“Roaring Kitty” Sued for 10(b)(5) Securities Fraud
Roaring Kitty sued for Securities Fraud Related to his recent Tweets and Reddit posts regarding his ownership stake in Gamestop
On Friday, June 28, 2024, “Roaring Kitty,” the social media icon, was sued in the Eastern District of New York for securities fraud related to his recent tweets about Gamestop. This blog post provides a quick overview of the case and a brief analysis of the major issues. Although similar to the cases Dynamis has handled on behalf of the Atlas Traders and “AlexDeLarge”, there are some important distinctions. A copy of the complaint, filed by Martin Radev on behalf of others similarly situated, is set forth below. For the reasons articulated, as well as many others, this complaint is likely doomed from its inception and susceptible to dismissal if Roaring Kitty files a well-crafted motion to dismiss.
Factual Overview
As many people know, Gamestop (GME) has been very volatile as of late, with major volatility occurring as a result of posts by Roaring Kitty on May 12, 2024.
Initial Social Media Activity (May 12, 2024): Keith Patrick Gill, known as “Roaring Kitty” and “DeepF***ingValue,” made a post via his Roaring Kitty account on the social media platform X (formerly Twitter) for the first time in nearly three years. The post was a meme showing a gamer in a suit, leaning forward in his chair in seeming concentration. Although hardly a “factual post,” this post was widely interpreted as Gill paying attention to GameStop securities again. On May 13, 2024, the first trading day after Gill’s first post, GME went from approximately $17/share to nearly $50 by the close of trading on May 14, 2024, after Gill posted multiple additional tweets that appeared to reflect a renewed interest in GME. Notably, these tweets were generally devoid of analysis and texts, and were largely memes susceptible to multiple interpretations.
Subsequent Social Media Activity (June 2, 2024): Gill posted on Reddit through his DFV account, disclosing his large position in GameStop securities, including 120,000 GameStop call options with an expiry date of June 21, 2024 and 5 million shares of GameStop stock. This post garnered significant attention with approximately 108,000 upvotes, 21,000 comments, and 12,000 reactions. It was interpreted by his followers as a rallying cry to invest in GameStop securities. The price of GME launched to the moon once again, closing above $45. Subsequently, in had been revealed by the WSJ that these options had been purchased shortly before the May 12, 2024 post, which has been viewed nearly 30 million times.
Market Impact and Alleged Deceptive Activity: Following Gill’s social media posts, there was a surge in the price of GameStop securities. However, it is alleged that by June 13, 2024, Gill had quietly sold or exercised all 120,000 of his GameStop call options, realizing millions of dollars in gains. He allegedly did this without disclosing his intent to sell, thereby misleading his followers and the market.
SEC Investigation and Market Reaction (June 4, 2024): News emerged that the SEC was investigating Gill's activities, specifically his trading in GameStop call options around the time of his social media posts. Following this news, GameStop’s stock price fell $1.50 per share, or 5.36%, closing at $26.50 per share.
Further Market Impact (June 13, 2024): On this date, during after-market hours, Gill posted another screenshot of his GameStop portfolio on Reddit, showing that his portfolio no longer included the 120,000 GameStop call options. This indicated he had sold these options, although he accumulated additional stock, which further impacted the market.
In sum: the complaint alleges that this was a “pump and dump scheme” by Gill, whereby, “he: (i) shortly before his May 12, 2024 social media post on X, and unknown to investors, quietly purchased a large volume of GameStop call options on E*Trade at comparatively low prices; (ii) on May 12, 2024, reignited the meme stock movement and pumped the value of GameStop securities with his first social media post on X in nearly three years; (iii) after the prices of GameStop securities had abated, pumped the value of GameStop securities again via a June 2, 2024 post of his GameStop portfolio on Reddit, disclosing his large position in GameStop securities, including 120,000 GameStop call options and 5 million shares of GameStop stock; and (iv) by June 13, 2024, quietly sold and/or exercised (i.e., dumped) all 120,000 of his GameStop call options for a large profit, seemingly to increase his own stake in GameStop stock by over 4 million shares (totaling 9 million shares), belatedly revealing as much to investors on June 13, 2024, during after-market hours.”
The plaintiff allegedly was injured by this “pump and dump,” purchasing 10 shares on May 13, 2024 (shortly after the May 12th tweet), and additional shares on June 4, 7 and 11 (a total of 25 shares). The plaintiff also purchased three options, two on May 13, 2024 (one sold on May 17) and one more on June 3, 2024. It is unclear the total “losses” alleged, but they are definitely small.
How did Gill commit securities fraud?
The complaint alleges he committed fraud by secretly purchasing a large volume of GME call options, using Twitter and Reddit to pump these securities, failing to disclose his purchase of securities prior to his posts (i.e. making it appear that he was just thinking about GME for the first time in years), revealing a large options position on June 2, 2024, and failing to disclose his plan to sell his recently purchased call options to the public. Gill, the complaint charges, owed his Twitter and Reddit followers a duty to disclose his “intent to sell” his call options. On its face, this claim is a bit puzzling. The call options had an expiration date of June 21, 2024, just a few weeks after his post. What did people expect - he would just hold onto the options and watch them expire at a massive loss? Moreover, he exercised the options, at least in part, by converting them into four million shares of GME stock, which is hardly a “dump” of the underlying security.
Will this Complaint Succeed?
Probably Not. Social-media stock fraud allegations are on the rise, as regulators (DOJ and SEC) as well as private market participants attempt to claim that influencers are manipulating the market and causing an artificial market manipulation that hurts other retail investors. There are numerous defenses to these types of charges, a few of which will be set forth below:
First, the entire nature of securities fraud is that the fraudster either lies to you, misleads you by failing to disclose something, or omits to disclose something material that they are required to disclose. Here, Gill disclosed he had purchased options with a June 21, 2024 expiration date. Any reasonable person, let alone a reasonable investor, would have understood that Gill would be selling such a large position or exercising the options. No one would have let the option simply expire. In short, no one was tricked by a failure to disclose because a soon expiring option, by its very nature, is an “intent to sell” that security. Additionally, selling all the options shortly before they expired would likely have significantly hurt the stock (and thereby his twitter followers) as everyone would be expecting such a large “dump” of options on the market.
Second, the fraud allegations about Gill’s tweets/reddit posts will likely fail because they were not material to reasonable investors. It is clear that the plaintiff here sought to profit simply because Gill tweeted, not because of the content of the tweets. The plaintiff wanted to ride the waive and hopefully catch some meme stop momentum. Not a terrible strategy, and of course, the plaintiff didn’t make a large bet. But it was a bet, it was a gamble. The tweets of a meme stock icon were not something that a “reasonable investor” - one who reads earnings reports and analyzes company news - would take into account when making a decision on whether or not to purchase or sell a stock. In short, even though the tweets obviously caused market movement, the test for materiality (and thus the reasonable investor standard) is objective, and it is unreasonable to purchase securities simply because an individual named Roaring Kitty posted innocuous tweets on social media.
Third, the tweets can hardly be described as false. Rather, posting a meme of a guy thinking about GME is not even a fact that can be proven or disproven. That is why the complaint focuses on this alleged failure to disclose an “intent to sell” rather than material falsehoods. But this puts the plaintiffs in a tough position - not only do they have to show that he failed to disclose an intent to sell (a tough put when the options are expiring shortly) - but they need to show that Roaring Kitty had a duty to disclose his intent to sell. And this is a high barrier. Generally, only financial advisors or fiduciaries have to disclose their positions or intent or things of that ilk. Roaring Kitty is neither. This too will be a hurdle that the plaintiffs will have to get over, and it will be difficult for them to do so. Notably, the complaint attempts to plead around this issue by claiming that Gill formerly worked at Mass Mutual and was a registered stockbroker, but that was years ago, and no one looking at the Tweets or on Reddit would have understood that he was acting in a professional capacity.
[Note: This is not legal advice. For information or to discuss a case, please contact Dynamis LLP lawyer Eric Rosen at erosen@dynamisllp.com
