The controversial investor Keith Gill, also known as Roaring Kitty in online circles, has started to face some major consequences for his bet on the battered videogame retailer GameStop as he was targeted by a class-action lawsuit this week for alleged market manipulation and securities fraud.
Although the lawsuit was quickly withdrawn by the plaintiff, it marked the first legal action brought forward against Gill since he returned to social media in May this year after two years of complete absence.
Lawsuit Alleges that Gill Masterminded a “Pump and Dump” Scheme?
This recent lawsuit was filed on June 28 by a GameStop (GME) shareholder named Martin Radev. He accused Gill of orchestrating a “pump and dump” scheme by taking advantage of his large following on social media to manipulate the stock price in his favor.
The legal documents filed in court mention the 120,000 call options bought by Gill right before he published his famous “man leaning forward” picture in his X account. As a result of his actions, the stock price surged from $17 per share to nearly $50 per share in just one day.
For short sellers, the move caused significant losses exceeding $1 billion. Radev claims that he was influenced by Gill to buy 25 shares of GameStop and three call options in mid-May and complained that Roaring Kitty did not adequately disclose his intent to sell the options. As a result, he alleges that Gill misled investors and other market participants about his agenda.
Timeline of Events Involving Roaring Kitty and GameStop
To understand the context of the lawsuit, it’s important to review the sequence of events that led to this point:
- May 13, 2024: After two years of silence, Gill reappears on the social media platform X (formerly known as Twitter) with a cryptic meme showing a man leaning forward as if he is now paying close attention to something.
- May 14, 2024: GameStop shares surge from $17.46 to $48.75 only two days after Gill publishes the X post (with no details or any direct reference to GameStop). At some point during the May 14 session, the price of GME surged to nearly $65 per share.
- June 2, 2024: Gill discloses on Reddit that he owns 5 million shares of GameStop and 120,000 call options set to expire on June 21.
- June 13, 2024: Gill reveals that he has exercised/sold all 120,000 options calls and increased his stake in GameStop to over 9 million shares.
- June 28, 2024: Radev files a class-action lawsuit against Gill.
- July 3, 2024: The lawsuit is voluntarily dismissed by the plaintiff.
Expert Opinion: A “Doomed” Case from the Start
Although Radev’s allegations are quite serious and are probably shared by a significant number of market participants, legal experts immediately questioned the lawsuit’s merits and odds of succeeding.
According to Erin Rosen, a former federal prosecutor and founding partner of the law firm Dynamis, the cause is “doomed from its inception” and Gill should have no problem getting a dismissal from the court.
The reason for this is that no reasonable investor would expect that Gill will hold on to his call options until their expiration date as that would cause significant losses or undesirable consequences.
Rosen notes that it is “unreasonable to purchase securities simply because an individual named Roaring Kitty posted innocuous tweets on social media” while proving fraud in this specific scenario is very complicated as he did not invite investors to join him in his pursuit at any point.
Roaring Kitty merely shared a series of cryptic images and videos, hosted a YouTube livestream explaining why he ‘liked the stock’ and shared his enthusiasm with a large crowd. Nevertheless, his reemergence has enraged quite a few foes in the traditional finance space like Bill Ackman, who claimed that he was manipulating the market. However, he should be careful making such claims as Ackman himself and many others do very similar things, talking about stocks and other investments they like on social media and TV.
Shortly after news of the lawsuit started to circulate, the price of GME stock started to drop, possibly as investors feared that this could have immediate consequences on Gill’s investment position or other people’s perception of his actions.
GME shares dropped by 5.5% yesterday to $23.33 per share and are dropping another 1.5% this morning during the pre-market session at $22.98 per share.
Radev’s Lawsuit Could Trigger Debates on Social Media Disclosures
Despite the lack of merits and legal cause of Radev’s class-action lawsuit, he brings to the table an important topic of discussion concerning the significant influence that social media figures can have on stock prices and how retail investors can be lured to support certain investments despite not being fully aware of the risks they are assuming.
The events associated with Gill and GameStop shares may prompt regulators to push forward additional rules that demand more formal disclosures from social media influencers who are sharing their views on financial assets.
The case demonstrates the growing power of social media in the financial industry and, even though the proceeding was rapidly dismissed, it could mark the beginning of a more profound debate on the type of incident that it tried to address.
Roaring Kitty Targets Ryan Cohen’s Chewy – Discloses a 6.6% Stake
— Roaring Kitty (@TheRoaringKitty) June 27, 2024
Gill’s influence on stock prices apparently extends beyond GameStop as the popular investor recently prompted a spike in the price of Chewy stock right after disclosing that he owned a 6.6% stake in the online pet products retailer.
On June 27, CHWY stock experienced a significant spike, with the price climbing from $29.14 to $39.1 in a single day although it ended up settling lower than the previous day at $29.05. The move was caused by an X post published by Gill showing the image of a dog. Market participants seem to have agreed that this was evidence that Roaring Kitty could now be targeting Chewy.
Ultimately, Gill disclosed his sizable bet on the company involving 9 million shares that are currently worth around $245 million. Chewy was founded by the current Chief Executive Officer of GameStop, Ryan Cohen, who took over the reins of the videogame company in 2023.
Gill commented in his most recent YouTube livestream that Cohen’s involvement and leadership are one of the reasons he is backing GameStop. This is the link that investors quickly relied on to believe that Gill was now backing Chewy following the release of the dog’s image.
The founder of the notable short-selling firm Citron Research, Andrew Left, highlighted that it is highly unlikely that Gill is using his money to acquire such a sizable stake at Chewy considering that the numbers don’t add up.
“Even selling all his GameStop without paying taxes, it just doesn’t add up,” he argued in a social media post on X.
The “Kitty Phenomenon” Generates a 33% Annual Gain for GME Stock
Although volatility has subsided recently for GameStop (GME) shares, Gill’s involvement with the stock continues to be a major factor to consider for both investors and short sellers as any changes to his position could trigger either a sizable spike if he makes another huge bet on the videogame retailer or a significant drop if he suddenly discloses that he is cashing out of his trade.
Following yesterday’s drop, the stock accumulates a 33% gain thus far in 2024. These gains are a direct consequence of Gill’s involvement as shares started to climb right after he reappeared on social media.
Hence, his influence on the stock price remains significant and relevant to the future of GME shares. The company has taken advantage of the move by selling $1 billion shares via an at-the-market (ATM) offering to raise money and shore up its finances.
Investors and analysts continue to debate the long-term prospects for GameStop as opinions remain divided on whether the company can successfully transform its business model in the face of changing consumer habits and increased competition in the gaming industry.
Regulatory Scrutiny Continues Despite Radev’s Voluntary Withdrawal
The events surrounding Gill and GameStop have caught the attention of regulators. The Secretary of State of Massachusetts, the state where Gill resides, has announced that it is investigating the GameStop trade.
The investigation could lead to a lawsuit or to changes in local rules and guidelines that govern the role and responsibilities of public figures when it comes to sharing their investments.
As social media continues to play a significant role in shaping market sentiment, regulators and market participants will need to debate how to maintain fair and efficient markets while still allowing people to share their views freely on social media platforms and messaging boards like Reddit.