GameStop's three largest shareholders have gotten $3B richer in rally

Reddit group that drove GameStop shares 1,700% higher and cost Wall Street short-sellers billions goes PRIVATE after messaging platform Discord BANNED their server for ‘hate speech’ in the wake of SEC and White House ‘monitoring’

  • GameStop shares rose another 130% on Wednesday amid a Reddit buying frenzy
  • The struggling company runs a chain of video game stores across the country
  • Group WallStreetBets is leading charge to inflate stock and punish hedge funds
  • GameStop stock is up 1,700% since January 1 in run that hurt short sellers
  • Hedge funds Citron and Melvin Capital likely lost billions as the shares rose 
  • But GameStop’s three largest shareholders have gained $3B in recent moves
  • They include board member Ryan Cohen, whose shares are up more than $2B
  • GameStop CEO Geroge Sherman is up $500M and investor Donald Foss $800M
  • TD Ameritrade instituted unprecedented restrictions on GameStop stock
  • Wall Street investors express alarm and say they have never seen anything like it
  • When the bubble collapses all of the shareholder gains could be wiped out 
  • Biden’s press secretary says that his team is ‘monitoring the situation’

YouTuber ‘Roaring Kitty’ has been one of the key cheerleaders of the GameStock rally

The Reddit subgroup fueling the unprecedented surge of GameStop shares in a campaign that is rattling Wall Street, has been kicked off gamer messaging app Discord due to hate speech violations. 

Discord on Wednesday confirmed it has banned the r/WallStreetBets server from its platform, where thousands of users had shared messages hyping up GameStop’s stock and urged other investors to hold on to their shares or buy more.

The campaign effectively sent the company’s shares of up 1,700 per cent in four weeks, with three of its largest individual investors gaining more than $3 billion in net worth during the stock’s staggering rally. 

The extreme volatility raised concerns about manipulation which could lead to an investigation by stock market regulators, and has even drawn attention from the White House. 

However, Discord said the server was not removed due to fraud but for ‘continuing to allow hateful and discriminatory content after repeated warnings.’  

‘To be clear, we did not ban this server due to financial fraud related to GameStop or other stocks,’ the company said in a statement.

‘Discord welcomes a broad variety of personal finance discussions, from investment clubs and day traders to college students and professional financial advisors.

‘We are monitoring this situation and in the event there are allegations of illegal activities, we will cooperate with authorities as appropriate.’

Earlier, the White House and Securities and Exchange Commission said they are monitoring the situation after Reddit users led by a YouTube financial guru known as ‘Roaring Kitty’ sent shares in GameStop up another 130 percent on Wednesday, costing hedge funds billions and prompting the CEO of the Nasdaq Exchange to propose a trading halt. 

The Reddit group WallStreetBets has been driving up GameStop’s share price, which closed at $347.51 on Wednesday after starting the month at $17.25, by betting against Wall Street short-sellers who expected the firm to collapse.

It is a battle that pitted small investors using free trading apps such as Robinhood against several massive hedge funds, which had taken out large short positions on the assumption that GameStop’s stock would go down.

Millions of Redditors have pursued a strategy known as a ‘short squeeze’, in which a price rally forces short sellers to buy up more shares. The GameStop surge has inspired copycats to pursue the strategy with heavily shorted theater chain AMC, which saw share prices soar 260 percent on Wednesday. 

Professional Wall Street investors are shaken by the bizarre speculative rallies, warning that the bubble that could collapse at any moment, wiping out the gains of the biggest shareholders and small investors alike. 

After markets closed on Wednesday, the SEC released a statement on ‘ongoing market volatility,’ saying it is working with ‘fellow regulators to assess the situation and review the activities of regulated entities, financial intermediaries, and other market participants’. 

The Biden administration has said they are ‘monitoring’ the flurry of trading action and a growing number of state regulators are calling it dangerous.  

Nasdaq CEO Adena Friedman told CNBC on Wednesday morning: ‘If we see a significant rise in the chatter on social media … and we also match that up against unusual trading activity, we will potentially halt that stock to allow ourselves to investigate the situation.’

However GameStop is listed on the New York Stock Exchange, not the Nasdaq.  

GameStop shares rose another 120 percent on Wednesday extending the rally fueled by the Reddit group WallStreetBets, which urged a buying campaign

Nasdaq CEO Adena Friedman told CNBC on Wednesday morning: ‘If we see a significant rise in the chatter on social media … and we also match that up against unusual trading activity, we will potentially halt that stock to allow ourselves to investigate the situation.’

Reddit users are piling into the stock in part to punish big hedge funds that shorted it



Hedge funders (left to right) Andrew Left of Citron, Gabriel Plotkin of Melvin Capital and Loen Shaulov of Maplelane LLC were on the losing end of the price action, pulling out of their positions after likely losing billions

New York Mets owner Steve Cohen had exposure to the turbulent situation as well, after his Point72 Asset Management helped bail out Melvin Capital

On the losing end of the recent price action have been a number of hedge funds, who had heavily shorted GameStop stock, betting that the share price would fall.

Hedge funds Citron and Melvin Capital said on Wednesday that they had closed out their short positions after suffering undisclosed losses, likely totaling in the billions. 

Short selling is a way of making money off a stock if the share price goes down, and GameStop had been one of the most shorted stocks on the market when the Reddit group targeted it. 

Why are GameStop shares skyrocketing?

GameStop is one of the most heavily shorted stocks on the market, with more contracts to sell the stock short than there are shares available.

‘Short selling’ allows an investor to profit when the price of a share drops. Short sellers borrow a stock, sell the stock, and then buy the stock back to return it to the lender.

Reddit users saw an opportunity for what is known as a ‘short squeeze’, in which rising share prices force short sellers to buy the stock to cover their losses.

Users of the Reddit group WallStreetBets have been urging its millions of members to buy and hold GameStop stock, locking up the supply of shares and forcing desperate hedge funds to bid higher and higher to cover their shorts.

It is a bubble that could burst at any time, if investors decide to cash out and a selling spree ensues.

Most professional investors agree that GameStop’s earning potential does not justify the current share price.

Citron founder Andrew Left has called the Reddit cheerleaders of GameStop an ‘angry mob’, and recently stopped covering the stock in his research letter, saying he had been harassed by the forum users. 

Melvin Capital, the $12.5 billion hedge fund founded by Gabriel Plotkin, was one of the main targets of the Reddit campaign, after an SEC filing revealed that the fund had a large short position in GameStop.

‘By the end of the week (Or even the end of the day), Plotkin is going to have less than a college student 50k in debt who works part time at starbucks,’ one Reddit user wrote on Wednesday morning.

New York Mets owner Steve Cohen had exposure to the turbulent situation as well, after his Point72 Asset Management teamed up with Ken Griffin’s firm Citadel to inject Melvin with a combined $2.75 billion bailout on Monday to help the struggling fund.

Responding to a worried Mets fan on Twitter who asked if the GameStop situation would impact the team’s payroll, Cohen wrote: ‘Why would one have anything to do with the other’.

Maplelane Capital LLC, a New York hedge fund that started the year with about $3.5 billion, was down roughly 30 percent for the year through Wednesday, with its bearish GameStop position a significant driver of losses, sources told the Wall Street Journal. 

GameStop’s largest individual shareholder, Ryan Cohen, has seen his 13 percent stake increase in value by more than $2 billion over the past two weeks. The Chewy co-founder, who joined GameStop’s board this month, originally paid about $76 million for the stake and has seen his net worth increase by about $6 million per hour over the past two weeks. 

Meanwhile, investor Donald Foss, the former CEO of a subprime auto lender, has seen his 5 percent stake increase by about $800 million, and GameStop CEO George Sherman’s 3.4 percent stake is up about $500 million.   

GameStop’s largest individual shareholder, Ryan Cohen, has seen his 13% stake increase in value by more than $2 billion over the past two weeks, or more than $6 million an hour


Investor Donald Foss (left), the former CEO of a subprime auto lender, has seen his 5 percent stake in GameStop increase by about $800 million, and GameStop CEO George Sherman’s (right) 3.4 percent stake is up about $500 million

Users of the Reddit forum WallStreetBets have been urging each other to buy and hold GameStop stock, driving the price higher, as seen above on Wednesday

In addition to the individual stakeholders, BlackRock, the world’s largest asset manager, could have made gains of about $2.4 billion on its investment in GameStop.

The asset manager owned about 9.2 million shares, or a roughly 13 percent stake, in GameStop as of December 31, 2020, a regulatory filing showed on Tuesday.

Assuming no change in BlackRock’s position, the value of its stake would be worth $2.6 billion now, compared with $173.6 million as of December.

As the price surge continued on Wednesday, TD Ameritrade issued an alert to its users saying that it had ‘put in place several restrictions on some transactions’ in shares of GameStop and theater chain AMC, another heavily shorted stock that skyrocketed overnight.

A spokeswoman for TD Ameritrade did not immediately respond to a request for more information from DailyMail.com on Wednesday.

Overall, the main stock indexes were down on Wednesday, with some market watchers blaming the speculative frenzy for shaking investor confidence.

What is GameStop? 

Founded in 1984, GameStop operates some 5,000 retail stores nationwide, selling and renting video games.

Havard Business School classmates James McCurry and Gary Kusin opened the first store in Texas with the help of Dallas billionaire Ross Perot.

Like other brick-and-mortar retailers, the company has been looked down upon and belittled by Wall Street investors as commerce shifts online.

When Chewy founder Ryan Cohen joined the GameStop board, it led many to feel the company’s stock was undervalued. 

He pushed for the company to try and expand into the online markets.

Cohen is now at least $3billion richer because of the surge in stock prices, but the gains could be wiped out when the bubble bursts. 

White House Press Secretary Jen Psaki said on Wednesday that President Joe Biden’s team is ‘monitoring the situation’ with GameStop. 

Senator Elizabeth Warren, a Massachusetts Democrat, weighed in calling for more regulation. ‘With stocks soaring while millions are out of work and struggling to pay bills, it’s not news that the stock market doesn’t reflect our actual economy,’ she said. 

‘For years, the same hedge funds, private equity firms, and wealthy investors dismayed by the GameStop trades have treated the stock market like their own personal casino while everyone else pays the price,’ Warren added.

‘It’s long past time for the SEC and other financial regulators to wake up and do their jobs – and with a new administration and Democrats running Congress, I intend to make sure they do,’ she said. 

The top securities regulator in Massachusetts believes trading in GameStop stock suggests there is something ‘systemically wrong’ with the options trading around the stock.

Jacob Frenkel, Securities Enforcement Practice chair for law firm Dickinson Wright, said the SEC would likely look at whether the messaging by investors holding the stock long-term and activists betting against it was manipulative.

‘With federal prosecutors having become much more sophisticated in their cases over the years on securities trading … it is reasonable to believe that any SEC investigation could well have a parallel criminal investigation,’

Others say that the trades are up to the investors who make them, at the end of the day.

‘That’s the sentiment, the public doing what they feel has been done to them by institutions,’ Reddit co-founder Alexis Ohanian said in a tweet on Wednesday.

GameStop shares are up 1,700 percent since the beginning of the month in a staggering rally

TD Ameritrade issued an alert to its users saying that it had ‘put in place several restrictions on some transactions’ in shares of GameStop and theater chain AMC

Who is GameStop’s largest shareholder?

Ryan Cohen, the former CEO of pet supply website Chewy, has been building up his stake in GameStop over the past year.

He is pushing for the company to shift its focus away from physical stores toward an e-commerce platform.

Cohen joined the GameStop board earlier this month. He previously sold Chewy to PetSmart in 2017 for $3.35 billion.

GameStop shares were boosted on Tuesday by Elon Musk, who tweeted ‘Gamestonk!!’ along with a link to Reddit’s WallStreetBets stock trading discussion group, where supporters affectionately refer to the Tesla CEO as ‘Papa Musk’.

‘Stonks’ is a tongue-in-cheek term for stocks widely used on social media. 

The small investors on Reddit, many using free trading apps such as Robinhood, have been buying GameStop stock at high volumes to drive the price up, and forcing panicked hedge funds with short positions to buy shares of their own to cover their short positions, further fueling the surge.

It is a risky strategy that could collapse at any time, but posters on the Reddit forum indicated on Wednesday morning that their buying campaign would continue.

Many of the comments indicated that the Reddit users participating in the campaign reveled at the prospect of destroying hedge funds that had bet against GameStop, as well as the prospect of making ‘gains’ if the share price continues to rise. 

Little is known about the YouTuber Roaring Kitty, who has been posting videos for several months analyzing options trading of GameStop and proposing that the stock was ripe for a short squeeze. 

His calls evolved into a passionate mass movement that members of WallStreetBets seem to have embraced with an almost religious furor, vowing that they will either ‘ride’ GameStock to $1,000 or all the way to zero.

GameStop’s extraordinary price action has been the talk of Wall Street this week, and is raising questions about potential regulatory clampdowns from the US Securities and Exchange Commission (SEC).

GameStop’s shares skyrocketed for a fourth straight day, thanks in part to Elon Musk’s Tuesday afternoon tweet

The company surged 50 per cent in extended trade Tuesday after Musk tweeted ‘Gamestonk!!’ ‘Stonks’ is a tongue-in-cheek term for stocks widely used on social media

With commentators and lawyers calling for scrutiny of the moves, Nasdaq chief Adena Friedman said exchanges and regulators needed to pay attention to the potential for ‘pump and dump’ schemes driven by chatter on social media.

‘If we see a significant rise in the chatter on social media … and we also match that up against unusual trading activity, we will potentially halt that stock to allow ourselves to investigate the situation,’ Friedman said, asked on CNBC about the issue after the exchange’s annual financial results.

‘If we do think or contemplate that there may be some manipulation, we then engage with FINRA and the SEC to evaluate and investigate that.’

The Securities and Exchange Commission (SEC) declined to comment on the proposal. Gamestop and AMC are both listed on the New York Stock Exchange.

Mainstream commentators have questioned the justification of moves in several Reddit-hyped stocks in recent days, at a time when some on Wall Street are wondering if months of stellar overall gains have driven shares more generally into bubble territory. 

The surge in recent days – GameStop (file image) has increased more than seven-fold to $147.98 from $19 since January 12 – has spurred concerns over bubbles in stocks that hedge funds and other speculative players had bet would fall in value

‘These are not normal times and while the (Reddit) … thing is fascinating to watch, I can’t help but think that this is unlikely to end well for someone,’ Deutsche Bank strategist Jim Reid said. 

Easy access apps like Robinhood, which allow ordinary Americans to make stock market trades at almost no initial cost, have spurred a boom in direct investment over the past year as trillions of dollars in official stimulus drove markets higher.

On GameStop, the retail army have pitched themselves against some of the institutional short-sellers – a traditional area for hedge funds – who promote and bet on falls in companies they judge as weak.

The 20 small-cap Russell 2000 index companies with the biggest bearish bets against them have risen 60 percent on average so far this year, easily outperforming the rest of the market, a Reuters analysis of Refinitiv data shows.

Early on Tuesday, short sellers in GameStop were down $5 billion on a mark-to-market, net-of-financing basis in 2021, according to analytics firm S3 Partners. 

Why regulators may scrutinize GameStop’s Reddit-driven small investor stock surge

Shares of video game retailer GameStop Corp surged nearly 700% over the past week as retail investors piled in to the stock, appearing to be urged on by bullish posts in popular online forum Reddit as opposed to any fundamental changes in the company’s finances or prospects. GameStop’s interstellar surge has sparked calls for regulatory scrutiny. Why?

MARKET MANIPULATION

U.S. law bars the dissemination of false or misleading information with the aim of manipulating investors into buying or selling securities, as seen during a rash of ‘pump and dump’ schemes during the early 2000s dot.com boom.

Regulators are likely to explore whether Reddit was used in a similar way, after thousands of messages hyped up the stock and urged other investors to hold on to their shares or buy more.

‘GME IS THE HOLY GRAIL,’ wrote one user on Wednesday, urging others to keep pushing the stock higher. ‘WE ARE STILL GOING TO THE MOON…ITS NOT TOO LATE TO BUY.’

Jacob Frenkel, Securities Enforcement Practice chair for law firm Dickinson Wright, said the SEC would likely look at whether the messaging by investors holding the stock long-term and activists betting against it was manipulative.

‘With federal prosecutors having become much more sophisticated in their cases over the years on securities trading … it is reasonable to believe that any SEC investigation could well have a parallel criminal investigation,’ he added.

The U.S. Securities and Exchange Commission declined to comment, as did the Southern District of New York which could have jurisdiction over a criminal case.

STOCK EXCHANGE HALTS

Wild swings in GameStop’s shares led the New York Stock Exchange (NYSE) to halt trading in the company several times this week. But lawyers said there was sufficient marketplace confusion to warrant a longer suspension.

On Wednesday, the Massachusetts state regulator, William Galvin, called on NYSE to suspend GameStop for 30 days to allow a cooling-off period. ‘This isn´t investing, this is gambling,’ he told Reuters in an interview. ‘This is obviously contrived.’

Lawyers said the incident could prompt a broader review of share suspension rules.

‘I could see the SEC encouraging the NYSE to put in place rules that might smooth such swings as a result of retail investment activity,’ said Marc Adesso, partner at Saul Ewing Arnstein & Lehr. NYSE declined to comment.

RISE OF LOW-COST RETAIL BROKERS

The GameStop saga has again shone a spotlight on low-cost retail trading platforms which have allowed millions of ordinary Americans to trade stocks. Consumer advocates say retail investors are taking risks they may not understand and incurring hidden costs that are rarely fully disclosed. ‘So much of this trading has been fueled by broker de facto claims of ‘free trading’… but that is false and misleading and the SEC should say that and stop it,’ said Dennis Kelleher, CEO of progressive think tank Better Markets.

The combination of accessible retail trading and social media could upend the market if not adequately policed, Galvin warned.

‘It’s diminishing the integrity of the marketplace and it´s putting individual investors at risk.’ he said.

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