SEC Will Struggle to Build Case After Massive GameStop Stock Rally:

The ongoing saga surrounding the price of public shares of the retail video game store GameStop has attracted the increased attention of federal regulators with the Securities and Exchange Commission.

“The Commission is closely monitoring and evaluating the extreme price volatility of certain stocks’ trading prices over the past several days,” the SEC said in a Friday statement which almost certainly referenced GameStop and other stocks buoyed by the Reddit message board r/WallStreetBets.

“[E]xtreme stock price volatility has the potential to expose investors to rapid and severe losses and undermine market confidence,” the statement reads. “As always, the Commission will work to protect investors, to maintain fair, orderly, and efficient markets, and to facilitate capital formation.”

The statement said the SEC was working to “identify and pursue potential wrongdoing” by “closely review[ing] actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities.”

“[W]e will act to protect retail investors when the facts demonstrate abusive or manipulative trading activity that is prohibited by the federal securities laws. Market participants should be careful to avoid such activity,” the SEC warned. “Likewise, issuers must ensure compliance with the federal securities laws for any contemplated offers or sales of their own securities.”

The SEC’s choice of words — including its reference to “manipulative” trading activity — suggests that many observers were correct about predictions that the SEC was likely mobilizing its regulatory efforts using market manipulation theories.

Duke Law School Prof. Gina-Gail S. Fletcher, who is described by her colleagues as an expert on market manipulation, spoke with Law&Crime at length about the possibility of regulatory success. She believes the SEC is likely fact-finding right now to see if anyone or any group of people broke the law. It’s hard to predict whether individual-specific litigation might be successful, she explained, without a clear record of exactly who said what — and when — in each Reddit board.  Plus, due to Reddit’s anonymity, regulators may have a difficult time identifying possible defendants even if they believe laws were broken.  (The New York Times has identified a former insurance financial educator, chartered financial analyst, and financial wellness educator named Keith Gill, 34, of New Hampshire and Massachusetts, as one of the major players.  The report identifies Gill as the Redditor known as “Roaring Kitty.”)

Even if potential defendants are identified, Fletcher said successful litigation against alleged individual market manipulators would be difficult for the SEC.  She cautioned that the average layperson’s definition of “manipulation” is not the same thing as “market manipulation” under federal securities law.  Put simply, a bunch of…