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Image: Naked Brand Group

Robinhood has blocked its users from purchasing shares of GameStop after the video game retailer’s stock shot up by almost 700 percent over the past week, as “retail investors piled in to the stock, appearing to be urged on by bullish posts in popular online forum Reddit as opposed to any fundamental changes in the company’s finances or prospects,” Reuters reported on Thursday. The publication was referring to the WallStreetBets Reddit chat room, for instance, where retail investors acted in concert to push shares higher, and squeezed hedge funds that had been shorting the stocks in the process. 

Brokers like Robinhood – the Menlo Park-headquartered company that operates a free-trading app for casual traders – are not merely putting a halt to buying GameStop shares in response to what has been characterized as “wild trading activity,” many have also restricted trading on a number of other heavily shorted names, such as AMC, Bed Bath & Beyond, and Nokia. And still yet, in addition to block users from further buying securities in the movie theater chain, the home goods retailer, and the Finnish telecommunications and electronics company, among other companies, Robinhood has put a stop to trading of a fashion name: Naked Brand Group.  

Shares of Naked Brand Group – whose roster of brands includes Heidi Klum Intimates, Heidi Klum Accessories, Bendon, Lovable, Heidi Klum Swim, Naked, and Hickory, among others, as well as a license for the Frederick’s of Hollywood brand – “surged 63 percent in premarket trade, benefiting from the wave of short-selling targets getting retail interest,” MarketWatch reported on Thursday morning.

Financial site InvestorPlace revealed that as of Wednesday afternoon, the Australian retail group’s stock had “traded more than 960 million shares – a massive increase over the stock’s daily average trading volume of 150 million shares,” with it being “incredibly likely” that such gains have come connection with the WallStreetBets-related activity. Couple this with the fact that Naked Brand very recently revealed that it had “inked securities purchase agreements with certain institutional investors for the issuance and sale of 29,415,000 of its ordinary shares at a price of $1.70 per share, for aggregate gross proceeds of approximately $50 million.”

“The extreme speculative behavior among rookie investors is unnerving many on Wall Street,” CNBC reported on Thursday, with some asserting that “this buying frenzy could hurt overall market confidence and destabilize the conditions.” Against that background, calls for regulatory scrutiny are coming to light and fast on the basis of market manipulation.

“In the context of a securities transaction, a manipulative act is one that sends ‘a false pricing signal to the market’ and therefore, does not reflect the ‘natural interplay of supply and demand,” Arnold & Porter’s Sina Mansouri stated in a client note. “It is typically undertaken to create a false image that the security’s value is based on supply and demand, and thereby induces unwitting investors to buy the security.” Such activity is regulated under a number of statutes, but most notably, Section 9(a)(2) of the Securities and Exchange Act Exchange Act prohibits transactions in certain securities that create “actual or apparent active trading in such security, or raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such security by others.”

In the situation at hand, if the WallStreetBets traders and co. “are all egging each other on using a social-media platform, they are effectively engaged in a crowdsourced pump-and-dump scheme,” Daniel Hawke, a partner at Arnold & Porter Kaye Scholer LLP told the Wall Street Journal. And the fact that such stock surges are tied to thousands of messages posted on sites, such as Reddit, is no small matter, and in fact, “could make it easier for regulators to levy claims of manipulation,” the WSJ states, “which historically has been a difficult offense for regulators to prove.” 

But is market manipulation really at play? At least some are skeptical. Social Capital CEO and early Facebook executive Chamath Palihapitiya, who got in on the GameStop trading on Tuesday and closed out his position on Wednesday morning, defended the retail investors’ “rights to sway stocks like the pros,” and squeeze out short-selling hedge funds, according to CNBC. “Hedge funds try to push stocks around all the time,” Palihapitiya asserts. “To a normal person that doesn’t make any sense. But to a Wall Street mathematician, that’s the game that’s been played.” 

(“A short squeeze occurs when a stock jumps sharply higher, forcing traders who had bet that its price would fall,” i.e., trading who has been shorting it, “to buy it in order to forestall even greater losses,” according to Investopedia. Such short-sellers “borrow shares that they believe will drop in price in order to buy them after they fall. If they are right, they return the shares and pocket the difference between the price when they initiated the short and the actual sale price.” If they are wrong, as was the case here, they have to buy the stock “at a higher price and pay the difference between the price they set and its sale price.”)

Nonetheless, Jacob Frenkel, Securities Enforcement Practice chair for law firm Dickinson Wright, told Reuters that the U.S. Securities and Exchange Commission (“SEC”) is “likely to look at whether the messaging by investors holding the stock long-term and activists betting against it was manipulative.” At the same time, Marc Adesso, partner at Saul Ewing Arnstein & Lehr says that he “coukld see the SEC encouraging the NYSE to put in place rules that might smooth such swings as a result of retail investment activity.” 

The WSJ’s Dave Michaels and Alexander Osipovich say that the market activity and subsequent pushback may just serve to test the scope of the SEC’s market manipulation rules. 

As for Naked Brands, the market frenzy comes as the company has been the target of short sellers due to its risk of being delisted from the Nasdaq in connection with its failure to “maintain the $1 per share price to stay compliant,” per InvestorPlace. “However, it looks like that could change, as investors are pushing the stock up higher and closing in on the $1 price.”