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Texas Attorney General Launches Investigation Into Robinhood Over Gamestop Trading Debacle

Following the spar between hedge-fund short-sellers and retail investors over the shares of GameStop (GME) and other companies, Texas Attorney General Ken Paxton has launched an investigation into a number of companies that responded to the debacle by cutting off retail access to the stocks in question.

Most notably, Paxton sent Civil Investigative Demands (CIDs) to Discord, which banned a server that retail investors were using, and Robinhood, the trading app that popularized retail trading but which banned users from purchasing GME and a few other select stocks.

The 13 CIDs issued by Paxton were also sent to Interactive Brokers, TD Ameritrade, TD Bank, E-Trade, WeBull Financial, Public Holdings, M1 Holdings, Citadel Financial, and Apex Clearing Corporation.

In a press release, the Office of the Attorney General (OAG) said that the CIDs request copies of public statements and internal documents, as well as “all terms of service, policies related to content control and moderation, and communications between platforms and moderators of chat servers, including decisions to limit, control, or prevent access to the Discord r/WallStreetBets server.”

“Wall Street corporations cannot limit public access to the free market, nor should they censor discussion surrounding it, particularly for their own benefit,” said Paxton.

Thanks in large part to Robinhood, the amount of retail traders participating in the market — that is, average individuals and not financial institutions — has increased substantially in the past decade.

Retail investors of a popular forum on Reddit, WallStreetBets, took notice that GME was being heavily shorted by a number of hedge-funds.

In short — pun intended — many on Wall Street were betting that the price of GME would decrease.

By essentially borrowing shares of the stock and selling it at the current price, the hedge-funds expected the price to decline, at which point they could buy back the stock at the lower price, return it, and pocket the profit.

Unlike traditional investing where one buys a stock and can only lose as much money as it is purchased with, shorting a stock opens up traders to the risk of losing a theoretically infinite amount of money since a stock price can rise indefinitely but the stocks must be bought back and returned.

The group of retail investors on WallStreetBets carried out a “short squeeze” by buying up shares of GME and refusing to sell, forcing the stock price to skyrocket.

As GME’s price shot up, it was fueled further with public attention, especially after a single tweet from Austin resident and Tesla (TSLA) owner Elon Musk that linked to the subreddit in question.

Investors on Wall Street have consistently argued, especially in the past year, that the stock price of TSLA is overvalued and have attempted to short it, only to see the price of the electric car manufacturer reach record highs.

While the price of GME shot from below $18 at the beginning of January to a high of over $400 on Thursday, retail investors began buying up shares of other widely-shorted companies like AMC Theatres (AMC).

In response to the surge of GME buyers, many retail investing platforms like Robinhood cut access to the purchase of GME, AMC, and other stocks, only allowing users to sell what they own.

“This apparent coordination between hedge funds, trading platforms, and web servers to shut down threats to their market dominance is shockingly unprecedented and wrong. It stinks of corruption,” said Paxton.

“I’m hopeful that these companies will step up and cooperate with these CIDs in order to clear any confusion over why stock purchases were forcibly closed and why even conversation around these stocks was silenced.”

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