ladies and gentlemen, welcome to the plane Bagel. I'm your host, Richard Coffin. There's been a lot of discussion recently, both online and on major news outlets, around what constitutes market manipulation, with a lot of the conversation really revolving around Keith Gill, AKA Roaring Kitty, on Twitter and YouTube, and Deep Value on Reddit. The very same person who helped kick off the initial GameStop rally back in late 2020, early 2021, and after a long hiatus has made a comeback with imposing memes on Twitter, sharing his massive nine-figure position in GameStop on Reddit, and even live streaming on YouTube on Friday, June 7th, for the first time in 3 years. And throughout all the cryptic memes and other activity from Keith Gill, we've seen a lot of volatility in GameStop stock, with a position running up over 200% after the initial comeback post from Keith Gill, and us seeing another run-up and just general excitement as Keith Gill announced his first live stream on YouTube in 3 years.

on June 7th, with some seeming anticipating this massive revelation of his secret high confidence 4D chess investment strategy. Uh, in thesis around why GameStop was about to take off to the moon. And when he eventually did go live after a bit of a delay, that sentiment did kind of die nonetheless with Keith Gill's activity lining up with this volatility in the GameStop stock price. It's drawn a lot of negative attention. In fact, on June 4th, Massachusetts Secretary of State Bill Galvin announced a probe into Keith Gill's trading activities around the stock. And on June 3rd, it was reported that broker E-Trade, where Keith Gill holds his massive GameStop positions, was considering kicking him off of the platform. With these groups ultimately expressing concern that Keith Gill may be unfairly influencing the stock. And after seeing this past week that Keith Gil did in fact exercise some short-term call options on the position at a profit, some have raised the argument that this was all a scheme to pump and dump the position. And with all

the discourse and opinions being shared here. I thought i' I'd jump right in, not to necessarily throw my own opinion into the ring, but to try and answer the legal question: does what Keith Gill is doing here constitute Market manipulation? And naturally, legal matters do fall a bit outside my area of expertise. I do work as a portfolio manager, but really only have sort of a passing knowledge of all this stuff. So, to get to the bottom of this, I decided to reach out to none other than legal eagle, the massive lawyer SLC content creator here on YouTube, to get some of his input on all this. And I'll showcase him throughout the video, with the overall goal being to look at the applicable laws here, the precedent that's been set by other cases around Market manipulation, and how it all applies to Keith Gil. But let's start at the very beginning. What laws actually govern Market manipulation in the United States? As you might imagine, rules do change from country to country, and even within the US, there are both state-level and federal-level laws that can apply.

well as laws that apply to different areas such as uh whether Futures are involved. In which case it would be the Commodities Exchange Act of 1936. But for stocks specifically, one of the main pieces of legislation here is the Securities Exchange Act of 1934, which lays out what you might call the traditional definition of market manipulation. So, the classic case of market manipulation involves fraud, some kind of knowing misrepresentation. It's a thing that has existed for time immemorium. You tell someone something false and in the hopes that you will somehow benefit monetarily from the actions that they take related to that stock purchase or sale. The classic example of the cause of action for that is under Rule 10 B5 under the Securities and Exchange Act of 1934. And to make a case for that, you have to show that an individual misrepresented something material, a material fact, that they did so knowingly, which means basically that they knew it was false when they said it, uh, that a plaintiff relied on the individual.

misrepresentation. Um, that that caused them to take action with respect to a security, and that the plaintiff suffered a loss as a result of the action that they took. Another cause of action that often comes up is under FINRA Section 2020. So, that section says, quote, No member shall affect any transaction in, or induce the purchase or sale of any security by means of any manipulative, deceptive, or other fraudulent device or contrivance. Now, what all of these things have in common is that the person who seeks to benefit engages in some kind of knowing misrepresentation, uh, some falsity with respect to the security so that they can benefit from it. That doesn't really seem to apply to Keith Gil, AKA Roaring Kitty, because he is simply transparent about what he is doing. Um, he seems to be genuine in his, um, statements about actually liking GameStop as a company. So, taking his statements at face value, he's not engaging in a misrepresentation. He is simply telling people what's going on with, at least, uh, in his own stock.

portfolio and people are making judgments and taking action as a result. So, this traditional definition will encompass actions like spoofing where someone cancels orders before they're completed, uh, wash trading where an individual takes both the buy and sell side of their own trading activity, and pump and dumps where someone is actively marketing a positive message or otherwise trying to encourage buying activity only to simultaneously or shortly thereafter sell off the position. Because these actions all involve explicit fraud or deceit, but interestingly that's not necessarily required for something to be deemed Market manipulation, and we've seen that in other wise legitimate trade with no other form of misconduct can still be deemed Market manipulation if the activity is made with the intent to try and move the price of the stock, something that's known as open market manipulation, such as was the case with the recent conviction of Abraham Eisenberg this year who used his own buying activity to inflate the price of cryptocurrency mango with the intent of enriching himself using Futures contracts, something that technically

fell under the Commodity Exchange Act of 1936. So if deceit alone doesn't constitute market manipulation, what does? Well, the Commodities Exchange Act can actually give us an idea of what prosecutors might look for whether there is actionable market manipulation under the CEA. It requires analysis under a four-part test. The first is that the accused could influence market prices. The second is that the accused specifically intended to create artificial prices and that the price does not reflect legitimate market forces. Three, that the artificial prices existed. And four, that the accused caused those artificial prices. And noticeably missing from this test is whether anyone actually engaged in a misrepresentation. You can be entirely truthful about things and still be liable for market manipulation under this particular test. So historically, as highlighted in the case Sullivan Long Inc. versus Scatter Corp, anything that disrupts the ability of markets to reflect undistorted, though not necessarily accurate, estimates of the underlying economic value of a stock can constitute market manipulation with or

without explicit deceit meaning you might see more activities encompassed in market manipulation than you might at first expect. If you were to say buy a stock to try and push its price higher and try to trigger a short squeeze, for example, it could very well be considered legal, as is argued here by IHS Market. Since you're actively carrying out trades with the intent of influencing the stock's price, so while short squeezes themselves aren't deemed illegal, trying to prompt one can be, which might leave you to believe that this is a slam dunk case against Keith Gil. But based on what we have publicly so far, it's not seemingly the case. Well, a lot of people do associate Keith Gill and Roy Kitty with the ape Army and trying to squeeze the shorts, and there were a lot of theories that Keith Gill had bought and exercised this massive call position to try and dry up liquidity and send the stock skyrocketing to the moon this past Friday, which didn't happen. Publicly, that hasn't really been Keith Gill's messaging. He's mostly focused on his

fundamental thesis for the company of GameStop, indicating that a short squeeze is possible, is different from encouraging others to try and trigger a short squeeze. In his last live stream, for example, Keith was pretty adamant in highlighting that this was his own trading strategy. It's very risky. He does not recommend others to follow him, and he might be wrong about the company. Stuff wrong I have historically. I will again in the future. Could be. I mean. It's just. It's always important for you to understand that. So while Keith Gill's positive thesis on the company might have contributed to the stock price increasing, and certainly people taking that and running with it to try and trigger a short squeeze could itself in a way be deemed market manipulation. It's not a clear-cut case. There's an argument that goes both ways for Keith Gil. He does appear to be able to influence market prices, as Matt LaVine put it. Two people seem to have access to a genie that can change the price of a stock. One is Elon.

Musk and the other is Keith Gil uh, and obviously when Keith Gil speaks about GameStop, it seems that does result in a change in the price. There is an argument to be made that under this four-part test, he is engaging in Market manipulation. The other side of that is that he's just simply talking about what he's doing, and people can make whatever decisions they want. There's an argument to be made that there is a First Amendment issue here, that if you're just talking about what you're doing, it's not your fault that um people Happ to follow what you're doing for the purposes of transacting in their own Securities, and that's a really important Point highlighted by Devon here because Keith Gill is far from the first person with a massive following and influence to share his opinions and what he likes about a given stock. We've had people like ex-hedge fund manager Jim Cramer, who has explicitly told people on CNBC to buy or sell certain stocks during new segments.

listen Tesla is sell cell cell. You don't want to own this stock. And when it comes to investing, there's perhaps been no personality more influential than Warren Buffett himself who, well, certainly perhaps on the other spectrum of things than Jim Cramer, has thrown his weight behind companies like Coca-Cola, a publicly traded stock. And just overall, we've long had influential investors sharing their opinions on the stocks that they hold and they like. In fact, there's a term for it, talking your book, which at a surface level, again, is not considered illegal. This could be an issue if there's deceit involved, but based publicly on what we've seen with Keith Gil, that hasn't been the case. And for example, him disclosing his large position in GameStop, while it could be seen as a positive for the company, given that it signals a degree of confidence in the stock, there's nothing illegal about a factual representation of your holdings of a company. In fact, there's legislation that requires that type of disclosure once an investor becomes a

large enough shareholder in a given publicly traded stock. But does that mean Keith Gill is out of the woods with all this? Well, not quite. Things could get dicey if Keith Gil were to now sell his positions in the short term and take advantage of the higher stock price. Since that could fall under a pump and dump, which requires that second half of selling after you've had this influence over the position. And even the call options, which he's now profited from, could bring about legal challenges, given that he purchased them leading up to his return to YouTube and with them speaking publicly about the long-term thesis for the stock. But putting tens of millions of dollars into what's effectively a short-term bet on the price, this could be interpreted by some as an intent to enrich himself with his social media presence. But the thing is that even if we see Keith Gil sell his position and even with the fact that he's already profited from his call options, it doesn't guarantee that he'll be found guilty of Market manipulation.

and seemingly a lot of this will come down to whether there's demonstrated intent. It sounds like it's really hard to prove what someone intended, what they mentally were thinking about at the time of their particular action, but it's something that happens in the law all the time. And if Keith Gil were prosecuted under this act, you know, the best way to figure out what he was thinking is probably to look at all of his DMS and his emails. And if there's a Smoking Gun email that says, hey, I'm going to buy a whole bunch of options, I'm then going to make some Tweets in social media, um, with the hope that it changes the market price, well then you kind of got him dead to rights in terms of specifically intending to create an artificial price and profiting off of that. So you can imagine if the SEC or the cftc starts Prosecuting Keith gild related to his Communications, um, about GameStop and his profit related there too. A lot of that case is probably going

to hinge on what he specifically intended at the time that he both purchased this stock and the options. And his social media statements related there too. And you know we don't necessarily know what he was intending but a case could completely hinge on what a jury would decide on that. So obviously despite the public messaging, there is the chance that Keith Gill did in fact intend to manipulate the stock's price given his likely awareness of his cult following that tends to dissect his every action and promote the idea that if we continue to buy the stock and limit the shares available in the market, that we can prompt a short squeeze. And there's a chance that the probes into Keith's trading activity does turn something up. There are a lot of questions over where Roaring Kitty amassed hundreds of millions of dollars to take these positions and again why he would buy short-term call options when he's sharing a positive long-term thesis on the stock. But it goes to show that pump

and dumb cases aren't always black and white. And even if you have that influence over a Stock's price with what you post, if prosecutors don't have concrete evidence of intent here, it doesn't guarantee a guilty verdict. Now, of course, everything we've talked about is whether this constitutes legal Market manipulation. There is the separate argument about whether using your influence to impact a Stock's price is fair or ethical, and it's a debate that's gone pretty heated. On the one hand, some argue that Keith Gill is exploiting a gap in legislation and his level of influence to take advantage of retail investors and play into the online conspiracies and vague messaging to enrich himself. Given that he clearly benefits from more activity in the stock, and while it's not directly provable that all this volatility in GameStop is directly related to Keith Gill's actions, the concept of someone being able to influence stock prices is naturally a negative for market efficiency and fairness. On the other hand, a lot of supporters are quick to

highlight that whatever Keith Gil and the Apes, as they're called, are doing is just business as usual for many other industry players. For one, it's questionable how much of the trading activity around GameStop is actually retail investors being convinced by Keith Gil here, versus institutional money that might be either just momentum trading or otherwise trying to take advantage of the stock's volatility. Given especially that last time we saw with the first rally that a good chunk of the buying activity was coming from institutional investors. And as you probably know, there's not a whole lot of trust in some institutional players. There's even a popular clip of Jim Cramer back in 2006 describing how he and other hedge fund managers actively used futures and other instruments to manipulate the markets by creating false impressions. You can't create yourself an impression that a stock's down, but you do it anyway 'cause the SEC doesn't understand it. And while we've seen a lot more controls put in place since then, there's still this perception that

activity still takes place today, with some going so far as to claim that the market pauses, Robin Hood's removal of the buy button, and the recent actions against Keith Gill are all a conspiracy by short sellers to ultimately crush GameStop, which does go a little far, but underlying those concerns are valid grievances about the industry, such as how, for example, lawmakers are still able to trade stocks in the US despite having the privileged position of being the ones who regulate these companies and industries. Now, obviously, the presence of issues in the markets doesn't itself justify trying to manipulate markets and clearly doesn't inherently help to improve things or improve the efficiency and effectiveness of markets, but just goes to show that, again, it's not a black and white situation. It's a very messy issue, and even myself, as someone who's long sort of lamented the influence that influencers can have over how the audience invest their money. At a surface level, Keith Gill has been pretty cautious with his messaging and how he

communicates the degree of risk with his approach. It's not to say it's right. He could certainly be considered reckless, given that he's likely aware of his cult following. But it would set a really tricky precedent to crack down on his activity when others have gone away without caring to be so careful. But until we get further updates and see what Keith Gill does with his position and what any investigation turns up, we'll have to wait and see how things play out. Anyway, thanks for watching. I hope you found this video helpful. If you did, please do make sure to like, subscribe, all that good stuff. It does help the channel tremendously. Also, be sure to check out Devon over at the Legal Eagle YouTube channel. Some great content breaking down legal matters. And let me know your thoughts on all this down below, whether you agree or disagree, whether you support the ape Army and want to bring down the hedge funds and short sellers, or whether you view this as a deterioration of capital markets as we know them that requires an address.

By legislation, welcome any and all views here. Thanks again for watching, and as always, be safe out there.

What Constitutes Market Manipulation? Featuring @LegalEagle

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I'm a CFA and CFP professional working as an analyst for an investment management company in Ottawa. I'm a huge finance nerd and am passionate about the field - I think people lack the resources they need to make educated financial decisions, and hopefully this channel helps with that!

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The videos on this channel are for education purposes only and do not constitute financial advice. Richard Coffin does not provide recommendations on The Plain Bagel - those looking for investment advice should seek out a registered professional. Richard is not responsible for investment actions taken by viewers and his content should not be used as a basis for investment trades.

What Constitutes Market Manipulation? Featuring @LegalEagle

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