‘Roaring Kitty’ Sued for Securities Fraud over GameStop Rise
bloomberglaw.com
bloomberglaw.com
He's being sued by someone who sold naked call options and got burned. This case is going nowhere.
I'd love to start suing people for every time I take a loss while trading.
Nassim Taleb made money by understanding that out of money call options were underpriced, not overpriced how people think generally. People don't learn from the past.
Whether that strategy is a net win over a business cycle isn't known. Taleb's funds never published their full results.
End result, even harder to win with OOTM options even if you are correct.
It doesn’t matter if it bounces back later that year. Any puts near those levels would have cost peanuts and paid handsomely.
I don't specialize in derivatives so I can't speak to how compelling his industry work is versus his writing. But my understanding is Taleb's strategies were explicitly designed to lose small amounts of money often and win huge amounts of money occasionally.
The idea is basically to go long vega and gamma waiting for an apparently rare event you believe will happen somewhat more frequently than expected. In the meantime you'll eat the theta and usually lose money, but ideally within certain risk parameters.
And yes it sometimes takes years to pay off, during which time the fund is paying management fees and options purchase prices. So it bleeds money over time, and then makes it back and more at random intervals.
That's by design. In fact it's a similar model to Venture Capital in that way.
You may not always win though.
Also selling 200k worth meant he would have made it out like a bandit if the bet succeeded. I wonder what his net worth is if the broker allowed him to be leveraged so much?
Your max loss is infinite, as the plaintiff has now discovered.
That's when you sell a naked call. If you instead sell a covered call, you keep 100 * the number of calls sold in your account as collateral. Then you still only receive an exact credit at the time the position opens, but your risk is capped and defined as the price of the collateral at the time the position opened.
>Aren't you just capping potential returns
Yes
>in exchange for immediate premium ?
That's not the main goal though, the main hope is to have them expire worthless so you can pocket the premium(or just going down in price over the option time period so you can flip it before expiry). So the best case is the stock going just under the strike price at the time of expiry. It wouldn't really matter that much if the premium wasn't paid out immediately but was paid at expiry to you by your broker.
sold the strangle and sold vol for 600% and bought it back at 400% and managed to cancel out his losses.
that guy is an options trading ninja.
Surprised they went for the courts instead of arbitration. Securities arbitration is notoriously biased towards the client. And even an allegation makes it onto the individual’s permanent regulatory record.
Smells like a PR stunt.
Broadly speaking, I believe so. But FINRA arbitration is odd. I wouldn't be surprised if this individual could claim he thought DeepFuckingValue was giving him advice over Reddit to gain standing. From there, it's in the system.
Still, though. The fact that DeepFuckingValue just turns out to have been a licensed broker complicates the narrative quite a bit. Needless to say he can be expected to have known that the whole short trading theory of "Hold the Line" was bunk, and did nothing to disabuse the community of it.
I say it every time this comes up: this guy's criminal exposure is really significant. I find the idea that he Just Happened to stumble on a tulip bubble and had nothing to do with encouraging it just too much to believe. What we know of his public postings doesn't rise to criminal behavior, but then we don't know what sock puppets he might have been operating or what trades he was making privately.
And the incentives all point to this guy being guilty of securities fraud.
But no, this suit isn't going anywhere.
But did Keith Gill?
All the argument here tends to treat "/u/DeepFuckingValue" as the sole authority of what this guy did, and in context that seems outrageously naive.
Accounts all over WSB were pushing this stock like crazy, and this guys Just So Happens to have been a huge beneficiary, when he was absolutely expert enough to have understood the bubble (and importantly, how the bubble was driven by the WSB community misunderstanding short trading)?
Again, his expertise and the incentives just don't line up here. That's not proof, but it's pretty good justification for suspicion. Occam's favorite explanation has to be that this guy ran a pump and dump.
You could make this argument about literally anyone on Youtube or TV talking about stocks. Don't, please.
Yet he was silent as his investment conveniently went through the roof, driven by a huge misunderstanding propagated within the very community where he did almost all his profuse speaking.
And that doesn't seem suspicious to you? Look, I'm not the SEC. I can't subpoena his trade history or social media logs. But there is an SEC, and they can, and we have to believe they're looking into this.
Basically: sure, he might be totally innocent and just a lucky beneficiary of a crazy bubble. I'm just saying it's more likely that he was executing a pump and dump.
Again: I admit that the innocent explanation is possible. I just don't think, given the circumstances, that it seems likely.
By all means, the SEC will look into this (as they should), but I’d wager that DFV is not going to be found guilty.
He was long gamestop and published his reasoning to the internet with explicit disclaimers before each video. When his bet started to pay off, people started to hop into the trade.
How is this materially different than any other firm or person that gives price targets or argues in favor of a position?
Also, he apparently misrepresented his qualifications in such a way that it makes the story that much more attractive to investors who could pump his holdings up.
Yeah, the suit is BS, but the fact that he's a licensed broker really shifts the narrative a bit and makes you start to question things. It's no longer "Johnny Everyman finds Picasso painting at yard sale", it's now "Museum curator finds Picasso painting at yard sale".
I've been an active member of WSB for more than 5 years now and I've followed this story since the beginning. Based on his YouTube channel and some other things, I still think DFV is just a dude who stuck to his convictions and got insanely lucky, but I'm less certain of that than I was last week.
I don't think this suit will go anywhere, but I wouldn't be surprised theres a few twists left in this story.
There are plenty of people on WSB who very clearly know what they are talking about and trade for a living. I just think the narrative became that he was this random guy and finding out that he has a little more experience than people thought changes the story a little bit.
Like I said above, I really don't think he did anything wrong and I don't think he was intentionally being misleading. He didn't really even post many comments on Reddit. Half the time he just posted a screenshot of his account and that's it. I think people just interpreted it how they wanted.
As a regular person (with perhaps a higher-than-average exposure to various hazardous memes), this claim look bizarre. Taking out adjectives, a part of this reads:
"Gill's <adjectives> conduct not only violated <blah> regulations and rules, but also various securities laws by undermining the integrity of the market for GameStop shares"
How do I read this?
> Gill's conduct violated regulations and rules.
> Gill's conduct undermined the integrity of the market, and therefore violated various securities laws.
Was it really Gill's conduct that undermined the integrity of the market? It doesn't look like that to me, but IANAL.
As for his conduct violating regulations and rules, I'd really like to read these regulations and rules that govern how someone is expected to conduct themselves on r/WSB and youtube.
I think there is another side to the story though with many people who lost money buying the stock (selling options is different) based on his advice. Gill is held to a much higher standard than a normal person as he is a licensed security broker.
If you look at my comment history on HN, you will see at the time I was pointing out a lot of Redditors were engaging in a pump and dump scheme. Pump and dumps are illegal and regulated by the SEC. If Gill, a licensed security broker, is found to have been a part of this he could end up losing.
https://docs.house.gov/Committee/Calendar/ByEvent.aspx?Event...
https://docs.house.gov/meetings/BA/BA00/20210218/111207/HHRG...
And at most it seems he was giving his opinion about the company. He never said something like "everyone should buy GameStop because it's guaranteed to rise in value".
People off r/wsb may not have had as clear a picture (and I imagine many of the people who quadrupled the size of the sub in a week may not either), but it’s incredibly hard to blame Gill for other peoples reporting of him. By the end of things he wasn’t even really posting text, just portfolio shots.
> ...many people who lost money buying the stock (selling options is different) based on his advice.
Out of academic curiosity, how does this work?
Mr. Regular Joe wants to buy some stocks for an investment. He worries he doesn't know enough about the market, so he looks for advice from Mrs. Licensed Broker.
Mrs Licensed Broker says "Hello Mr. Joe, right now, GME is undervalued. It should be around $20, it is now at $4. By my estimates, it is a good buy. Look, I have put my own money into it because I think it's a good idea".
So, Mr. Regular Joe buys GME.
Mr. Regular Joe's wife buys GME.
Mr. Regular Joe's neighbor buys GME.
Mr. Regular Joe's grandmother's pet squirrel buys GME.
All of this buying has pushed the stock above $20.
Whose actions are Mrs Licensed Broker responsible for?
Or do we want to live in a society where every licensed broker who writes opinion pieces on seeking alpha and Wallstreet Journal suddenly realize that reddit could read their article, go crazy and expose them to legal trouble? In such a world, Mr. Regular Joe has to gamble with his money and pick stocks on random, because nobody who understands the market will share information with the Plebeian class.
This was a pump and dump. Those have been around since at least the 19th century. Older ones involved newspapers and newsletters. Newer ones involve social media. The SEC fines people for this regularly. This time, the suckers were people who hadn't seen this a few dozen times yet.
[1] https://www.sec.gov/divisions/investment/iaregulation/memoia...
If he is a professional, Gill is in trouble. When I was working in capital markets, my contract stipulated that I had to disclose any trading activity to my employer. That's because, for example, I could be using insider information to conduct some trades privately, which is unethical and illegal. Or I could bet against the bank. Etc. I can't remember how many trainings I had regarding what I could do and not do in terms of trading privately.
Pretty sure that teasing masses on Reddit would have had me fired.
Why? Because they ticked the "I'm an experienced options trader" box? This guy did, but clearly didn't understand how options worked.
They are only taking action because they have an easy target they can score some political points on and who won't fight back
A theory recently occurred to me that I think is part of the explanation:
The rise of blogs and sites like Youtube gave independent journalists reach. Independents vastly outnumber people working in mainstream media. Yet mainstream media has more resources, more access to experts and higher production values.
So how can some rando with a webcam convince the public to watch them instead of watching 60 Minutes or reading the NYT? They can do it with the 'elites' narrative: 'Read my blog because the MSM is a tool of the elites and they only tell lies!'
And soon enough the only mainstream journalists the internet trusts are the ones who demagogue like Glen Greenwald or Tucker Carlson.
But as to the actual comment to which I am replying: it seems like the 'retail investors' who lost money on this WSB thing are suggestible marks. They enriched the kind of 'elite' they hate so much because they believed what they read on Reddit.
So it's probably good, in future, if someone treats them as children and protects them from themselves.
It will be interesting how congress will refer to him during the hearings, considering that reddit also has to appear and not youtube, so his alter ego DeepFuckingValue should be in focus?
Makes sense for this case. Public messaging versus publicly visible but arguably private conversation.
There is no cure for stupid.
https://news.bloomberglaw.com/securities-law/roaring-kitty-s...
[1]: If anyone’s curious, I was compelled to drive over a mile on a tire rapidly losing air because of a pothole that should have been patched before they started highway construction that day. Both shoulders were blocked by barriers, the busy highway had been narrowed to two lanes, and the very deep/sharp pothole was just past an exit, so I could do nothing but speed (carefully) through a construction zone to get to the next exit before my tire went completely flat.
They usually get tossed out pretty quickly.
"In 2016, an Illinois man sued Starbucks for misrepresenting the amount of liquid contained in its cold drinks. ... The judge agreed with Starbucks' argument that a reasonable consumer who orders an iced drink expects the drink to contain both liquid and ice."
There's really nothing redeeming about this lawsuit. Shame that Keith has become the focus of this show when really he did nothing wrong, it's just that he became the face of the squeeze and dumb people want to ascribe responsibility to him.
I guess it's a cautionary tale about coming out publicly, you become the target of very petty people. I hope the SEC does its job and goes after all the naked short selling and investigates all the failures to deliver that preceded the squeeze. But I'm cynical.
Cuz you all just don't get it. lol