"The political pressure to investigate is intense, so I suspect an investigation is already under way," Nicolas Morgan, a partner at the global defense firm Paul Hastings, told Treasury & Risk sister publication ThinkAdvisor on Wednesday in an email.

"However, identifying a violation of the federal securities laws will be challenging," said Morgan, a former senior trial counsel in the SEC's Enforcement Division.

Acting SEC Chair Allison Herren Lee said in a joint statement released Wednesday afternoon with the head of the exam division and the acting director of trading and markets that the securities regulator is "aware of and actively monitoring the ongoing market volatility in the options and equities markets, consistent with our mission to protect investors and maintain fair, orderly, and efficient markets."

The SEC, the statement said, is "working with our fellow regulators to assess the situation and review the activities of regulated entities, financial intermediaries, and other market participants."

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 served as a senior trial counsel and as 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."

That said, Lundy said 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."

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 said.

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

From: ThinkAdvisor