered long mandatory sentences. The directive was an attempt to mitigate some of the notoriously harsh drug sentences that the federal guidelines and sentencing laws created.

In 2017, however, former Attorney General Jeff Sessions, a staunch defender of mandatory minimum sentences, rescinded Holder’s memo, giving prosecutors the green light once again to hammer drug offenders. Prosecutors who wished to depart from this guidance were required to get a supervisor’s approval.

“We are returning to the enforcement of the laws as passed by Congress, plain and simple,” Sessions said in a speech at the time. “If you are a drug trafficker, we will not look the other way, we will not be willfully blind to your misconduct.”

Sessions blamed Holder’s 2013 “smart on crime” initiative for a national rise in crime in 2015 and 2016. This claim was absurd on its face; Holder’s memo may have led to shorter sentences for only around 500 federal drug offenders each year.

“The Acting Attorney General’s interim guidance replaces a directive that made it more difficult for prosecutors to exercise their traditional discretion and to pursue justice on a case-by-case basis,” a Justice Department spokesperson said in a statement to Reason. “The interim guidance returns to the well-established approach of emphasizing that prosecutorial decisions should be made after a careful consideration of the particular facts and circumstances of individual criminal cases.”

The Biden administration has already started rolling back other Trump-era criminal justice policies. Earlier this week, President Joe Biden signed an executive order directing the Justice Department not to renew any contracts with private prisons. 

Other Trump-era Justice Department policies could also be on the chopping block. For example, Sessions also rolled back Obama-era Justice Department guidance on civil asset forfeiture that restricted when federal authorities could “adopt” local cases. Such adoptions are one of the primary ways state and local police get around stricter state laws on civil asset forfeiture, which allows police to seize property suspected of being connected to criminal activity even when the owner is not charged with a crime.

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Please enjoy the latest edition of Short Circuit, a weekly feature from the Institute for Justice.

New on the Bound By Oath podcast: the origins of Section 1983—originally known as Section 1 of the Ku Klux Klan Act of 1871.

New on the Short Circuit podcast: Rudy Giuliani is in hot water. And we talk about the undertalked about Reception Clause.

• In which the D.C. Circuit determines that the Army Corps of Engineers acted unlawfully in granting an easement to the Dakota Access Pipeline underneath Lake Oahe but that we shouldn’t be too hasty in doing anything about that unlawfulness.
• The U.S. can prosecute crimes committed on seagoing vessels that sail under the American flag, but what about “stateless” vessels that fly no flag at all? It can prosecute crimes there too, says the First Circuit, which is bad news for this defendant, his stateless boat, and his honkload of stateless cocaine.
• Some legal commentators would have you believe that it’s never RICO, but this First Circuit opinion demonstrates that if the prosecution introduces copious evidence of your organization’s decade-long work as a “mega-gang,” then it is probably RICO.
• In criminal statutes, does the word “willfully” mean “on purpose” or “with bad intent”? Third Circuit: Yes.
• Norfolk, Va. police arrest two men after a search of their car uncovers 300+ grams of fentanyl, four cell phones, a loaded gun, and $1,800 in cash. Though the men admit to owning the other items, neither claim ownership of the fentanyl. Fourth Circuit: The men clearly knew each other and were acting suspiciously, so it was reasonable for the cops to assume that they were engaged in a common enterprise and the fentanyl belonged to both.
• Citizen of El Salvador sought to avoid deportation on the ground he faces persecution as a former member of the MS-13 gang. The Board of Immigration Appeals denied relief, reasoning that the social group of “former Salvadoran MS-13 members” is too amorphous to warrant such relief. Fourth Circuit: Even assuming that decision is entitled to Chevron deference (a question we need not decide), the Board’s decision is unreasonable and cannot stand. The group is hardly amorphous, as it’s limited to former gang members. Dissent: Chevron.
• Woman visiting an inmate is strip searched, forced to remove her tampon for inspection, and made to “squat and cough.” Fourth Amendment violation? Fourth Circuit: Qualified immunity. The guards had reasonable suspicion to believe that she was attempting to pass the inmate contraband given rumors that the inmate was smuggling drugs and that a security guard said he saw the woman unbutton her waistband an hour into her visit. Dissent: This was significantly more intrusive than a standard strip search—should’ve gone to a jury.
• Is using someone else’s Social Security number a crime involving moral turpitude? Fifth Circuit (further entrenching a circuit split): Sure is. Dishonesty is an essential element of the crime, and it is thus turpitudinous.
• A Houston peroxide manufacturer discovered that its hurricane preparedness plan was inadequate when Harvey pummeled Texas and the facility’s materials blew up. Neighbors sue, and the trial court gives the okay for a class action. Fifth Circuit: Not so fast. When expert opinions are used to certify a class, the court must first ensure that those opinions would be admissible at trial under Daubert.
• Tennessee couple seeks bankruptcy protection, claiming less than $6,000 in assets. Zoinks! They actually control millions through a complex web of family trusts and shell companies. And the couple’s largest creditor is having a bad time at the Sixth Circuit. One decision says the creditor can’t pierce the corporate veil in reverse (i.e., get assets from some of those entities to satisfy the couple’s debts). And another won’t allow the creditor to pursue a malpractice claim against the couple’s bankruptcy attorneys.
• Back in November, a panel of the Sixth Circuit said that a district court could not deny a COVID-related request for compassionate release with a “barebones” form order. But that panel, says a different panel of the Sixth Circuit, was wrong, and one-sentence orders denying compassionate release are totally cool. (In dissent, Judge Moore, who wrote the initial panel opinion, suggests they got things right the first time.)
• Redacted opinions aren’t too common, but here’s one from the Sixth Circuit about a sentence reduction for an inmate who assisted police after hearing another inmate say, “[I]f you ever want to get rid of a body, hogs is the way to go.”
• A home healthcare agency declines to pay nurses for the overtime they worked because it “couldn’t make money” if it did. She sues, wins with a settlement. The district court orders attorneys’ fees, but then reduces them to 35% of the total settlement amount because that’s what judges in that district “typically approve.” Sixth Circuit: That’s not a good reason. Grant the fees as requested, add some for this appeal, and please don’t appeal again.
• Sixth Circuit: There’s not a lot that will void the absolute immunity that prosecutors normally enjoy, but threatening to charge someone with double murder unless they falsely implicate someone else (who served 41 years before being released) will surely do it.
• This Ponzi scheme began—like so many others—when an investment manager decided to paper over a loss rather than fess up to his investors. He invented a fictional investment in an Australian hedge fund, and he used funds from new investors to pay the old. The scheme ran for over seven years before it finally came crashing down, at which point the district court sentenced the gentleman to over seven years in prison. Seventh Circuit: Affirmed.
• When an elected official blocks someone on Twitter, do they violate the First Amendment? Eighth Circuit: Not in this case; the Twitter account here was the elected official’s private account, started in her capacity as a political candidate, not as an elected official. Dissent: But the block occurred after she was elected and started using the account for government business. That violates the First Amendment.
• Pro tip from the Eighth Circuit: When seeking qualified immunity for allegedly firing a tear-gas canister at a TV news crew for no good reason, do not rely on a set of factual claims contradicted by the video shot by that very TV news crew.
• Is a private entity constrained by the First Amendment because it rents its space from the government? Still no, says this Ninth Circuit panel.
• Airman faces court martial for sexually assaulting four female airmen. The jury is instructed that if they determine he committed one of the crimes, they may consider that as evidence showing his propensity to having committed any of the other crimes. They convict. A year after his conviction becomes final, the Court of Appeals for the Armed Forces holds the instruction unconstitutional in a different case. Ninth Circuit: Alas, the decision doesn’t apply retroactively.
• Another week, another appellate decision involving churches and COVID-19 restrictions. This time, the Ninth Circuit gives a mixed ruling, enjoining some restrictions while upholding others, including a ban on “singing and chanting.”
• Officers shoot a participant in an illegal “sideshow”—an event where drivers perform donuts, burnouts, and other similar maneuvers—while the driver is moving at a speed of “up to five miles an hour.” It’s unclear if the victim knew the police (in an unmarked car with a yellow siren) were actually police, and the police claim they worried he was going to run them over. Ninth Circuit: No qualified immunity. It is clearly established that officers cannot shoot the driver of a slow-moving car when they could reasonably step out of the way instead.
• Kansas militiamen plot to bomb an apartment and mosque complex, acquiring 300 lbs of fertilizer and drafting a manifesto urging Americans to stop “the sellout of this country.” Unbeknownst to them, a militia member is an undercover informant. Convictions and lengthy sentences all around. Tenth Circuit: The defendants were eager to commit the crime and thus not entrapped, and their manifesto—addressed to the government and referencing policy—qualifies them for the terrorism sentence enhancement. (More in this longform piece.)

Are you looking to kick-start a career in public interest law? Are you motivated by working on cutting-edge constitutional cases, stopping government abuses, and championing individual rights? Good news, IJ is hiring for Law and Liberty Fellows to join in August/September 2022. This Fellowship is IJ’s preferred path for recent graduates or post-clerkship candidates with less than two years of experience. The Law and Liberty Fellowship is based at our headquarters in Arlington, VA. We are currently looking for Fellow to join us in August 2022. The program runs through August 2024. Upon completion, Fellows are considered for permanent employment. Visit the Careers section of our website, www.ij.org/jobs, to learn more and apply. Application is open through March 12.

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