GameStop-Gate: What Did Robinhood Do Exactly—and Why? | Opinion

Quiet week? Never. Day traders took on the hedge funds over GameStop—and rattled the big guys, Wall Street and Congress. Meanwhile, the bad news on the economy continued. Sure, the number of folks filing first time unemployment claims dipped a bit. But the still-high level of claims remains freakin' bad. And there was more bad news. GDP contracted 3.5 percent in 2020, the biggest drop since 1946. Even the markets finished down for the week—the S&P 500 index slumped 3.3 percent. And with all that, here's what I have for you in On the Street: the crazy day traders vs. the crazy hedge funds, of course. Also: a former pal of the late sex offender Jeffrey Epstein steps down as CEO of Apollo management—but doesn't step down that far. In addition, I get to whine about regional cost-of-living differences. (Sounds boring. It isn't. Well, maybe it is...) And in music, I offer up the greatest version ever of "Whiskey in the Jar." So, let the column begin:

GameStop-Gate? I don't know about you, but I find the GameStop war between day traders from Reddit and its forum, r/WallStreetBets, and the hedge funds really entertaining. And I'll also tell you this: the investigations by the Securities and Exchange Commission (SEC) and Congress are going to be even more entertaining. But to catch you up, here's the abridged version of what's been going on. (Unabridged details here.) Day traders on Reddit, via the no-fee brokerage app Robinhood, have been running up the price of GameStop stock—and other companies like troubled movie chain AMC and Tootsie Roll— to punish the short sellers betting that the companies' shares would decline. The early winners were the Reddit traders who were cheered on by the likes of Elon Musk and Mark Cuban. Last week, for instance, the hedge fund Melvin Capital needed a $2.75 billion cash infusion from other hedge fund buddies—Citadel and New York Mets owner Steven Cohen's Point72 Asset Management—after it lost its shirt on its GameStop short bet. In other words: the Reddit crowd, how do I say this delicately, screwed Melvin. But here's the problem. Robinhood and other brokerages last Thursday restricted trading of GameStop and other Reddit favorites, like Tootsie. Why? The speculation was rampant. Citadel Securities, via trade clearing, is reportedly a huge customer of Robinhood. Did it or others put pressure on Robinhood to intervene? (Citadel/Robinhood say no.) Or did Robinhood figure out it better do something on its own to protect its wealthy patrons? Its CEO, making the rounds of the cable circuit, had denied any wrongdoing. Just following regulatory rules, Vlad Tenev said. As it turns out he and his company apparently needed to pause to raise cash to cover the cost of trades and pay off investors who wanted to cash out. But this, by the way, isn't Tenev's first rodeo with regulators. As I wrote here in December, the firm agreed to hand over $65 million to the SEC. Among other things, the SEC said Robinhood misled customers over the "true costs" of its trades. Also: Massachusetts regulators, in a complaint, said that Robinhood was taking advantage of its young, inexperienced customers. "The (firm's) platform is not presented as serious investing with substantial risk...It's presented as some sort of game that you might be able to win," a Bay State official said. Next stop? Congress, where the bipartisan outrage—from Sen. Elizabeth Warren to Sen. Ted Cruz— is just starting to gear up. And, yes, they'll look into the relationship between Robinhood and its real paying customers: the hedge funds and other well-off entities. Grab your popcorn, as they used to say at AMC theaters, and enjoy the show.

The Epstein Stench: It never ends. Last week, Leon Black, one of Apollo Global Management's founders, announced plans to resign as CEO and become merely the firm's chairman. The reason: the fallout from his relationship with Jeffrey Epstein, the late child abuser. Until 2017, when the two had a fallout out over—what else?— money, Mr. Epstein advised Mr. Black, a billionaire, on how to reduce his tax liability when passing assets onto his apparently needy children. (This, as the rest of us were hanging out at H&R Block.) Epstein also doled out tax advice on things like fine art and yachts. (For more details, see Dan Primack's Axios roundup.) For quite awhile, this relationship that started in the '90s seemed A-OK with Black and Apollo. Apparently Epstein's tax advice was so valuable and unique, that Black continued his relationship with the Florida man—even after Epstein, in the sweetest deal you could imagine, pled guilty in 2008 to prostitution charges that happened to involve a young girl. But no biggie. Mr. Black believed folks like Mr. Epstein deserved second chances. To make a long story short, Epstein was arrested in July 2019 for, yes, sex trafficking of minors. He died in custody. (Suicide, they say.) But even though Black had broken off his relationship with Epstein, it was a bad look for both Black and Apollo. So, of course, it was eventually time for an independent outside investigation to get to the bottom of things. The law firm Dechert LLC, in its report, cleared Black of doing anything wrong when it came to Epstein's criminal activities. But the report makes great reading nonetheless: Dechert revealed that Epstein's tax strategy saved Black as much as a couple of billion dollars. In exchange, Epstein was compensated some $158 million during their time together. (Dechert didn't go into it, but it is hard to believe Black couldn't have done better by going to, say, Ernst & Young.) In his statement announcing his plan to step down as CEO, Black said he "profoundly" regretted his relationship with Epstein and pledged $200 million "towards initiatives that seek to achieve gender equality and protect and empower women." Good for him. Good for Apollo, I guess. I'm sure Epstein's many victims appreciate the gesture.

Blue State Blues: You can put this item in the following category: It ain't going to change, but it sure feels good to whine about it. If you're a follower of President Joe Biden's plan to fix Social Security, you know that one solution is to tax folks extra if they happen to make more than $400,000 a year. Sounds great. Get those rich folks! But it clearly targets Blue Staters more than it does our brothers and sisters in the fly-over lands. How? Well, I've always maintained/complained that when it comes to government programs and rules, income levels should be adjusted for regional differences. For example: if you live in Manhattan, New York, you don't get a tax deduction for your traditional IRA contributions if you and your spouse make, on an adjusted gross income basis, more than $125,000 a year—and one of you is already in a retirement plan. Okay, seems fair. But guess what? The earning power of the couple in Kansas making $44,000 a year is exactly the same as you and your family in New York City making that $125,000, according to NerdWallet's cost-of-living calculator. So, the lower earning couple gets to deduct their IRA contributions and you don't. Fair, because pizza is better in New York City? Another example: let's go back to Biden's Social Security fix. By 2034 or so, the tax money coming in won't cover all of the Social Security benefits being paid out. One of Mr. Biden's solutions? Make families earning more than $400,000 a year pay more in Social Security taxes. (I'm not a member of that club, by the way.) Seems reasonable. Except that in 2020, taxpayers making just $137,900 or more could stop making Social Security payments out of their paychecks. Biden's proposal would mean everybody making less than $137,900 (The 2020 figure) or more than $400,000 would have to pay the tax, but the people in between wouldn't. Why not just get rid of the ceiling all together? Or adjust the limit based on where people live? The reason is politics, of course. Four-hundred grand a year sounds like a lot of money no matter where you live, but according to NerdWallet's cost-of-living calculator, a family in Kansas making $139,000 has the same buying power as a family in New York making $400,000. No politician is going to support making the "middle class" folks of Kansas pay more while letting the "rich" of New York City off the hook. True, but I feel better for bringing it up. For the last time, I might add.

Loose Change: Goya Robert Unanue, CEO of the MAGA crowd's favorite ethnic food brand, has been put in the penalty box by his own board of directors. (Per the New York Post.) The reason: he can't keep his mouth shut about Trump's fake voter fraud narrative. He also, in a Fox interview, talked up a "coming war." For all you boycotters, may I suggest Pilon coffee, a Goya rival, when you head into your fox holes? It's the best...Observation of the Week from Wall Street Journal reader, MR: "Russian, Chinese and Iranian hackers have better access to U.S. healthcare data than the state employees trying to administer COVID programs in this country."...On the Street Jukebox: The late Gary Moore and Eric Bell take on, in 2005, "Whiskey in the Jar," a hit for Thin Lizzy way back when. Listen here and play loud with your AirPods in...Thank you, friends—and a special thanks to my column editor Peter Carbonara. Sorting out the ways of day traders and hedge funds ain't easy. Onto next week.