Key takeaways:
- A class-action complaint is filed against stock trader Keith Gill, alleging securities fraud.
- According to the lawsuit, Gill engaged in securities fraud by neglecting to provide sufficient disclosure regarding the acquisition and sale of his GameStop options calls.
A class-action complaint is filed against stock trader Keith Gill, who made headlines in 2021 for the GameStop short squeeze, alleging securities fraud in response to a flurry of social media posts that caused the price of GameStop stocks to swing wildly between May and June.
A veteran federal prosecutor thinks the action is probably “doomed” to fail. The complaint, which was filed on June 28 in the Eastern District of New York United States District Court, aims to sue Gill for allegedly arranging a “pump and dump” plan via a string of social media posts starting on May 13.
According to the lawsuit, Gill engaged in securities fraud by neglecting to provide sufficient disclosure regarding the acquisition and sale of his GameStop options calls. This deceived his supporters and potentially caused losses for certain investors.
Plaintiff Martin Radev, represented by the legal firm Pomerantz, claimed that he suffered harm due to the purported “pump and dump” after starting to buy 25 shares of GameStop and three call options in mid-May.
After taking a two-year break from social media, Gill reappeared on May 13 and posted a string of mysterious memes to his X account. This caused the price of GameStop shares to soar 180% higher, from $17.46 to $48.75 before the close of trading on May 14.
Gill revealed a sizable stake in GameStop in a June 2 Reddit post. The position consisted of 120,000 call options with a June 21 expiration date and five million shares of GameStop stock. As a result, GameStop’s price surged once again, ending the day above $45 in value.
Gill disclosed on June 13 that he had exercised all 120,000 option calls, resulting in millions of dollars in gains. Interestingly, he continued to accrue GameStop shares using these gains.
The lawsuit alleges that Gill misled his followers and other market participants and caused investors to lose money by failing to adequately disclose his intention to sell his options calls in advance.
Eric Rosen, the founding partner of Dynamis Law Firm and a former federal prosecutor, stated in a blog post dated June 30 that the class-action lawsuit is “doomed from its inception” and that Gill should simply file a “well-crafted” move to dismiss it.
According to Rosen, the argument that Gill ought to have told the court that he intended to sell his options would not stand up in court since no “reasonable person, let alone a reasonable investor,” would have expected Gill to hold onto all of his options until the precise moment and date of their expiration.
Furthermore, Rosen stated that it would be challenging to establish one’s status as a “reasonable investor” in a court of law based on this strategy because it was “clear” that the plaintiff was only looking to profit from the price impact of Gill’s postings on X, not from the actual content of his X posts.
“It is unreasonable to purchase securities simply because an individual named Roaring Kitty posted innocuous tweets on social media.”
According to Rosen, the most crucial step in prosecuting a fraud case is establishing that a fraudster has blatantly lied or purposefully deceived investors by withholding vital information.
He clarified that getting past a judge would be extremely challenging because a collection of haphazard memes shared on social media by a person going by the handle “Roaring Kitty” are not statements that contain facts that can be independently verified or refuted.
