Now that the GameStop stock surge has reached full peak, opponents of WallStreetBets – the Reddit board that championed the movement – have been denouncing it as a “pump and dump,” a criminal scam that could mean jail time for those who spearheaded it.
“Sorry family, but Game Stop fiasco was nothing more than a Pump and Dump scam from Reddit and WSB. Sadly lot of unknowingly trend followers will probably go broke from it. But hey, Reddit CEO made millions off of it,” said one Twitter user.
“They can claim its for a good cause but this was going to happen. It’s a pump and dump bubble that’s going to hurt everyday people, not just hedge funds. A lot of people bought in, and few had an exit strategy,” tweeted another.
While Jordan Belfort, the famed author of “The Wolf of Wall Street,” stopped short of calling the GameStop surge illegal, he referred to the phenomenon as a “modified pump and dump” during an interview with CNN.
So what is a pump and dump? According to CNBC, pump and dumps happen when “fraudsters boost the company’s stock price by sharing positive, but fake, information.”
“Scammers buy up the shares cheap before spreading the rumors that drive the stock price higher and higher and encourage other investors to get in on the supposed windfall,” the report continued. “When the stock hits a high point, the scammers dump their shares, leaving unsuspecting investors holding the bag.”
Despite the passionate pleas of the Reddit movement’s detractors, there is currently no evidence to show that WallStreetBets lied to potential investors about the viability of GameStop’s stock in order to bankrupt the hedge fund managers who put money on short-selling the stock. More from CNBC:
As of now, there’s no real concrete ruling that GameStop is a classic case of a pump and dump scam. With GameStop, many retail investors, especially those tuned into the WallStreetBets subreddit, say they bought up the company’s stock because they wanted to squeeze hedge funds that have been betting GameStop will fall apart.
Some traders have also seen Chewy CEO Ryan Cohen’s recent purchases of GameStop stock as a sign that the company could be ripe for investment. Cohen made several big stock purchases starting last year that added up to a 12.9% stake and eventually joined the board, leading to speculation that there could be a reorganization or modernization of the company in the near future.
Whether or not the WallStreetBets engaged in illegal activity, the GameStop surge has sent out a shockwave across the financial sector, leading to an estimated $5.5 billion loss for the short-sellers who bet against GME stock. The biggest loser: Melvin Capital.
“GameStop’s new crowd of bulls got their first taste of blood on Monday when The Wall Street Journal reported that Melvin Capital would receive a $2.75 billion investment from Citadel and Point72 Asset Management, expected to buoy the short-seller after its loss of nearly 30% through Friday,” reported Business Insider. “While the firm had bet against several other stocks, its GameStop short is believed to have driven the bulk of the losses.”
“More broadly, GameStop short-sellers have lost more than $5 billion in the year to date, according to data from the financial-analytics firm S3 Partners. Back-to-back rallies have pushed out older shorts, but demand to bet against the stock remains ‘extremely strong,’ Ihor Dusaniwsky of S3 said,” the report added.