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Does Reddit’s Attack on Wall Street Create Civil Liability?

By Zach Hyman, Millennial Law

In January 2021, users of the popular internet forum, Reddit, banded together to purchase stock in GameStop, with the intent to deprive private equity funds of their investments in shorts with respect to the company, by inflating the value of its stock. These users could have purchased products from GameStop which would have created the same result and would have provided GameStop with much needed capital to continue to operate. Instead, they chose to purchase an ownership interest in the Company, without contributing any capital, leaving GameStop in a position where it has too high of a valuation to raise capital, and received no real benefit as a result of these trades.

Shares and stock are evidence of ownership of a corporation, and normally the value of shares is based on the value of the company which issued them. While most corporations are privately owned, which means that their shares can only be purchased if they are issued by the Company or purchased from a shareholder directly, the stock market has created an open forum for the purchase and sale of ownership interests in companies. Regardless of where or how shares can be purchased, the value of them is based on what an anticipated dividend, i.e. the distribution of profits to shareholders after expenses have been paid, will be, and when one will be issued. Owning shares also gives a person the right to vote on certain company-related issues, inspect the books and records of a company, and creates obligations among shareholders. These obligations, often referred to as fiduciary duties, include the obligation to act in the best interests of a corporation, and an obligation to refrain from harming the interests of other groups of shareholders, and are generally owed to a corporation, and not the shareholders in general.

In the context of a small closely-held corporation, or if an investor owns a big piece of a company, the purchase of stock for the purpose of depriving people who invested in a short of the value of their funds, without regard to the effect that such a transaction would have on the company, would give rise to a claim against the investor. However, the acts that occurred with respect to the GameStop transaction creates more questions about the extent to which people can be held accountable for conduct that is intended to harm a company. It also creates questions of when and whether a person is required to act in the best interest of a company or other investors, as there is an argument that the ownership of a small part of a company does not create an obligation to act in its best interest, because the shareholder owning a miniscule part of a company lacks the ability to affect its policies. After all, the Reddit users could have purchased products from GameStop, which would have achieved the same result while giving GameStop additional capital.

Another avenue for potential liability may be through the assertion of a civil conspiracy claim. Under Florida law, where people conspire together to harm another, and can achieve that result thanks to the number of people involved, all of them can be held liable for such conduct. Since there is clearly an agreement, as evidenced in the Reddit posts, to purchase stock for the purpose of depriving other investors of their interest, this may give rise to a potential claim.

Regardless of the legal questions and issues that have been created by the recent trends in stock trading, there is no question that the proliferation of electronic communication has changed the way that our institutions have operated, and creates the biggest question of them all: Will the law be able to keep up with the changes in how we do business in the future?

This article is part one in a series. The full series can be found here.

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