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Senate Committee to Meet on GameStop 'Meme Stock' Surge

A law professor says Congress and regulators 'should hold traders accountable for their words and actions, even in the absence of explicit fraud.'

The meteoric rise of GameStop  (GME) - Get GameStop Corporation Report demonstrates how technology and social media "have combined to push the limits of market regulations," a witness is scheduled to tell a Senate committee Tuesday.

The U.S. Senate Committee on Banking, Housing and Urban Affairs' hearing entitled "Who Wins on Wall Street? GameStop, Robinhood, and the State of Retail Investing” will feature the testimony of a number of legal and financial industry experts. 

The hearing, which is slated to begin at 10 a.m. ET, comes in response to the surge earlier this year of GameStop and other so-called "meme stocks" such as AMC Entertainment  (AMC) - Get AMC Entertainment Holdings Inc. Class A Report, Bed, Bath & Beyond  (BBBY) - Get Bed Bath & Beyond Inc. Report and Kohl's  (KSS) - Get Kohl's Corporation Report.

GameStop was climbing 15.5% to $224.55 in pre-market trading Tuesday. Shares surged Monday following reports that the video game retailer will ask  (CHWY) - Get Chewy Inc. Class A Report founder Ryan Cohen to lead its e-commerce strategy.

The GameStop incident "highlights the ways in which social media and technology have combined to push the limits of market regulations," according to the written testimony of Gina-Gail S. Fletcher, law professor at Duke University.

"Congress and regulators should hold traders accountable for their words and actions, even in the absence of explicit fraud," Fletcher said. 

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Fletcher also criticized the Securities & Exchange Commission's response to the meme stock surge, saying "arguably, the SEC’s failure to act created a vacuum of authority, which resulted in a haphazard and uneven response from market actors."

GameStop shares have rocketed more than 590% since January 12, when the company reached an agreement with Cohen's RC Ventures LLC to re-structure its board and focus on digital sales and not simply "remain a videogame retailer that overprioritizes its brick-and-mortar footprint and stumbles around the online ecosystem." 

"When fast-moving, high-risk speculators dominate, we have a classic recipe for market disruptions," Rachel Robasciotti, founder and CEO of Adasina Social Capital, said in her prepared remarks. "What we saw in January with GameStop and Robinhood is what we saw during the Great Recession with Wall Street churning out subprime, mortgage-backed securities."

The Robinhood financial app was heavily criticized for its decision to limit trading in highly-leveraged stocks.

"The events surrounding the changes in prices for GameStop and the questions about the Robinhood trading platform have so far not revealed the kind of problem that would justify new legal restrictions or regulations," according to the written testimony of Andrew Vollmer, senior affiliated scholar, Mercatus Center at George Mason University.

He added that new regulation "would be appropriate if data and evidence emerge to show a severe, sustained, recurring harm to investors that a law could prevent or reduce."

"We have not seen such a harm yet, but the more detailed investigations being undertaken could produce evidence of misconduct or reasons to reconsider the need for new regulation," Vollmer said.