Can a GameStop Happen in Australia?

Events in the US

Earlier this month, it was hard to miss the dramatic surge in the stock price of a NYSE listed entity called GameStop.

The explosion in the price for GameStop’s shares was particularly surprising as GameStop was reporting heavy operating losses and reductions in net sales with little prospect of improvement.

The price jump, against all financial reason, was partially attributed to users of the online message board/forum ‘Reddit’ which, was rumoured to be a plot to take on a number of hedge funds who had shorted the embattled retailer’s stocks – a ‘short squeeze’. A concert of posts on the Reddit message boards encouraged the acquisition of GameStop’s stocks both as a shrewd investment and a way to thwart hedge funds. Retail investors quickly acquired GameStop stocks and options (the acquisition of the latter forced a further rise GameStop’s stock price as sellers of call options were forced to buy stocks to cover their position as the stock price rose). The Reddit activity was championed by one particular user whose potential profits were in the millions, and later by Elon Musk, who tweeted in support of the stock.

Buoyed by zero commission trading apps, a plethora of (mostly amateur) investors managed to increase the price of GameStop’s stocks in 2021 from $US17.25 to $US347.51.

Predictably, the trading frenzy didn’t last and the GameStop stock price fell back to a more realistic price almost back where it started.

Some commentators asserted that the conduct on the Reddit forums amounted to market manipulation and is being investigated by the SEC and US Justice Department.

The probability of a similar trading event occurring is less likely in Australia. A lack of brokerage free apps, a smaller exchange traded options market and a regulator with the capacity to review content posted on the internet relating to ASX traded shares have been cited as why a similar trading event occurring in Australia is improbable. However, if a similar trading event did occur in Australia, would the actions of individual Reddit users breach Australia’s laws against market manipulation?

Could GameStop happen legally in Australia?

ASX has the power to exercise controls to regulate extreme movements in the price of securities. Trades in the “extreme cancellation range” can be cancelled and the securities (and options) subjected to a regulatory halt. ASX can also call on entities if it believes that there is or is likely to be a false market in the entity’s securities and require the entity to provide information to correct or prevent a false market. If the entity fails to comply it can have its securities suspended.

Whilst the ASX has these powers, and trading may be suspended, we are looking at the legality of the activities giving rise to the GameStop stock movements and whether the participants are exposed legally.

Market Manipulation in Australia

The market manipulation regime in Australia is governed primarily by section 1041A of the Corporations Act 2001 (Cth) (Corporations Act). Section 1041A provides that a person cannot take part in or carry out any transactions likely to have the effect of:

  • creating an artificial price for trading in securities; or
  • maintaining at a level that is artificial a price for trading in the securities

To contravene section 1041A the conduct would need to do more than cause or be likely to cause, a change in the price of a financial product, even if it is extreme. It would need to involve both a transaction that was likely to have the effect of creating or maintaining an artificial price in the securities.

The Federal Court has ruled an ‘artificial price’ connotes a price created not for the purpose of implementing or consummating a transaction between genuine parties wishing to buy and sell securities, but rather for a purpose unrelated to achieving the outcome of the interplay of genuine market forces of supply and demand.

The Federal Court also affirmed that proof of a sole or dominant purpose of setting or maintaining a price is one way of demonstrating that the impugned transaction was at least likely to have the effect of setting or maintaining an artificial price.

The offending behaviour requires the taking part in one or more transactions. In GameStop it appeared that no one transaction was large enough to create or maintain an artificial price. The price moved due to many trades by many people. Many investors were presumably subscribers to Reddit who did not otherwise know each other. This makes the likelihood of a breach of the market manipulation laws in Australia by any individual investor very unlikely. The situation would have been different if GameStop had been caused by large transaction or transactions involving a single major investor.

Misleading and deceptive

If the behaviour does not fall within the market manipulation laws, there would still be a risk of illegality if a posting on Reddit contained a misleading or deceptive statement or involved misleading or deceptive conduct. To be a breach of relevant laws, the misleading or deceptive Reddit post would also need to be likely to induce a person to acquire or dispose of financial products, or have an effect on the price of the securities. Further, (to attract criminal sanctions) it would need to be shown that the Reddit poster either did not care whether the information in the Reddit post was true or false, or that the poster knew or ought to have known that the information was false or miselading.

Section 1041E of the Cororations Act provides that (our highlighting):

“A person must not (whether in this jurisdiction or elsewhere) make a statement, or disseminate information, if:

(a) the statement or information is false in a material particular or is materially misleading; and

(b) the statement or information is likely:

(i) to induce persons in this jurisdiction to apply for financial products; or

(ii) to induce persons in this jurisdiction to dispose of or acquire financial products; or

(iii) to have the effect of increasing, reducing, maintaining or stabilising the price for trading in financial products on a financial market operated in this jurisdiction; and

(c) when the person makes the statement, or disseminates the information:

(i) the person does not care whether the statement or information is true or false; or

(ii) the person knows, or ought reasonably to have known, that the statement or information is false in a material particular or is materially misleading.

Section 1041H(1) provides:

A person must not, in this jurisdiction, engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive.

To be in breach of section 1041H(1), it is not necessary to prove that defendant intended to mislead or deceive.

A person who suffers loss or damage by the conduct of another person who was engaged in a contravention of these sections will have a civil remedy to recover the amount of the loss or damage against that person.

GameStop in Australia?

GameStop may have been hard to stop in Australia unless the ASX intervened, but the process could be illegal if care is not exercised by the participants.

Market manipulation – unlikely to be illegal

It is possible – but unlikely – that if a GameStop type event occurred in Australia, that a court could find that illegal market manipulation has occurred.

To be guilty of market manipulation, section 1041A of the Corporations Act requires a ‘transaction or transactions’ which were likely to create or maintain an artificial price. As we mentioned, GameStop was a series of small transactions by presumably unrelated investors none of which, on their own, created or maintained artificial prices.

While traders may have ostensibly represented that they were participating in a concerted campaign against large hedge funds by purchasing GameStop securities in order to inflate the price, the purpose of each individual transaction (acquisition of securities) may have been different. It is unlikely that the dominant purpose of each small retail trader parting with their money and entering into a transaction was a reason other than eventually making a profit from the sale of their GameStop stock to other retail investors.

Misleading and deceptive – care required

Posting on a chat room an exhortation to hold or sell is not of itself illegal but it would be a problem for that poster if that person used false, misleading or deceptive information or engaged in conduct which is misleading or deceptive.

People are occasionally known to get carried away in chatroom threads, often with little regard for the facts or the truth. If the GameStop type of activity was to occur in Australia, participants in the process would need to be very careful about what they post when trying to induce retail investors to buy or hold securities. If they get their facts wrong or people are misled or deceived they could be in breach of the Corporations Act which could attract criminal sanction (if section 1041E is breached) and exposure to significant civil claims for losses incurred by affected investors.

Many people who bought GameStop stock lost a lot of money. In aggregate, it was millions. Remember, to breach section 1041H(1) there is no need to establish any intention. So, if you get your facts wrong, you’re likely to be in breach and exposed to a claim.

In Australia if one was to find evidence of misleading or deceptive information or conduct, we may be looking at the seeds of a nasty civil class action.


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