Will GameStop get another boost from the Robinhood trial?

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Retail investors in the Wall Street Bets Reddit forum, known among themselves as “monkeys”, probably feel justified by their choice of stocks even from GameStop (NYSE: GME) this week. Robin Hood (NASDAQ: HOOD), the online brokerage firm that handles much of GameStop’s short squeeze trading in early 2021, is the target of a lawsuit alleging damages due to its trading limitations during the GameStop frenzy. But will this legalistic drama and uproar have any concrete effect on GameStop itself? Under the right circumstances, they could actually be to GameStop’s advantage.

What happens with the trial

Robinhood, the retail equity trading platform that has hosted at least seven explosively successful IPOs in recent days, was also at the heart of the action during GameStop’s famous contraction in the first few weeks of 2021. An army of retail investors, using the Reddit r / WallStreetBets sub-forum to discuss the situation, bought GameStop and the stock price has skyrocketed. As a result, Robinhood finally imposed trade restrictions on January 28. The restrictions blocked new purchases of GameStop shares, allowing traders to sell only their shares in the company. This led to stock prices plunging from a high of around $ 483 to a low of nearly $ 40 in February.

Image source: Getty Images.

Lawsuit against Robinhood and leading short-selling hedge fund Citadel Securities on behalf of investors claims these investors collectively suffered $ 10 billion in financial damage as a result of GameStop’s trade restrictions, and alleges significant collusion between Robinhood and Citadel. Robinhood, other brokerage houses and hedge funds described their actions at the time as intended to protect small investors, with one managing director publicly declaring: “The brokers were forced to act because they would be in the line of test if an uninformed investor was losing money. “However, the plaintiffs allege that Robinhood and Citadel” entered into an anti-competitive deal “and that as a result of that deal, Citadel opened new short positions when GameStop shares were at their highest price. Robinhood, the plaintiffs allege , then imposed its trade restrictions in collusion with Citadel to “artificially lower” the price of GameStop. This, they claim, caused a collapse in stock prices and allowed Citadel to profit from its newly acquired short positions.

This week’s new revelations include information on documents allegedly presenting evidence that Robinhood executives directly contradict their own public statements in their private communications. On Friday, September 24, these emails and memos appeared as part of a legal discovery. CNBC reported that while Robinhood CEO Vlad Tenev publicly said on Jan. 29 that the company had “no liquidity issues”, simultaneously, internal posts described conversely a “major liquidity crisis” . The documents also allege that on “January 27, 2021, the day before the restrictions were implemented, senior employees of Citadel Securities and Robinhood had numerous communications with each other which indicate that Citadel pressured Robinhood.” They also state that senior executives at both companies were in regular communication before and during the short squeeze and trading halt.

Will the trial actually benefit GameStop?

While it is impossible to guess the outcome of the lawsuit and its possible consequences for the defendants, the latest documents appear likely to rekindle the belief of retail Wall Street Bets investors in a collusion between Robinhood and short-selling hedge funds like Citadel. Even if the evidence fails to win the case for the plaintiffs, this apparent new confirmation of the “monkeys” suspicions will bolster their certainty about the corruption of the entire business process surrounding GameStop and other memes stocks, reinforcing faith in the possibility of another short squeeze.

Indeed, on Monday, September 27, the first trading day after the revelation of the new documents by the discovery, the GameStop share was up 2.3% at the close of the market. It rose again by 0.8% in post-trade exchanges. With no other major news from GameStop at the time, the gains were most likely driven by sentiment among retail investors after the alleged new evidence was released.

How, then, will all of this affect GameStop? Just as short selling doesn’t actually reduce the short company’s cash balance – despite the apparent belief of many Reddit retail investors that it does – the rise in GameStop’s stock price will not help. no more money in the pocket of the game retailer. The exception to this will be if GameStop issues new shares, diluting its stock but benefiting from stock prices driven up by the bullish positions of retail investors.

A judge's gavel rests on a wooden stand.

Image source: Getty Images.

The company has done this once before, when it sold 5 million shares in June, earning gross proceeds of $ 1.1 billion. The move left GameStop with a virtually debt-free balance sheet and $ 1.78 billion in cash and cash equivalents at the end of the second quarter.

GameStop has a lot of money, but it is in desperate need of transforming its business model into something capable of generating a profit under the current conditions of the video game market. At this point, he doesn’t appear to have come up with any revolutionary new strategies to give himself new long-term life as a current business. However, if its executives hatch a plan to turn it into a successful company with profitable new management, the current renewal of interest from retail investors could help it repeat its stock-selling windfall, if it does. need even more money to become a winner among video game stocks.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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