I wrote earlier about the difficulty of proving that short swing profits and losses in the stock of GameStop (NYSE:GME) violated the law. Columbia Law School Professor John Coffee recently came to the same conclusion in an interview with FOX Business.
One of the primary laws on point is Section 9 of the 1934 Securities and Exchange Act, which provides in part:
"It shall be unlawful for any person, directly or indirectly, by the use of the mails or any means or instrumentality of interstate commerce, or of any facility of any national securities exchange . . . to effect, alone or with 1 or more other persons, a series of transactions in any security registered on a national securities exchange . . . raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such security by others." (emphasis added)
As Professor Coffee noted, regulators will be hard pressed to prove that an individual who bought shares of GME did so "for the purpose of inducing [trades] by others" and not for the perfectly legal purpose of hoping to make a profit. Thousands of investors bought and sold shares of GME in the past few weeks and, if questioned, virtually all of them will say they did so to make money.
To prove manipulation, a regulator will need to prove intent, perhaps by finding evidence that a trader distributed thousands of emails directing others to make similar trades, or by posting false information online that might be expected to move the stock in one direction or another.
Regulators and legislators might take umbrage at dramatic swings in stock prices and might reasonably worry about the unintended consequences of those swings, but when non-insiders are trading securities it will be difficult to prove the existence of a crime without tangible evidence of manipulative intent.