Texas Launches Probe Into Online Brokers’ Halt of GameStop Trading

Texas’ attorney general accuses hedge funds and trading platforms of coordinating a shutdown that he says “stinks of corruption” during an epic rally of GameStop shares.

A GameStop storefront is seen before opening Thursday morning in Dallas. (AP Photo/LM Otero)

AUSTIN, Texas (CN) — Regulators stepped into the frenzied rally of shares in video game retailer GameStop on Friday, with Texas launching a civil investigation into stock brokerage app Robinhood and hedge fund Citadel over a halt in the buying of shares while the U.S. Securities and Exchange Commission hinted at launching its own investigation.

Republican Texas Attorney General Ken Paxton issued 13 civil investigative demands on Robinhood, Citadel, Interactive Brokers, TD Ameritrade, E-Trade and WeBull Financial, among others. Paxton is seeking information on the halt and the enforcement of higher margin requirements by the online brokerages.

“Following the GameStop stock surge, the companies receiving CIDs took extraordinary and unusual steps to limit access to the market, including forcibly closing off access to American citizens attempting to make trades and investments,” Paxton said in a statement.

The epic rally in shares of Grapevine, Texas-based GameStop began last year on the popular r/WallStreetBets community on Reddit. Community members regularly discuss their riskier stock and options trades while commiserating about their losing trades and posting memes about financial markets. Individual retail investors on r/WallStreetBets successfully banded together over the course of several months to each buy and hold shares of GameStop against hedge funds who are heavily shorting the shares in hopes they go down in value.

Shares have traded as low as $2.57 cents each in the past year, while shares closed Friday at an eye-popping $325. This has resulted in billions of dollars in losses for hedge funds that have scrambled to close their short positions.

The r/WallStreetBets members have also successfully caused shares of other heavily shorted stocks to rally this week, including former smartphone manufacturer Blackberry and movie theatre operator AMC Theatres. Their shares have been subject to the same trading restrictions at several online brokers this week as well.

Members of r/WallStreetBets openly revolted with anger against Robinhood after it restricted the ability to buy more shares in the “meme” stocks Thursday morning. Several posted about organizing class action lawsuits against the commission-free online brokerage. Several lawsuits were quickly filed from coast to coast. At least 19 such lawsuits have been filed as of Friday afternoon, according to the Courthouse News Service database.

Texas further issued a civil investigative demand on voice and text communication app operator Discord, which had briefly shut down popular r/WallStreetBets Discord servers that community members talked on off of Reddit.

“Wall Street corporations cannot limit public access to the free market, nor should they censor discussion surrounding it, particularly for their own benefit,” Paxton added. “This apparent coordination between hedge funds, trading platforms, and web servers to shut down threats to their market dominance is shockingly unprecedented and wrong. It stinks of corruption.”

Also Friday, the SEC said it is “closely monitoring and evaluating the extreme price volatility” of the r/WallStreetBets stocks this week. The four-member commission warned the volatility could potentially “expose investors to rapid and severe losses” and impair confidence in the financial markets.

“The Commission will closely review actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities,” the SEC said in a statement. “In addition, we will act to protect retail investors when the facts demonstrate abusive or manipulative trading activity that is prohibited by the federal securities laws.”

The SEC did not specifically name Robinhood, TD Ameritrade or any other online broker in the statement.

Friday’s announcements come after a full week of calls to investigate the trading restrictions by members of Congress, including Republican Senator Ted Cruz and Democratic Congresswoman Alexandria Ocasio-Cortez.

Paxton himself is under FBI investigation after his former senior staff reported him for alleged corruption and bribery regarding the hiring of special counsel to aid Republican campaign donor Nate Paul.

The attorney general is also awaiting trial on state felony charges of securities fraud and failure to register with the Texas State Securities Board from his time in the Texas House of Representatives. He faces up to 99 years in state prison if convicted.

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