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In six days, the GameStop share went from USD 43.03 to USD 347.51. How? Through a short squeeze orchestrated by internet users. Under Belgian financial criminal law, can this be treated as market manipulation or market abuse?
An unexpected explosion in the shares of a struggling company
GameStop sells video games in stores, a struggling model as purchases move online. On 21 January 2021 its share stood at USD 43.03; six days later it had risen over 700% to USD 347.51. This was not linked to the company’s performance but to a short squeeze orchestrated by Reddit users on r/WallStreetBets.
The short squeeze mechanism in brief
A short is a derivative by which speculators bet on a falling share price: they borrow shares from A and immediately sell them to B, hoping to buy them back cheaper later, return them to A and pocket the difference. This carries risks: if the price rises, the speculators lose; as borrowers, they pay interest that can exceed 100% of the borrowed shares’ value; and there may be more shorts than shares. In the GameStop case, nearly 71 million shorts were issued against only 69.75 million shares, of which 20-30 million were in circulation. The r/WallStreetBets community chose that moment to buy the shares. The price rose; hedge funds, still paying interest, had to buy back shares quickly to repay their loans and limit losses. Supply was cornered, demand grew, the price soared. That is the short squeeze.
Under Belgian financial criminal law, could the internet users be pursued for market manipulation?
Financial criminal law protects equality between investors as to market information, and market integrity and transparency. Abuse in short selling is not new. Market manipulation is punished under Belgian financial criminal law, notably the Act of 2 August 2002, and in light of Directive 2014/57/EU on criminal sanctions for market abuse (MAD).
Article 39 of the Act of 2 August 2002 criminalises those who fraudulently engage in pump and dump and coordinate to push an instrument’s price to an artificially high level before selling en masse. More precisely, market abuse is punished by one month to four years’ imprisonment and a fine of EUR 300 to EUR 10,000 for those who intentionally: carry out a transaction, place an order or engage in other conduct that fixes, or is likely to fix, the price of one or more financial instruments at an abnormal or artificial level (unless legitimate and consistent with accepted market practice); use fictitious devices or other forms of deception; or disseminate information, including rumours, giving or likely to give false or misleading signals as to supply, demand or price. The sanction can be severe, and the offender may also be ordered to pay up to three times the patrimonial advantage derived from the offence. The offence requires intent: the financial prosecutor must prove that the accused intended to adopt the conduct targeted by the law.
This article is a translation. Only the French version is authoritative. It is provided for information purposes and does not constitute legal advice.
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