How the GameStop Short Squeeze Escalates Compliance Risks

from ThinkAdvisor

February 05, 2021by Stephen Marsh

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The GameStop short squeeze story has been everywhere. And why not? It contains a classic David versus Goliath narrative, with a group of small retail investors getting the best of some of Wall Street’s most prominent players.

But as the dust begins to settle, a cautionary tale for financial services firms is starting to emerge, along with a clarion call for monitoring employee digital communications, personal trading and outside business activities more closely.

Flash mob with institutional roots

In 2019, Keith Gill, who went by the name Deep F—— Value on Reddit, began posting about GameStop, promoting his long position in the company. He touted GameStop on other social media platforms as well, including YouTube and Twitter, eventually persuading many others to join in, goosing the company’s valuation by more than 700% during a six-day stretch last month.

That allowed Gill to parlay his initial investment of $53,000 into stock and options worth about $48 million (though he’s absorbed huge losses recently). He frequently posted screenshots of his trading account at E-Trade during this time, which fueled GameStop’s rise even further.

The fallout for hedge funds that made huge bets against GameStop’s ailing business was enormous. Some of Wall Street’s biggest names — no doubt the target of Gill’s trading — lost billions after having to cover their positions.

Cue the investigators

Lawyers can question whether the actions of Gill and the Reddit crowd were legal. But what can’t be debated is that Gill was not an average retail investor.

In fact, he was an employee of a large financial services company for much of this time (he quit recently) and was a chartered financial analyst who had passed his FINRA Series 63, 65, 7 and 3 exams.

Visit ThinkAdvisor for the full article.

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Stephen Marsh
Smarsh Blog

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