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E*Trade is considering telling meme-stock leader Keith Gill he can no longer use its platform after growing concerned about potential stock manipulation around his recent purchases of GameStop GME 21.00%increase; green up pointing triangle options, according to people familiar with the matter.
Shortly before Gill reignited a meme-stock craze in May, he bought a large volume of GameStop options on E*Trade, the people said. This week, Gill posted screenshots of an E*Trade account showing he owns GameStop shares now valued at $140 million and a new set of options that expire later this month. His total gains on the positions were at $85.5 million, he posted late Monday, showing his account remained in operation.
The stock of GameStop surged again on his posts, showing the power Gill, also known as Roaring Kitty and DeepF—Value, has as an influencer. GameStop shares, up 21% on Monday, have risen more than 60% since he reappeared.
At E*Trade and its owner Morgan Stanley MS -0.44%decrease; red down pointing triangle, that power created concerns he can pump up a stock for his own benefit. Their debate includes whether his actions amounted to manipulation and whether or not the firm is willing to risk drawing the attention of his meme army by removing him, according to people familiar with their internal discussions.
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No decision has been made and the firm could decide no action is needed.
Separately, the Massachusetts securities division is looking into Gill’s activities, a spokeswoman said Monday.
Gill couldn’t immediately be reached for comment.
The Securities and Exchange Commission has also been reviewing trading in GameStop call options around the time of Gill’s social-media posts, according to people familiar with the agency’s efforts. The options trades sparked internal discussions at the SEC over whether they could be considered manipulation, one of these people said. It couldn’t be determined whether the SEC was reviewing Gill specifically.
Gill, who has described himself as a deep-value investor to The Wall Street Journal, has become the face of one of the biggest momentum trades in recent memory, with many individuals piling into GameStop with no regard for its fundamentals.
He has long been eager to vocalize his love of GameStop. He studied the company and bought the shares in 2019 while telling his group of online followers about the stock in lengthy YouTube videos. He told his mom about the stock, and told her to tell her friends, too, she told the Journal in a 2021 interview.
Today, millions of people are watching. His followers on X have swelled to more than one million. Tom Bruni, head of market research at Stocktwits, said visits to the GameStop symbol page on the platform have surged more than 20-fold this year.
Gill isn’t solely an amateur investor: He holds several securities-industry licenses and was previously a registered broker with a unit of Massachusetts Mutual Life Insurance, or MassMutual. MassMutual agreed to pay a $4 million fine in 2021 to settle an inquiry by state regulators for failing to supervise Gill’s social-media and trading activity.
The debate about him as a client inside Morgan Stanley began about three weeks ago.
On Sunday, May 12, an X account associated with Gill posted a picture of a man leaning forward in his seat, the first post in three years.
The following day, just as demand for GameStop and other meme stocks surged, E*Trade’s systems crashed. The trading platform was down for most customers for several hours that day. During that time, E*Trade turned to “emergency trading procedures” that involved taking orders over the phone and writing them on paper or on email, according to people familiar with the matter. The platform experienced internal issues and the crash wasn’t related to surging volumes, one of the people said.
Morgan Stanley employees, knowing that Gill is a customer, looked at his E*Trade account, according to people familiar with the matter. That sort of monitoring of clients is routine.
The employees saw he had purchased call options before the tweet, the people said. A call option gives a trader the right to buy the stock by a certain date at a stated price. At least some of those options expired that week, one of the people said. That meant Gill’s trades likely generated profits thanks to the stock move his tweet generated.
Morgan Stanley’s global financial-crimes unit and external counsel began discussing whether Gill’s actions were legal and whether the firm should cancel his E*Trade account, the people said.
Some Morgan Stanley employees have been concerned that closing Gill’s account could result in the firm losing E*Trade clients, the people said. Gill’s messages have been able to command a large following, one reason GameStop and other meme stocks have soared. Morgan Stanley employees have worried what would happen if Gill posted on social media that he had been ditched by E*Trade and whether that might prompt many people to shut down their E*Trade accounts in solidarity, the people said.
On Sunday, Gill posted a screenshot showing that Gill owned five million shares of GameStop and 120,000 call options tied to the stock expiring this month. The positions, alongside roughly $29 million in cash, were valued at more than $289 million after Monday’s close, he showed in another post.
That marks a mammoth jump from 2021, the last time the DeepF—Value account posted on Reddit. A screenshot from that period showed a roughly $30 million position in GameStop.
Brokerages generally have wide latitude to shut down customers’ accounts at their discretion. Morgan Stanley can restrict or close a customer’s account at any time, according to E*Trade’s client agreement for self-directed accounts. When Morgan Stanley restricts or closes an account, the company may cancel all open orders and stop all services. The customer would instruct Morgan Stanley on what to do with the remaining assets.
If Morgan Stanley doesn’t receive instructions “after a reasonable period of time,” it may sell the remaining assets and send the customer the net proceeds, or transfer any remaining securities or cash to the client.
Morgan Stanley faces a delicate choice. When the meme-stock rally was in its heyday in early 2021, Robinhood and other brokerages had restricted trading in GameStop, which enraged the Reddit trading crowd that hails Gill as a leader.
Gunjan Banerji, Alexander Osipovich and Hannah Miao contributed to this article.
Write to AnnaMaria Andriotis at annamaria.andriotis@wsj.com
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Appeared in the June 4, 2024, print edition as 'E*Trade Weighs Booting Memes Leader'.
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