Quite honestly, I don’t harbor much hope for the Congressional hearings later today on the GameStop short squeeze, although given that Trump is off the horizon for now, they’ll probably garner a good deal of attention. On deck at the House Financial Services Committee are Robinhood CEO Vlad Tenev, Melvin Capital CEO Gabriel Plotkin, Reddit CEO Steve Huffman, Citadel CEO Kenneth Griffin and Keith Gill, aka Roaring Kitty. As we’ll see soon, Gill and his recent employer Mass Mutual have the most to lose, since they are the targets of a lawsuit seeking class action status filed by a GameStop investor on the wrong side of the GameStop action.
The pros expect nothing much to be resolved at the hearings, in part because more hearings are planned, with the next one having the most potential for follow-up measures. That session is slotted to feature experts discussing market structure, which could potentially lead to new laws or regulation. Robinhood CEO Tenev’s written testimony shows he intends to (not incorrectly) assign blame for the trading halts his firm imposed on T+2 settlement rules which puts brokerages at risk. That’s arguably archaic, but the flip side is funding requirements do introduce friction, and trading is already dysfunctionally low friction as it is. So be careful what you wish for.
It remains to be seen if anyone on the committee will be well briefed enough to grill him properly on whether his firm was adequately capitalized and the risks of running a firm that eschews all fees in favor of payment for order flow. I can’t see anyone laying a glove on Reddit; their position is effectively “We’re a chat board and what about Section 230 don’t you understand?”
Elizabeth Warren is using the hearings to press a favored issue, and one that has some relevance: that Robinhood investors, like pretty much every retail securities brokerage customer, had to agree to mandatory arbitration.
However, the more entertaining part of the GameStop saga, although it won’t unfold as quickly, is the suit Iovin v. Gill, filed in Federal court in Massachusetts, against not only Keith Gill but Mass Mutual and MML Investors. Class action law firm Hagens Berman is representing Christian Iovin and seeking class certification. We’ve embedded the filing at the end of this post.
The filing looks to have high odds of beating a request for summary judgement/motion to dismiss. I’m less able to judge the likelihood of it winning class certification, but Hagens Berman is an active and successful player, so I doubt they would have taken this case on unless they were pretty confident of pursuing it as a class action. And in reading it, I have to wonder what Keith Gill was smoking.
Gill painted at target on his back for legal action by being a central figure in the GameStop short squeeze and not disclosing that he was a securities industry professional, with multiple securities licenses (including a Series 24, a principal’s license), a commodities license, and a CFA, and was working at Mass Mutual as a registered rep in its securities subsidiary and a “Financial Wellness Director.” You cannot make this stuff up.
And on top of that, Gill made it easy for him to be sued not only via his high profile during the GameStop ramp (with over 150,000 followers on Twitter, over 400,000 subscribers on YouTube, and numerous Reddit posts crediting him with persuading others to pile on) but also with his cooperation with media stories that depicting him as the moving force behind the ramp. As you can see, the filing cites the Wall Street Journal’s Keith Gill Drove the GameStop Reddit Mania. He Talked to the Journal. The fact that Gill didn’t demand a correction of anything in the article means he can’t object to what it says now that he’s been sued, such as:
The investor who helped direct the world’s attention to GameStop, leading a horde of online followers in a bizarre market rally that made and lost fortunes from one day to the next, says he’s just a normal guy….
To many of them, Mr. Gill—who until recently worked in marketing for Massachusetts Mutual Life Insurance Co.—is the force behind the quadruple-digit gains in shares of the videogame retailer GameStop, up more than 1600% this year through Friday. On Wednesday, the stock jumped 135% to $347.51, a record, before plunging to $194 a share Thursday and then sharply rebounding to end the week. At the start of the year, GameStop shares went for around $18.
Many online investors say his advocacy helped turn them into a force powerful enough to cause big losses for established hedge funds and, for the moment, turn the investing world upside down.
Mr. Gill posted a screenshot of his brokerage account Wednesday, showing a roughly $20 million daily gain on GameStop shares and options. “Your steady hand convinced many of us to not only buy, but hold. Your example has literally changed the lives of thousands of ordinary normal people. Seriously thank you. You deserve every penny,” replied one Reddit user, reality_czech.
The problem is that Gill’s Jimmy Stewart “Aw shucks” routine may not get him very far given that his various securities licenses hold him to a high standard of conduct, including the requirement that his communications on social media:
not omit any material fact or qualification if the omission, in light of the context of the material presented, would cause the communication to be misleading…be clear and not misleading within the context in which they are made, and that they provide balanced treatment of risks and potential benefits.
The filing argues that the Reddit forum WallStreetBets, which was Gill’s main venue for presenting and hyping his GameStop trade, was utterly antithetical to the investor protection standards that Gill was required to adhere to. Even the press made that point. From CNN:
That ethos on WallStreetBets not only encourages risky trades, but also trading the entirety of your net worth or portfolio in a single risky trade — a financial move that would be sure to make any certified financial advisor bleed from their ears.
The filing argues that Gill’s Roaring Kitty/DeepFuckingValue persona was a ruse, intended to hide his status as an industry professional who’d bought GameStop at prices averaging $5. The filing curiously doesn’t include Gill’s (presumably not faked) E*Trade account shots as part of the ruse, since any registered rep is normally required to trade only though his employer.1
The tricky part is that securities fraud, and this is a securities fraud case, requires establishing intent, which the lawyers call scienter, as in knowing in advance that what they were doing was wrong. The fact that Gill has so many securities licenses will make it pretty much impossible for him to pretend that he didn’t know what the relevant rules were. So his defense is likely to rest on “Gee, I thought this was a great trade. How was I to know so many people would agree and make the same bet?”
The filing makes a good go at pre-rebutting that. Even though Gill initially depicted his YouTube channel as being about general financial education, it became more and more fixated on GameStop, with “at least” 56 of 80 presentations devoted to it, and many of them discussing its vulnerability to a short squeeze. Virtually all of his tweets from July 2020 were about GameStop.
The filing contends that Gill acquired a following by posting his month end account balances.2 As Gill got more interest, he started posting more often. The lawsuit argues that Gill intended to, and was successful at, whipping up a frenzy. Many WallStreetBets members attributed their GameStop purchases to Gill, which is why it was so easy for the media and Congresscritters to find him:
There’s also the question of whether monkeys were running compliance at Mass Mutual. They are not in a good position. The filing describes Mass Mutual’s extensive obligations to supervise Gill. Why didn’t they require him to provide all of his social media handles? How did they let him trade outside their firm and not notice his positions? How is it conceivable that no one noticed Gill’s YouTube videos?
With respect to the suit, the litigants win no matter what. If Mass Mutual failed to require registered reps to provide social media accounts, they are in hot water. If anyone told an officer that Roaring Kitty was their Keith Gill, they are going to find it hard to wriggle out of liability. And conversely, if they can credibly throw Gill under the bus and truthfully depict him as hiding his conduct from Mass Mutual, that confirms that he knew what he was doing violated securities laws and he therefore deceived his employer so he could go ahead.
Now readers might wonder, why would Hagens Berman take on this case when the only deep pocket might be Gill himself, who is probably worth at most $45 million, and that before taxes and the cost of his defense?
The answer is that this case is cheap to pursue by class action standards and has enormous PR value. If I were them, I’d be happy if I recovered my costs. They already have ample evidence of Gill’s influence from Redditors themselves; they might spend money on experts to firm up the connection between his postings and moves in the stock. There isn’t that much in the way of discovery: getting at all of Gill’s e-mails and texts, getting documents from Mass Mutual, and deposing key individuals. The fact that Gill appears to be going ahead with his Congressional testimony says he’s not (yet) well advised; I can’t imagine that counsel would be on board with that plan.
So get ready for some spectacle. I expect the legal theater to be more entertaining than the Congressional channel.
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1 An employer can agree to let a broker hold accounts at another firm but that’s rarely allowed because the broker must get various pre-trade approvals to avoid trading securities on the restricted list. It’s a huge nuisance for everyone involved.
2 We are charitably assuming that the balances Gill posted on line were accurate. If not, or not all the time, the plaintiffs will have a field day.
00 2021-02-16 FINAL GameStop Complaint.DOCX - 02-16-21-gamestop-complaint
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This very much fits with the case I made, although I expected SEC to go after someone. Didn’t expect a civil case and a class action though.
I thought that he was a former MML employee, but it he was a regulater person, then he was an idiot – and “I was doing it via an invented persona” will not fly with any court, as that would basically throw all that stuff out of the window.
A civil case will force the SEC’s hand. They hate being outflanked by a state regulator and a class action firm looks even worse.
In fairness, the delay is likely due to the Biden regime change. Of all things, the stupid impeachment delayed Gary Gensler’s confirmation, and he in turn will name his own chief of enforcement.
It seems to me that the only parties not being called to testify are the hedge funds who actually ran GameStop up from $18 to $480. The are conspicuously absent.
I’ve watched a lot of Roaring Kitty video in the past three weeks. I think Gill is very smart, and is performing a great educational service, but he has painted a target on his back by doing these videos, because every buy side portfolio manager on Wall Street is now turning to their analysts and saying, ‘Why didn’t you catch this? What am I paying you for?’
No, he painted a bulleye on himself because he broke the rules he signed up as a securities professional.
Don’t know what are the exact rules in the US, but in general, as a securities professional:
– you are resticted in trading securities. That may be from a total ban (on you and your family), to getting approvals before hand. In general, any speculative activity (which tends to be defined as short-term) tends to be frowned upon, and any propagation of your position that can be reasonably construed as for the purposes of creating you a gain may be highly problematic.
– you’re highly restricted in what you can publish and where, and what/where/how can you present when not presenting on behalf of the company. Definitely any comms that are recognisably tied to you (and that doesn’t mean with your name on it, it may be physical appearance, or even just a recongnisable voice) should be approved in principle, and on some occasions even on per-item basis.
There’s a question whether it was just him dropping the ball (i.e. ignoring the internal MML rules, similar to CalPERS CIO), or both parties. But even if it was MML dropping the ball as well, it doesn’t excuse him. I could understand if MML dropped the ball, and he was trading left right and center – but was quiet about it.
I could even understand if he put up a video or two originally, how GME was fundamentally undervalued and explained why. But posting his gains, and posting things on GME during the frenzy was just beyond dumb. It was arrogant and dumb.
In general, unless you’re independent FA, and even in those cases, you have to be extremely careful what you say and how.
“he broke the rules he signed up as a securities professional”….
And retail securities professionals at JPMorgan, Citi, Wells, etc…all followed those “rules”.
Your time may be better spent investigating what rules members of Congress broke while “playing” (umm investing in) the stock market. But the “outrage” over a guy with a twitter & redditt account who made some money in the stock market because he’s actually smart and didn’t go to an Ivy League University…sorry but cry me a river.
Making Shit Up is against site Policies.
They actually do follow those rules. Having a brokerage account outside the firm without having approval is a fast track to being fired. Ditto being a tout on Twitter.
I used to be a 24. Absolutely. The odds are he broke multiple rules. I would be astonished if MM didnt require him to notify them of every trade he did, and there is no way he wouldnt have had someone concerned at the number of trades if he did notify them. How did he manage to do his day job?
This is why I thought he was ex employee..
Even unregulated employees in FI have quite a few rules around securities trading, never mind regualted ones.
If they don’t it’s a quick way to not just being fired, but not being hired by anyone anytime soon.
In fact, most FI will fire you even for an ambiguous case (unless you have enough money to enter a long-running and expensive lawsuit), as they don’t want to risk the problems with regulators (in this area, the regulators are not forgiving, and any past benevolence could be held against you). If you’re lucky, and have connections, you may be allowed to resign.
Members of Congress is a strawman (unless he all of sudden became one) and against site policies.
“60. Unaware of Gill’s deceitful social media communications, Plaintiff used approximately $200,000 in collateral to SELL call option contracts for GameStop shares when the stock was below $100.” (caps mine)
Right – this guy was selling options at $100 for a stock that was trading at $4 not long before and had no idea something fishy was going on? Gimme’ a break. The plaintiff is an experienced trader who was every bit aware of the runup who was hoping to dump a load of stinky diaper worthless options on clueless yutz’s and, instead, the load of stinkies fell onto him instead.
There’s an old saying “bad facts make bad law” and this guy is a terrible plaintiff. He’s obviously a sophisticated trader who was trying to prey on less sophisticated ones. Now he’s complaining he was hoodwinked by another equally sophisticated trader doing the same against him. He’s essentially saying “hey – DFV was supposed to be a clueless schmuck I could cheat out of his money – it’s not fair he actually ended up knowing what he was doing and I lost instead.”
There were people genuinely hurt by the GME insanity who shouldn’t have been. This plaintiff isn’t one of them.
First, I have no idea what platform this guy was using, but Robinhood is famous for getting people who knew absolutely nada about options to trade them. He could also have had an unscrupulous conventional broker. So his use of options is no proof of sophistication. He was a retail customer and even if he were an accredited investor, he is still entitled to the full weight of securities law protections, including against pump and dump schemes, which have been illegal since the Securities Exchange Act of 1934.
Second, it doesn’t matter if he was a dope or not. He’s a place holder for people who were on the wrong side of this trade and if Hagens Berman gets class certification, his identity doesn’t matter much.
Third, one also assumes that Hagens Berman chose him not just for the magnitude of his losses but also because his story regarding the trade didn’t undermine their case.
You can’t sell uncovered options on Robinhood so if he wasn’t an experienced trader he had a lot of money stashed away somewhere he was playing with. Plus, on any of the exchanges, you need to verify you have some experience before doing anything with options, especially selling them.
I’ll never assume lawyers don’t choose crappy fact patterns, especially if the named plaintiff is their nephew or something. It would’ve been way cleaner to find somebody who had little or no trading experience — there are plenty of examples — and bought the regular stock, not options.
As for the rest … yeah. The core question is whether Gill was running a pump and dump. One of the major questions there will be how much money Gill made directly or indirectly. Did he hold to and through the end or dump? Is a pump and dump without the dump just stupidity? Bad luck? Delusion?
Why don’t you read the complaint rather than confusing the commentariat? The compliant clearly states that the plaintiff had $200,000 of collateral. This is not enough to establish whether he was an accredited investor (SEC standards are $200,000 in individual or $300,000 in household income, with an expectation that that will continue, or a net worth over $1 million). I would assume that the law firm would chose a lead plaintiff who was not an accredited investor so as to create the largest possible class.
“you need to verify”. That is a simple questionaire that the brokers use to CYA. Most of the time they are not even technical questions about options, but along the lines “how many years did you trade options”, “how many option contracts/year did you trade” etc..
The behavior Gill exhibited is so risky I wonder whether a certain magical powder has entered his life?
I have known more than one person who loved their high pressure/high risk profession to develop such a fondness and it did not improve their judgement.
Keith Gill testimony https://docs.house.gov/meetings/BA/BA00/20210218/111207/HHRG-117-BA00-Wstate-GillK-20210218.pdf
There are going to be plenty of “aw shucks” routines in the hearing.
Gill – downplaying his financial services history
Plotkin – doing a eyerolling inducing “what me need a bailout?” “what’s a naked short?” (their’s should have been called a “butt naked short”)
Vlad – “what expolitative business model?”
Reddit – “section 230 dammit, section 230!!!!”
And expect enough more than unbearable – ‘I”m just a boy from a working class/middle class trying to make good for my family”(emphasis on MY family)
SEC – “I’m shocked that there’s gambling going on here”
I’m gonna take a nap…wake me up whenever one of the sanctimonious clowns in the bespoke suits brings up the issue of how a simple Tobin Tax would put an and to all these and similar shenanigans.
Oh, so it wasn’t David vs. Goliath? People are going to want a definitive answer on that. Indeed, the name Roaring Kitty does not quite fit in in the Bible.
Facts are one thing, spin is another. The details of this will be over a lot of people’s heads. further, and more importantly, facts of the matter may not fit into tidy soundbytes which is how the media prefers to communicate with the people. Lastly, this can be spun as a David vs Goliath tale. People will choose the facts they want to believe and discard the ones that do not fit their chosen narrative. Along with the general hate of hedge funds, short sellers being perennial scapegoats and the hollowing out of the economy, this will be great for ideologues, either on the left (e.g. AOC) or on the right (e.g. Cruz) to exploit for political gain.
Unsurprisingly…they are trying to turn this entire fiasco into a scam for more deregulation.
Some are calling for “faster” trading….LOL.
Because everybody is good for the “easy money”, right? The funds are there. Trust.
What a joke.
Folks getting their panties in a tangle because a guy didn’t publicly disclose to his Reddit compadres (many who knew exactly who he was) his securities licenses when Wall Street has been PURPOSELY misleading the public for decades…..
Wow.
Regulations are regulations, there is no need for them to make sense, just need to be complied with.
Hope you’re being facetious….because I still remember the time when a good friend of mine went into one of the branches at JPMorgan Chase (where I then worked) and was sold 250K worth of auction rate securities by a fully licensed financial advisor who did not disclose that this financial product would not be liquid – even after she asked him since she was getting married within the year and would need a portion of the assets in order to buy a house.
We wrote about ARS back in the day. They were liquid until they weren’t, as in when the auctions failed. Anything that pays more than a money market fund, which ARS did, is bound to have some extra risks.
And you should know, if you actually worked for a brokerage, that the documentation always explicitly disavows anything other than the written terms which are binding. I made precisely the same less consequential mistake with JPM on a supposedly fee free business account. Three separate people in the branch (I made separate visits) made the same misrepresentation. When I started being charged fees and called to complain, since I was doing what I had been told was necessary not to be charged fees, the phone rep blandly told me that the branch had mispresented the product.
No, we are not “getting my panties in a tangle”. We pointed out Gill looks like he is on track to give up tons of what he made and may even be sued into penury.
Your misreading and “shoot the messenger” conduct suggests that you have such a large emotional investment in the GameStop story that you aren’t processing information properly.
Still watching this hearing …..
Are the elected reps on the House Financial Services Committee the ones who raise the most money from the financial services sector?
Asking for a friend…
Then listening to the question about RH customer service…wow.
And the reply iwas essentially…nope no actual human you can talk to. They are expanding live bot chats. I can’t believe the question wasn’t “is there a live person that can address issues on the platform?”
There are other deep pockets – Musk, Cuban, Chamath.
Chamath social media is as damning as dfv. He tweeted short squeeze play and traded it and outlined the mechanics of how a short squeeze would occur.
But merely tweeting and profiting isn’t dispositive. Many many people on WSB said it was Gill who got them to trade. Gill also became increasingly active and even pressed followers not to sell.
And I don’t think any of the others could even remotely have put themselves as having to adhere to securities law levels of disclosure about themselves and their actions.
Gill’s personal statement at the hearing indicated that he’d been unemployed for two years prior to being hired by Mass Mutual. He said he’d worked for ‘startups’ and an office supply company after college, which I’ll bet–I know middle aged MBAs who are doing this now–means that he was an hourly Excel jockey. It is a pathetic commentary on our economy that it was unable to give a person with such technical and social talents a real job for almost a decade. And he lived in Boston, one of the centers of the new economy.
As for credentials, the guy was a CFA. That’s not easy. And getting all those securities licenses was also hard. I’d like to know when he got all those designations. I worked for a brief time in the ’90s for a bulge bracket broker in Manhattan, and my understanding was that everyone who came into contact with customers, right down to the secretaries, had to pass the Series 7 or be studying for it. It seems that this credentialism has only expanded since then, if Gill had to have securities licenses, despite being one step removed from the customer.
I hope NC will continue to cover this story closely. It has many aspects.