Pump and dump schemes are illegal in the US. The traditional definition of one of these scams is the use of influence to drive up the price of a stock or meme coin in order to directly profit. Fines are attached to this activity, severe fines.
Roaring Kitty- aka Keith Gill – has re-emerged on the US stock trading scene having attracted Congressional scrutiny last time he was involved in trading GameStop NYSE:GME shares. Gill seems genuinely attached to GameStop, a loss-making basket-case of a retail operation, but he is also being incredibly successful in demonstrating the ability of social media influencers to move smaller stocks.
The big question is whether he is going to find himself in the sights of US regulators.
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Roaring Kitty is claiming that he is only trading GameStop with his own cash. What the rise in the stock price has done is caused GameStop to issue more shares and dilute its existing shareholders. This time around it looks unlikely that there will be another short squeeze as we saw in 2020.
Seasoned fund managers feel GameStop is a problematic business that has outlived its real purpose with the vast bulk of video games these days being downloaded rather than bought in bricks and mortar stores like GameStop’s. Before Roaring Kitty re-engaged on social media, GameStop was down approximately 30% YTD.
Investors off-loading GameStop on poor sales figures
Last week shares in GME were pounded Friday despite Roaring Kitty appearing for a livestream videocast in which he outlined his long term bull case for the stock. He has also revealed that he has stock and options positions on GME worth a staggering $586m. It was the worst session for GME stock since 2021.
Traders do not seem to be as impressed by the current Roaring Kitty thesis on GameStop. Investors seem to be selling stock on the back of a disappointing Q1 report from the company, which only seems natural.
The recent surge in GameStop’s stock value, driven by a Reddit post from Keith Gill, highlights social media and opinion leaders’ influence on financial markets,” said Antonio Ernesto Di Giacomo, an analyst with XS.com.
“While this situation has significantly increased the company’s market capitalization, it poses significant risks and challenges. It is crucial for investors to stay informed and cautious about the inherent volatility of such investments to protect their interests and contribute to the overall stability of the financial market.”
But is Roaring Kitty participating in a pump and dump scheme?
Legal experts in the US think Gill can benefit from a regulatory loophole, a ‘grey area’ which means the SEC cannot prosecute if Gill is being completely honest with his followers. It is also hard to bring a market manipulation case against him when many Wall Street fund managers openly discuss their own positions when they go on CNBC or Bloomberg. What’s the difference?
SEC chair Gary Gensler has also weighed into the debate around the loophole defence, saying that while fair disclosure is important, it would not be enough to protect “a bad actor.”
A big question surrounds Gill’s punchy disclosed $557m in shares and options contracts and how that got financed. He is also taking a big risk with disclosing $65m in call options which expire on 21 June. Cashing out this many options on GameStop may prove hard unless Gill has a backer, which he has not disclosed yet. And if he does, has he lost his main legal defence for not disclosing that?
There remains significant difference in opinion on Wall Street as to whether this is market manipulation or simply an activist fund manager like any other.
