Reported by Matt Levine

Last August, Ryan Cohen did a very funny joke. Cohen — founder of online pet-food retailer Chewy, chairman of the board at GameStop Corp. and general meme-stock influencer and activist — had spent about $121 million to buy about 9.8% of Bed Bath & Beyond Inc.’s stock in early 2022, and he sent Bed Bath’s board of directors a letter advocating some strategic changes. When his stake and activism were disclosed in March, the stock shot up 34% in one day, closing at $21.71 per share. But his strategy didn’t really work, Bed Bath kept deteriorating, and by August the stock was well below the $15 or so that Cohen had paid to buy it.

But then, on the morning of Aug. 16, Cohen re-disclosed that he owned those shares. Nothing had really changed: He had not bought any more stock since March, but since Bed Bath had done some (ill-advised!) stock buybacks in the interim, Cohen’s ownership had gone up to 11.8%, and he filed an updated Schedule 13D disclosure form saying so. “There have been no transactions in securities of the Issuer by the Reporting Persons during the past sixty days,” says the form, and “this Amendment No. 2 was triggered solely due to a change in the number of outstanding Shares of the Issuer.” 

Nobody read that, of course: Meme-stock investors saw that Ryan Cohen had disclosed a larger stake in Bed Bath and, being meme-stock investors, decided that that must be good news. The stock rallied, closing at $23.08 on Aug. 17, the day after his new filing. 

And then he sold all his stock! Bwahahahahahaha! What a great trade. On Aug. 18, Cohen disclosed that he had sold all of his Bed Bath stock on Aug. 16 and 17, at an average price of almost $23 per share, for a profit of almost $70 million. The stock fell to $11.03 the following day and kept falling; later Bed Bath did some wild stock deals to stay afloat, which further tanked the stock; ultimately it filed for bankruptcy this April. Between last May and today, Bed Bath’s stock never closed above $15 (roughly Cohen’s purchase price), except on the four days around his sales. He got out at the very top, and then the stock slid to bankruptcy. Impeccable stuff.

Well, not impeccable. Some Bed Bath shareholders sued him for securities fraud and insider trading. The theory is something like this:

1. 1.Cohen had a loss on his Bed Bath position and wanted out.
2. 2.He decided to use his meme-stock-influencer status to pump and dump the stock.
3. 3.Stage one of his plan was to tweet positive things about the stock, to remind meme-stock investors “oh, right, Ryan Cohen.”
4. 4.Stage two of his plan was to re-disclose his stake in the company, to further remind them “oh, right, Ryan Cohen.”
5. 5.Stage three of his plan was to dump all the stock immediately.

This is a very weird theory! You could imagine that if Cohen was doing a pump-and-dump, he might tweet things like “Bed Bath’s earnings this quarter will be great” or “excited to announce our new turnaround plan for Bed Bath” or what have you. He did not. Instead, the shareholders object to tweets like this:

And, most of all, this:

Get it? CNBC tweeted something about someone saying (correctly!) that Bed Bath’s stock was heading to $1, with an archive photo of a woman pushing a shopping cart at a Bed Bath store. Cohen looked at the photo and said “at least her cart is full,” which honestly is not a ringing endorsement of Bed Bath’s business strategy or future financial performance. But — and this is the key part of the lawsuit — then he added … well actually it just looks to me like a smiley face? But when I hover over it, Twitter tells me it is the “Full moon with face” emoji.

Is that securities fraud?

The idea here is that the moon emoji represents not just optimism about the stock, not “mere puffery,” but that it represents “an expert insider’s direction to buy or hold.” That is a lot of weight to put on that little emoji. I wonder if some portfolio manager at a big hedge fund loaded up on Bed Bath stock after this tweet, and then the stock tanked and she got called into her boss’s office to explain herself, and she was like “no I had an expert insider direction to buy this stock” and the boss was like “you did?” and she was like “well there’s this moon emoji tweet.” L

Read full report: https://www.bloomberg.com/opinion/articles/2023-07-31/the-moon-emoji-is-securities-fraud#xj4y7vzkg