Archives for February 2021

WASHINGTON (AP) — Lawmakers in Washington are digging into the GameStop saga at a congressional hearing.

The episode has been portrayed as a victory of the little guy over Wall Street titans, but not everyone is buying it. Lawmakers from both parties are among the skeptics.

GameStop shares soared 1,600% in January before falling back to Earth. Entangled in the drama are huge short-selling hedge funds, a social media message board and ordinary investors wanting in on the hottest new trade.

The House Financial Services Committee holds a hearing Thursday. The head of the panel, Rep. Maxine Waters, D-Calif., is homing in on hedge funds, which she says have a history of “predatory short-selling.”

“We must deal with the hedge funds whose unethical conduct directly led to the recent market volatility,” Waters said in a statement.

With short-selling, investors bet a stock’s price will drop. Defenders of the practice say it’s a tool for uncovering a stock’s true value and due-diligence investigating of companies.

The players in the hearing include a swaggering 34-year-old YouTube personality and GameStop evangelist; one of the richest and most prominent investment tycoons; and the CEO of the online platform Robinhood that hosted a tsunami of speculative GameStop trading but faced intense criticism for restricting trading at the height of the frenzy.

The CEO, Vlad Tenev, is denying speculation from some lawmakers that Robinhood acted to favor its big Wall Street clients when it blocked customers on Jan. 28 from buying shares of GameStop and a dozen other companies. The restrictions lasted in some form for days.

The accusation is that Robinhood changed the rules of the road midway through to favor big clients that stood to lose money if GameStop shares kept rising.

“Any allegation that Robinhood acted to help hedge funds or other special interests to the detriment of our customers is absolutely false and market-distorting rhetoric,” Tenev says in written testimony prepared for the hearing. “Our customers are our top priority.”

Tenev says Robinhood imposed the trading restrictions solely to meet capital requirements set by regulators.

As they question Tenev and other witnesses, lawmakers will look for what the GameStop trading frenzy says about the fault lines and potential conflicts in the structure of the market that can hurt unsophisticated investors.

“We don’t know whether it will just be warnings versus actual findings in terms of (stock) manipulation. That’s going to take time,” Quincy Krosby, chief market strategist at Prudential Financial, said in an interview Wednesday. “It’s clear the concern is there. We’ll see how the (Biden) administration handles this.”

The online GameStop booster, Keith Gill, who goes by Roaring Kitty, plans to tell the lawmakers that he reaped a profit on his investment because he did his homework, and not because he touted the stock to “unwitting investors,” according to his prepared remarks.

“I did not solicit anyone to buy or sell the stock for my own profit,” Gill says. “I had no information about GameStop except what was public.”

Expected to testify remotely at Thursday’s hearing are:

—Tenev, an early-thirties entrepreneur who started Robinhood in 2013 with a fellow Stanford University math student. Claiming 13 million users, the mobile app’s popularity has grown, fueled by a simplified trading format and first-stock-for-free inducement appealing to millennials. The Silicon Valley company is said to be looking to go public this year; the GameStop debacle has brought unwanted attention.

With its mission “to democratize finance for all,” Robinhood offers commission-free trading. Critics say its users pay in another, more hidden way, because Robinhood provides the data on stocks they’re buying and selling to big Wall Street firms. And the firms pay companies like Robinhood to send their customers’ orders to them for execution.

Tenev is certain to be asked whether Robinhood’s abrupt freeze on individual users buying GameStop shares was done at the behest of Wall Street titan Citadel — its biggest trading partner — or other major firms.

Citadel says it “has not instructed or otherwise caused any brokerage firm to stop, suspend or limit trading or otherwise refuse to do business.”

—Ken Griffin, Citadel CEO. One of the wealthiest hedge fund managers in an industry full of multi-billionaires. Hedge funds, which cater to the uber-rich, command trillions in assets and are known by their penchant for risk and prolific use of short-selling. Griffin is politically plugged in and has been a heavy donor to Republican politicians.

Chicago-based Citadel is one of the biggest hedge funds, and its separate securities-dealing business handles an estimated 25% of all U.S. stock trading. Citadel stepped in with a few other funds to rescue Melvin Capital Management after it sustained billions in losses on its GameStop bets. Gabriel Plotkin, Melvin Capital’s founder and chief investment officer, will also appear at the hearing.

—Gill, AKA Roaring Kitty. The most visible protagonist and GameStop booster on the WallStreetBets subreddit with his R-rated energy, bright red headband and colorful T-shirts. The 34-year-old operating out of the basement of his home in a Boston suburb drew legions of investors into his orbit as they joined his livestream chats on YouTube.

—Steve Huffman, Reddit CEO and co-founder. A major force in social media, Reddit claims some 430 million “Redditors” worldwide. Its WallStreetBets forum is at the center of the GameStop drama.

WallStreetBets “is first and foremost a real community,” Huffman says in his written testimony. “We saw the power of community in general and of this community in particular when the traders of WallStreetBets banded together at first to seize an investment opportunity not usually accessible to retail investors, but later more broadly to defend all retail investors against the criticism of the financial establishment.”

As the frenzy escalated, the acting head of the Securities and Exchange Commission said the agency is examining the trading restrictions imposed by Robinhood and other online brokerages as well as possible stock manipulation, and the role that short-selling may have played in GameStop’s extreme price swings.

The small investors were seen as the winners after they mobilized against Wall Street heavies on the subreddit. Their buying swelled the share prices of GameStop and other beaten-down companies beyond anyone’s imagination. Not coincidentally, it inflicted billions in losses on the hedge funds that had placed bets that the stocks would drop.

The populist traders’ strategy was risky. GameStop stock plunged 60%, to $90 on Feb. 2, wiping out hundreds of thousands of dollars in a few hours. The stock dropped another 42%, to $53, on Feb. 4 and currently trades around $46.

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AP Business Writers Matt O’Brien in Providence, Rhode Island, and Alex Veiga in Los Angeles contributed to this report.

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CANBERRA, Australia (AP) — Timothy Berners-Lee, the British computer scientist known as the inventor of the World Wide Web, says Australian plans to make digital giants pay for journalism could set a precedent that renders the Internet as we know it unworkable.

“Specifically, I am concerned that that code risks breaching a fundamental principle of the web by requiring payment for linking between certain content online,” Berners-Lee told a Senate committee scrutinizing a bill that would create the News Media Bargaining Code.

It’s a question dividing proponents and critics of the proposed Australian law: does it effectively make Google and Facebook “pay for clicks” and might it be the beginning of the end of free access?

The battle is being watched closely in the European Union, where officials and lawmakers are drafting sweeping new digital regulations.

Google contends the law does require it to pay for clicks. Google regional managing director Melanie Silva told the same Senate committee that read Berners-Lee’s submission last month she is most concerned that the code “requires payments simply for links and snippets.”

“The concept of paying a very small group of website or content creators for appearing purely in our organic search results sets a dangerous precedent for us that presents unmanageable risk from a product and business-model point of view,” Silva said.

Facebook regional vice president Simon Milner agreed that the potential cost for news under the code was “entirely uncapped and unknowable.”

Uniquely, Australia’s code includes a negotiation safety net. An arbitration panel would prevent digital giants from abusing their dominant negotiating positions by making take-it-or-leave-it payment offers to news businesses for their journalism.

In the case of a standoff, the panel would make a binding decision on whose best-offer wins.

Peter Lewis, director of the Australia Institute’s Center for Responsible Technology think tank, said the monetary value of public interest journalism has yet to be established.

“The reason it’s such as ephemeral process, if you like, is that no one’s ever tried this before,” Lewis said.

“How do you value fact-based news absent advertising? News has always been valued on the back of how much ads that the outlet can sell. Because Google and Facebook have dominated the advertising market and taken that out of the equation, we’re now trying to work out the value of public interest journalism,” Lewis added.

Google has reacted to the threat of compulsory arbitration by stepping up negotiations on licensing content agreements with Australian media companies through its own News Showcase model.

Facebook responded Thursday by blocking users from accessing and sharing Australian news.

Treasurer Josh Frydenberg amended draft legislation after weekend talks with Facebook CEO Mark Zuckerberg and Sundar Pichai, chief executive of Alphabet Inc. and its subsidiary Google, to make it clear the platforms would not be charged per news snippet or link.

“We never intended that . . . if the arbitrator was overseeing a deal between a television station and one of the digital platforms, that they would make that digital platform pay 2 cents, for example, for every click over the forthcoming year,” Frydenberg said. “That was never the intention. It was always the intention was to have a lump sum payment and that’s what we have made explicit in the code.”

Dan Stinton is managing director of Guardian Australia and New Zealand which is negotiating a licensing deal through Google’s News Showcase.

Stinton said Google has benefitted from news through engagement with search users who link to journalism, the consumer data Google collects from publishers and from its revenue share from ads that are published with news articles.

“Google have been prosecuting an argument that they’re being asked to pay for links in Search and that is not the case,” Stinton said.

“They’re not stealing published content, but I do believe they are using their market power to preference their own businesses to the detriment of publishers and that’s not right,” Stinton said.

“It’s not just paying for links and snippets within search, it’s paying for the entire benefit that Google receives,” he added.

Google has reached pay deals with more than 450 publications globally since it launched News Showcase in October.

The EU’s executive Commission has proposed new rules aimed at taming the biggest digital “gatekeepers.” Proposals working their way through negotiations among lawmakers from the 27-member bloc’s parliament could be amended to include elements of Australia’s model.

Britain, which recently left the EU, is planning similar digital reforms that include shaking up the relationship between online platforms and news publishers.

“There’s definitely an influence” from Australia, said Angela Mills Wade, executive director of the European Publishers Council, a lobbying group for media companies. “It is being closely monitored by all who have a stake in the outcome.”

The EU has already laid out a way for publishers and news companies to strike licensing deals with online platforms under revamped copyright rules. France was the first country to adopt those rules into national legislation but Google initially balked at payments. However, a court ordered it into talks with a publishing group that resulted in a framework for negotiating individual deals.

One part of the Australian model that has caught attention in Europe is the requirement for binding arbitration if payment talks don’t lead to an agreement, which Google has resisted because it would give the company less control.

Mills Wade said several leading EU lawmakers want to add an arbitration mechanism to the digital regulations.

“Given that Google and Facebook have been undermining the scope of the publishers’ right it is clear that regulatory measures are needed, especially the final arbitration mechanism,” said Mills Wade. “Otherwise the majority of publishers won’t have the negotiating power to reach agreements.”

Google has been striking other news payment deals, including a multi-year agreement with tycoon Rupert Murdoch’s News Corp.

Mills Wade welcomed that deal, saying it shows Google puts “enormous value” on news content.

“However, regulators in Australia, but also in Europe, should not be misled into thinking that single deals, especially just before comprehensive laws come into effect, are the answer to ensuring the fair remuneration due to all publishers large and small, whose content is used by Google,” she said.

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Chan contributed from London.

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CANBERRA, Australia (AP) — In a surprise retaliatory move Thursday, Facebook blocked Australians from sharing news stories, escalating a fight with the government over whether powerful tech companies should have to pay news organizations for content.

Australia’s government condemned the step, which also blocked some government communications, including messages about emergency services, and some commercial pages.

The digital platforms fear that what’s happening in Australia will become an expensive precedent for other countries as governments revamp laws to catch up with the fast changing digital world.

Facebook acted after the House of Representatives passed legislation that would make it and Google pay for Australian journalism, said Treasurer Josh Frydenberg. He said he was given no warning before Facebook acted. The legislation must be passed by the Senate to become law.

Australian news organizations could not post stories and people who tried to share existing news stories got notifications saying they were blocked from doing so .

“This post can’t be shared,” the website said. “In response to Australian government legislation, Facebook restricts the posting of news links and all posts from news Pages in Australia. Globally, the posting and sharing of news links from Australian publications is restricted.”

The legislation mentioned by the notice has not yet been enacted.

“Facebook’s actions were unnecessary, they were heavy-handed and they will damage its reputation here in Australia,” Frydenberg said.

Prime Minister Scott Morrison lashed out on his own Facebook page.

“Facebook’s actions to unfriend Australia today, cutting off essential information services on health and emergency services, were as arrogant as they were disappointing,” Morrison posted.

“These actions will only confirm the concerns that an increasing number of countries are expressing about the behavior of BigTech companies who think they are bigger than governments and that the rules should not apply to them. They may be changing the world, but that doesn’t mean they run it,” he added. “We will not be intimidated by BigTech seeking to pressure our Parliament.”

Facebook said the proposed Australian law “fundamentally misunderstands the relationship between our platform and publishers who use it.”

“This is an assault on a sovereign nation,” Health Minster Greg Hunt told Parliament. “It is an assault on people’s freedom and, in particular, it’s an utter abuse of big technologies’ market power and control over technology.”

The government contends the proposed News Media Bargaining Code will ensure media businesses will be paid fairly for journalism linked online. Both Google and Facebook had threatened to retaliate.

Australia’s proposal requires a negotiation safety net through an arbitration panel. The digital giants would not be able to abuse their dominant negotiating positions by making take-it-or-leave-it payment offers to news businesses for their journalism. In case of a standoff, the panel would make a binding decision on a winning offer.

Google had threatened to remove its search functions from Australia because it said the proposed law was unworkable. But that threat has faded as Google has worked out licensing content deals with Australian media companies under its own News Showcase model.

Rupert Murdoch’s News Corp. announced a wide-ranging deal with Google on Wednesday. Major Australian media organization Seven West Media reached a deal earlier in the week. Their rival Nine Entertainment is reportedly close to its own pact, and state-owned Australian Broadcasting Corp. is in negotiations.

The government accused Facebook of endangering public safety by temporarily blocking state emergency services messaging on a day when there were severe fire and flood warnings in various parts of Australia.

The Bureau of Meteorology’s weather warnings, a Hobart women’s shelter and the Betoota Advocate, a satirical website named after an Australian ghost town, were among those surprised to find their content blocked at least temporarily.

Communications Minister Paul Fletcher said he told Facebook the government expects access to its pages to be restored.

“The fact that there are organizations like state health departments, fire and emergency services . . . who have had their Facebook pages blocked, that’s a public safety issue,” Fletcher said.

Facebook said in a statement: “Any pages that are inadvertently impacted, we’ll look to reverse.”

Health Minster Greg Hunt said the Royal Children’s Hospital in Melbourne still didn’t have its feed fixed after more than eight hours.

Frydenberg said he had “constructive” discussions with Facebook chief executive Mark Zuckerberg after the content blocking began.

“He did explain to me that they had concerns with aspects of the code, and it goes to the interpretation of some of its elements. And he will come back to me with some more considered views,” Frydenberg said.

He said the government remains committed to the code that is yielding generous payment deals with Google for Australian media.

“Other countries are watching, but also Google and Facebook and other digital giants are very focused on what it means, as far as a precedent goes, for other countries,” Frydenberg said.

News Corp. said it would receive “significant payments” from Google under the three-year agreement, which includes heavyweight news organizations throughout the English-speaking world such as The Wall Street Journal and New York Post in the U.S., the Times and the Sun in the U.K., and The Australian and Sky News in Australia. The deal spans audio and video and News Corp. also will get an ad revenue share from Google.

Frydenberg said after weekend talks with Zuckerberg and Sundar Pichai, chief executive of Alphabet Inc. and its subsidiary Google, that he was convinced the platforms “do want to enter into these commercial arrangements.”

“It’s a massive step forward we have seen this week,” Frydenberg said of the Google deals.

“But if this was easy, every other country in the world would have done it already. But they haven’t,” he said.

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