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.
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.