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Photo of Wall Street during the Stock Market Crash of 1929, Reddit logo, GameStop logo, SEC seal, $0.00, Groundhog Day movie poster.

Stock Market Crash Deja Vu: Reddit Violates Securities Exchange Act

By Duane Thresher, Ph.D.          February 2, 2021

This article is in honor of Groundhog Day , specifically the movie, where the same day, Groundhog Day, February 2nd, kept happening over and over again. In this case though the repeating day was Black Thursday, October 24th, the start of the Stock Market Crash of 1929. And in this case the villain was Reddit, whose modus operandi was illegal price manipulation of GameStop stock, intentionally leading to a short squeeze on important short sellers like hedge funds, which could have resulted in another stock market crash and ensuing depression, particularly during the Coronavirus Scare. In this case, there are no heroes, except perhaps someone who can clearly explain all this, as I do here, since the mainstream media clearly can't.

The root of stock market crashes is borrowing to get stock.

In the Stock Market Crash of 1929, stock prices had been dramatically rising throughout the 1920's — "The Roaring Twenties" and its bull market — since the end of World War I (like after most wars). A lot of this stock price rise was fueled by businesses feeding lies to the media and investors in order to increase their stock price, which is seen as the value of a business.

People could make a lot of money in such a stock market, but had to start with some to do so; the more they had, the more they could make. The lower classes wanted to get rich and the rich wanted to get richer and they all proceeded to borrow money from banks to immediately buy stocks. When the stocks went up in price as it was foolishly assumed they always would — a typical story from Extraordinary Popular Delusions and the Madness of Crowds — they intended to sell the stocks, now worth more than what they paid for them, repay the loans, and pocket the hopefully-large difference. The banks and even President Calvin Coolidge (1923 - 1929) encouraged this speculation, even though some smart people warned it would lead to a severe depression.

But when stock prices invariably started to fall a little, some people panicked and immediately sold their stock to limit their losses. This drove stock prices down further, which caused more people to panic and sell their stock. This feedback loop continued until soon stock prices fell so far there was no way all these people could repay their loans to the banks.

Commercial banks (versus investment banks; see ahead) make money by having people deposit their savings in them at some low interest rate and then loaning out this money at a higher interest rate; the definitely-large difference between these interest rates is the banks' profit. Banks thus only have a relatively small amount of money on hand. If most of a bank's loans go bad and can't be repaid, the bank not only can't make money but it can't even give people their savings back, i.e. the bank fails.

Just after the Stock Market Crash of 1929, when some banks failed, people, fearing for their savings, started to take their savings out of other banks — like the "bank run" in the movie It's A Wonderful Life — which caused those banks to fail. This feedback loop continued until soon there were so few banks affordably lending money to businesses that many existing businesses failed, none were started, and the economy went into a depression, The Depression. A depression is notoriously hard to reverse, usually requiring a war, after which, deja vu, there is bull market, starting the cycle over again.

To correct the above abuses that led to the Stock Market Crash of 1929, Congress passed the Securities Exchange Act of 1934 (MCMXXXIV; see SEC seal), which also created the Securities and Exchange Commission (SEC) to enforce these laws (Title 15 of U.S. Code, §§ 78a et seq.). Among other laws, this prohibits lying about the value of stocks to investors and manipulating their market prices. Congress also passed the Glass-Steagall Act of 1933, which created the Federal Deposit Insurance Corporation (FDIC) to insure commercial bank deposits (and assure bank depositors), and separated commercial banks, which are regulated, from investment banks, which deal in stocks and are relatively unregulated. (Under intense lobbying by the banking industry, Congress repealed the Glass-Steagall Act in 1999, particularly the bank separation, which led directly to The Banking Meltdown of 2008.)

Another way to borrow to get stock is "short selling", which has been a problem in stock markets since its invention shortly after stock markets, but is still legal, even though its principle — to make money from falling stock prices, and thus encourage that — is in opposition to the principle of stock markets — to use a bad thing, gambling, for good, by raising capital for businesses so they can grow, increasing their stock price, and thus the economy can grow. Short sellers are thus generally considered disreputable and hated.

In short selling, a stock is directly borrowed and immediately sold. When the stock falls in price, as it is assumed it will, the borrower can pay it back with less than he sold it for and pocket the hopefully-large difference.

Unlike buying stock and trying to make money from rising stock prices, i.e. "long selling", where one can only lose what one spent buying the stock, a short seller can lose an unlimited amount, depending only on how high the stock price rises when it should have fallen. Short sellers can thus very easily be ruined. Such a stock price rise is called a "short squeeze". And remember from above that stock prices can be manipulated, although now illegally so.

"Hedge funds" are high-risk investment companies named from the expression "hedging your bet", meaning betting on both sides. Hedge funds do a lot of short selling. Because of the high risk, the SEC usually restricts marketing of hedge funds only to large institutional investors (corporations, government, universities, etc., particularly for pensions) and rich individuals. This is stupid because these investors have a huge influence on the stock market — they are capable of causing crashes by selling off large amounts of stock — and thus the economy — they are capable of causing ensuing depressions.

Institutional investors and rich individuals often invest in hedge funds because they are misled to believe hedge fund managers are financial geniuses. For example, Myron Scholes and Robert Merton won the so-called Nobel Prize for Economics (there is no real Nobel Prize for Economics) in 1997 for valuing financial assets in the stock market. Scholes and Merton became partners in a hedge fund, Long-Term Capital Management, that in 1998 lost 3 billion dollars and had to be bailed out by the Federal Government because to let the hedge fund's investors be hurt could have caused a stock market crash and ensuing depression.

In January 2021, there was a short squeeze involving the stocks of video game retailer GameStop and other brick-and-mortar businesses hurt by the Coronavirus Scare (primarily by the unconstitutional government orders regarding it; see Dr. Duane Thresher v. Governor of Virginia Ralph Northam). This short squeeze disastrously hurt some hedge funds. These hedge funds had reasonably predicted the prices of these stocks would continue to fall as the Coronavirus Scare wore on, so they short sold them, trying to make money for their investors. Such disastrous harm to hedge funds could have caused a stock market crash and ensuing depression, particularly during the Coronavirus Scare.

Today, the media is far worse than could ever have even been imagined in the 1920's, when as described the media was complicit in spreading the lies that manipulated stock prices. The Internet (actually, the Web) has greatly magnified the irresponsibility that has always been inherent in the media. At the same time, both formal deregulation and informal deregulation — the government allowing laws to be broken — has been occurring.

Reddit is a social media website whose subreddit (group of commenters) WallStreetBets engineered/coordinated the short squeeze of those short selling GameStop stock — to intentionally harm those hated short sellers — by illegally manipulating the stock price, disastrously increasing it by 3000%. These Reddit members, often described as fanatical, lied about the value of GameStop stock by saying it was dramatically undervalued and fanatically encouraged people to buy it, which increased the stock price, in turn increasing the stock price more as the stock price rise itself encouraged others to buy, hoping to get in on the run. (Additionally, the short sellers were desperately buying the stock trying to cover their bets.) This feedback loop ended only when the original stock price had increased by a factor of 30.

Such stock price manipulation by Reddit is a violation of Sec. 9(a)(2) of the Securities Exchange Act of 1934, which is Title 15 of U.S. Code, § 78i(a)(2):
(a) Transactions relating to purchase or sale of security
It shall be unlawful for any person, directly or indirectly, by the use of the mails or any means or instrumentality of interstate commerce, or of any facility of any national securities exchange, or for any member of a national securities exchange —


(2) To effect, alone or with 1 or more other persons, a series of transactions in any security registered on a national securities exchange, any security not so registered, or in connection with any security-based swap or security-based swap agreement with respect to such security creating 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.
As described, the Securities and Exchange Commission (SEC) is supposed to enforce this law, but from my experience with the IT incompetent SEC they are worthless and there is no chance they will, even after I demand they do so.

I've also had bad experiences with Reddit, which has been disreputable since its founding. The most notorious founder of Reddit — and the other two, Steve Huffman and Alexis Ohanian , are quite disreputable themselves — is Aaron Swartz . Swartz was a college dropout, hacker, political correctness activist, and media darling. In 2008, he hacked the PACER (Public Access to Court Electronic Records) computer system, run by the United States Courts, to download millions of federal court documents, without paying for them. He was investigated by the FBI and almost prosecuted for the hacking. In 2011, Swartz hacked the JSTOR (Journal Storage) computer system, owned by Ithaka Harbors Inc., to download millions of academic journal articles, without paying for them. For this Swartz was federally prosecuted. After declining a plea bargain deal from federal prosecutors, and having his counter-offer rejected, Aaron Swartz committed suicide by hanging himself.

I have the same complaints, and more so, about PACER and JSTOR that "made" Aaron Swartz hack them. All the documents for my case Dr. Duane Thresher v. Governor of Virginia Ralph Northam, in both the U.S. District Court and the U.S. Court of Appeals are in PACER and I've actually, frustratedly, and expensively used PACER. As a former academic I've actually, frustratedly, and expensively used JSTOR and have even recently had another bad experience with them; see Update at the end of Dr. Thresher v. Prof. Dr. Lohmann.

However, these complaints do not justify hacking. If Aaron Swartz wanted to do something about injustice, he should have done it through the justice system, which was designed for that. Yes, this is hard, expensive, obscure, and frustratingly slow; I know from experience. But that's what makes real heroes, not doing a few clicks for a publicity stunt, becoming an instant celebrity, and hoping that shields you from the law. I have this same attitude toward Edward Snowden. It's good that the abuses of the NSA and CIA were exposed, but Snowden should have done this through the justice system, not the media and by hacking the NSA and CIA and fleeing to Russia.

My bad experiences with Reddit also involved illegal activity by them, but in my case libel against me and giving a fraudulent corporate address so they couldn't be contacted about such legal matters.

Last August, it came to my attention that whenever someone, like a client, googled my name, the top result was always a libelous Reddit post about me (involving my work as a climate modeler; see Climate of Incompetence). I won't put up with libel against me — see "vigorously protect my reputation from defamation" note in Legal Notes section of the About Apscitu Law page — so on 19 August 2020 I wrote a letter to Reddit threatening a lawsuit if this libelous post was not taken down.

For Reddit's corporate address for legal matters, I looked at the Contact Information address on Reddit's legal webpage on that day, which was
Reddit, Inc.
420 Taylor St.
San Francisco, CA 94102
The next day, 20 August 2020, I sent this thus-addressed letter via USPS Priority Mail so it would only take 2–3 days and could be tracked.

According to the USPS tracking, the letter only arrived on 15 September 2020 (9:47 AM PDT, 16:47 GMT), 26 days later. This was because Reddit's given corporate address for legal matters was fraudulent.

When I then checked the address again on Reddit's legal webpage, it had mysteriously changed to
Reddit, Inc.
1455 Market Street, Suite 1600
San Francisco, CA 94103
Using the Internet Archive Wayback Machine, I looked at the address on Reddit's legal webpage just 5 minutes (9:52 AM PDT, 16:52 GMT) after my letter arrived at Reddit, so certainly still unopened, on 15 September 2020. It was the same 94102 address I had sent the letter to.

Then I looked at the address on Reddit's legal webpage 2.5 hours (12:25 PM PDT, 19:25 GMT) after my letter arrived at Reddit, by then opened and read, on 15 September 2020. It was the new 94103 address.

Clearly I was the one who caught Reddit in this corporate address fraud, which had been going on for years.

I wrote a letter with all this to Reddit on-again-off-again CEO Steve Huffman . I also pointed out that because of his corporate address fraud, the veil of corporate liability protection had been pierced, he had lost his indemnity, and I could now sue him personally for his personal assets.

I didn't trust even the new Reddit address, so I looked up the address given in Reddit's corporate registration with the California Secretary of State. Like many national companies, Reddit is incorporated in Delaware, which has the best corporate legal system in the United States, but its California address was the same new Reddit address.

I also wanted the address of Reddit's agent for service of process, i.e. lawsuits. Reddit's agent for service of process is CORPORATION SERVICE COMPANY WHICH WILL DO BUSINESS IN CALIFORNIA AS CSC - LAWYERS INCORPORATING SERVICE. I've had problems with CSC before. They are essentially just a mail forwarding service, not a law firm. You would think that a big company like Reddit would have a big legal department, but they may not have any lawyers working for them at all. This would explain all the illegal activity at Reddit.

I looked up the address given in
CSC's corporate registration with the California Secretary of State, which was in Delaware, and sent the letter there too.

The libelous Reddit post about me no longer comes up as a result when my name is googled.

Now if only the SEC, with the full force of history and the Federal Government behind it, could fight Reddit about its illegal activities at least as hard as I, an individual, have, and at least as hard as I fight for my Apscitu Inc. clients.

[Update: I sent an
email to the SEC Commissioners demanding they enforce the law and charge Reddit. The SEC Commissioners at this time are: Allison Herren Lee , appointed by Trump and made Acting Chair by Biden; Hester Peirce , appointed by Trump and at the SEC when I last had trouble with them; Elad Roisman , appointed by Trump and made Acting Chair by him, until Lee, and at the SEC when I last had trouble with them; and Caroline Crenshaw , appointed by Trump.]