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Roaring Kitty faces securities fraud lawsuit as his favourite shares tank

Meme stock king Keith Gill—also known as Roaring Kitty—seems to be losing his golden touch. Shares of the viral stock picker’s newest target, the online pet retailer Chewy, fell more than 6.5% on Monday even after Securities and Exchange Commission filings revealed his $245 million stake over the weekend. Chewy stock soared last Thursday after Gill simply posted a photo of a cartoon dog on social media, but they’re now 6.6% below Wednesday’s closing price. It was a similar story for Gill’s favorite stock, GameStop, which saw its shares plunge 5.4% on Monday.

This comes as the meme stock king faces a lawsuit in the Eastern District of New York accusing him of committing securities fraud for a string of social media posts about GameStop.

Gill has made a name for himself by leading an army of retail traders into the unloved stocks of struggling companies in an effort to turn a quick profit. The goal of these meme stock traders, as they’ve become known, is to lift the share prices of floundering stocks enough to spark a short squeeze against the (mostly) professional traders that have big bets out against them. Rising share prices force short-sellers—those who’ve borrowed shares in order to bet against a company—to cover their positions by buying stock, thus forcing prices ever higher.

The short-squeeze tactic has proved incredibly effective over the past few years, at least in brief bursts, but the rallying cry behind the meme stock trend is slowly waning.

Gill was able to marshall thousands of retail traders to follow him into stocks like GameStop during the pandemic based on the idea that they were profiting off the misery of Wall Street short-sellers. Many meme stock traders made a central villain out of Citadel founder and CEO Ken Griffin when surging prices of key meme stocks led some brokerages to pause trading because of extreme volatility in 2021. Citadel, a market maker, was even hit with a lawsuit at the time alleging that it colluded with brokerages to pause trading, but a U.S. district judge threw it out shortly after, citing lack of evidence.

Now, with the retail vs. Wall Street narrative fading, Gill’s ability to drive big moves in struggling stocks may be heading down a similar path. Of course meme stocks’ underperformance this year likely has multiple causes: The additional pressure of higher interest rates, the ailing financials of GameStop and other meme stock favorites, and the cooling of the U.S. economy and thus consumers’ willingness to invest in risky stocks could all be to blame.

The slowing of the meme stock trend could also be merely a temporary setback. The good news for Gill’s loyal fans is the latest lawsuit against the meme stock king is likely dead on arrival, at least according to Eric Rosen, a defense attorney and former federal prosecutor who works at the law firm Dynamis.

The plaintiff in the case, Martin Radev, alleges that Gill operated a “pump and dump” scheme that caused him material losses in May. This is when a fraudster attempts to artificially inflate a stock’s price for a short-term gain knowing that the information they’ve shared to do so is false. 

But Rosen explained in a June 28 article that this complaint is likely “doomed” for several key reasons. For one, the plaintiff would need to prove that he purchased GameStop’s stock based on false statements made by Gill. That’s difficult when the post the lawsuit is mainly based on is a meme of a man leaning forward to look at a TV.

“The tweets can hardly be described as false. Rather, posting a meme of a guy thinking about GME is not even a fact that can be proven or disproven,” Rosen argued.

Pomerantz LLP, the law firm representing Martin Radev, did not respond to Fortune’s request for comment. Gill did not immediately respond to an X message seeking comment.

Another important issue the plaintiff will need to overcome is the “reasonable investor” standard. In order to prove that the plaintiff was injured by Gill’s social media posts that boosted GameStop’s share prices (prior to a big drop), the prosecution will need to provide evidence that a reasonable investor would see Gill’s picture of a man leaning forward as investment advice. But Rosen argued that a social media post is clearly “not material to reasonable investors.”

“It is clear that the plaintiff here sought to profit simply because Gill tweeted, not because of the content of the tweets,” he wrote. “The tweets of a meme stock icon were not something that a ‘reasonable investor’—one who reads earnings reports and analyzes company news—would take into account when making a decision.”

The plaintiff will also need to prove that Gill both failed to disclose his intent to sell, and was required to disclose his intentions.

“They need to show that Roaring Kitty had a duty to disclose his intent to sell. And this is a high barrier. Generally, only financial advisors or fiduciaries have to disclose their positions or intent or things of that ilk,” Rosen noted.

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