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Over recent social media statements that caused the price of GameStop (GME) stocks to vary significantly between May and June, Keith Gill, the stock trader well-known for the 2021 GameStop short-squeeze, is facing accusations in a class-action lawsuit over securities fraud. But a veteran federal prosecutor feels the case is probably “doomed” to fail.
Allegations and Market Impact
Alleged in the complaint, filed on June 28 in the Eastern District of New York, Gill ran a “pump and dump” operation via a sequence of social media postings beginning May 13. The lawsuit says Gill misled his followers by not sufficiently disclosing the purchase and selling of his GameStop options calls, therefore causing investment losses and securities fraud.
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After buying 25 shares in GME and three call options beginning in mid-May, plaintiff Martin Radev—represented by law firm Pomerantz—said he was harmed by the claimed scam. From $17.46 to $48.75 by closing of trade on May 14, Gill’s return to social media on May 13 with a set of mysterious memes resulted in a 180% increase in GameStop shares.
Gill revealed a sizable investment in GameStop on June 2, comprising 5 million GME stock and 120,000 GME call options with a June 21, 2024 expiration date, which caused another GME price jump and closing over $45 on that day. Gill said by June 13 that he had used all 120,000 options calls to realize large returns and then bought additional GameStop shares.
Legal Interpretions and Potential Outcomes
Former federal prosecutor Eric Rosen, founding partner of Dynamis LLP, said in a June 30 blog post that the class-action lawsuit is “doomed from its inception” and may be dismissed should Gill submit a “well-crafted” petition to dismiss. Rosen said that because no sensible investor would expect Gill to hang onto all options until expiration, the requirement for Gill to reveal his purpose to sell calls would not stand up in court.
Rosen further pointed out that the case is weakened by the plaintiff’s intention to benefit from the price effect of Gill’s postings, instead of the actual substance. He underlined that establishing fraud calls for demonstrating that the defendant lied or purposefully mislead investors by omitting to disclose important information, which is challenging given random memes shared by someone known as “Roaring Kitty.”
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