SEC Likely to Probe GameStop Trading Surge, but What Will It Find?

Jim Lundy, partner in Faegre Drinker's Chicago office, said his law firm has "relayed information to several points of contact at the SEC" in the Washington headquarters and in a regional office "anonymously on behalf of clients."

Said Lundy, who was a senior trial counsel and a branch chief for nine years in the SEC's enforcement division: "My understanding is that certain other law firms around the country have done the same. The responses that we have received from the SEC in response to our submissions have been brief, non-committal, and indicated no direction one way or the other in terms of what, if any, next steps that they may take. That's fairly typical."

Still, Lundy explained that "due to the nature of the issues and multiple law firms who practice in this space submitting concerns on behalf of clients anonymously around the country … the enforcement staff should be amenable to investigating."

What would the SEC be looking for?

"False, material statements by anyone: the small retail traders, the short sellers, and obviously the company," Morgan relayed. "I haven't looked, but there are probably many inaccuracies being posted or circulated among the small retail traders, but establishing the materiality of any such false statements would be difficult to prove, particularly in light of the price volatility.

"I haven't seen any reports of false statements by the company or by short sellers, but if any such false statements existed, the SEC would obviously take a keen interest," he said.

The SEC "might look for evidence of manipulation, but proving that, for example, any particular small retail trader (or even a bunch them in concert) had an intent to create misleading price or volume (and actually succeeded!), will be very tough to establish," Morgan added.

"Short of identifying false, material statements, the SEC is unlikely to bring an enforcement action in response to the recent market activity," according to the attorney.