GameStop, AMC origins were in a letter from a Wall Street investor before a Reddit WallStreetBets message board took up the cause

Investors had pretty much given up on GameStop when Burry, who had made his name battling Wall Street’s biggest names, identified overlooked value in the video game retailer. Failed acquisitions, lackluster management and customers’ preference for downloading new games rather than buying them in stores had shaved nearly 70 percent from the share price.

But with GameStop trading near its all-time lows, and sitting on roughly $480 million in cash, the board could easily buy back most of the outstanding shares. That could triple the financial payoff for shareholders, including Burry, whose investment firm owned 2 million shares.

“Mr. Market is putting this one right in your hands,” he wrote.

The standpat board ignored Burry. But his letter was the first public indication that the smart guys on Wall Street were missing something about GameStop. He wasn’t the only one who saw it. Weeks earlier, an anonymous figure, whose views, aired on a Reddit message board, would ultimately rock the establishment on Wall Street and in Washington, had invested $3,030 in the company. That was just a sliver of Burry’s millions. But writing as “DeepF—ingValue,” Keith Gill, 34, a Massachusetts financial adviser, helped marshal an online posse of investors who drove GameStop’s share price last month into a historic 1,784 percent gain, humiliating the hedge fund managers who had wagered billions that the stock would fall.

In a nation roiled by us-against-them politics, the GameStop saga has emerged as a morality tale, ostensibly pitting an army of commoners against an arrogant financial elite and fueling an anti-Wall Street animus that has simmered since bank executives more than a decade ago escaped punishment for their role in triggering the financial crisis.

The episode has raised questions about whether the financial markets have one set of rules for deep-pocketed professionals and another for the average individual; where democratization of finance stops and recklessness begins; and whether regulators have failed to police or even understand social media’s effects upon markets.

It also shows that the same disruptive sentiments that upended American politics in recent years are now taking aim at the financial system. Just as populist forces challenged a system of globalization that favored Wall Street and giant corporations rather than factory workers, a grass-roots reaction against financial markets tilted to benefit the rich may be underway.

“What’s going on is a very big deal. It’s destroyed a lot of pretenses,” said Chris Arnade, who spent 20 years on Wall Street before becoming a writer on poverty issues. “It’s been building up for a long time. It’s the erosion of the public trust. It’s a sense of the game is rigged. …[And] if you feel like the game is rigged, you’re not going to play by the rules.”

But what began publicly with Burry’s observation of GameStop’s untapped potential has morphed into a phenomenon — one that is unmoored from traditional investing practices, driven by Gill’s unconventional talent for instigating what some call a revolution.

This tale of small investors vs. large institutions also is not as straightforward as it seems. Along with the retail hordes on Reddit, wealthy investors played an important role in GameStop’s rise. The company’s largest shareholders, according to the most recent securities filings, are Fidelity Investments and BlackRock, two of Wall Street’s most powerful players.

Some of the average investors on the popular message boards have financial industry experience, including at firms like Goldman Sachs. And many analysts say that some of those posting on the site are probably institutional investors posing as individuals.

“This is not entirely a David v. Goliath story. There are some sophisticated resources on both sides of these trades,” said Tyler Gellasch, executive director of the nonprofit Healthy Markets Association and a former Securities and Exchange Commission counsel.

On Monday, GameStop shares closed at $225, down nearly one-third.

GameStop is an unlikely vehicle to take center stage in a 21st-century drama over wealth, power and fair play. The company bills itself as the world’s largest seller of video games, consoles and accessories, with more than 5,000 stores in 10 countries. Its familiar black and red signage is a staple of American shopping centers and strip malls.

But as the market shifted away from physical game disks to downloading, GameStop stumbled. In 2014, it stood by as Amazon bought Twitch, a popular live-streaming platform for gamers that would have been a natural acquisition for the retailer. Instead, GameStop tried to diversify by buying cellphone stores, only to start selling them off three years later.

In a span of 15 months, the company went through five CEOs, in part because of illness. Amid the management upheaval, the company’s fortunes sagged. Revenue peaked at $9.4 billion in 2016, almost twice what its latest full-year results are expected to be when they are released in March.

GameStop’s weakness drew the attention of hedge funds that bet against the stock of wounded companies. These “short sellers” are a controversial breed, since their profits depend on the misfortune of others. But by late 2019, short sellers accounted for nearly two-thirds of the GameStop shares in circulation.

From then on, much of the important action in GameStop’s stock — though it was occurring in public — drew little notice. On a Reddit message board called r/wallstreetbets, anonymous posters using monikers like “chainsaw_vasectomy” traded stock tips in a blend of casual profanity, mutual cheerleading and savvy analysis.

The forum had a distinctive language. Users celebrated their “tendies,” a shorthand for chicken tenders that meant profits. They referred to each other with the self-deprecating, if offensive, term “retards.” Investors with “diamond hands” had the nerves to hold an investment position until, like the rocket ship icon that decorated many posts, it headed to the stars.

Reddit users also vented at a system they saw as deeply unjust, where the rich walked away from their mistakes and the poor were left to suffer.

“I bought a house in 2008 at the ripe age of 21 just months before the crash. I was lucky to be making decent money so young but the truth is I could just barely afford it with a roommate. Then the bottom fell out. These a–holes f—ed me. When I sold that home 5 years later I was still down 15%,” wrote solidtwerks. “These f—ers owe me. I’m taking what’s mine.”

Wall Street was not unaware of the anger brewing in the country. Even as billionaire investors such as Leon Cooperman of Omega Advisors complained of a war on wealth, others saw broader societal forces at work.

“There’s a nihilism that’s going on in there which I do think is reminiscent of the time. I think we saw it at the Capitol building. … People are crying for system change,” Michael Novogratz, a former hedge fund manager who now helms Galaxy Investment Partners, told CNBC. “This is generational. This is millennials and ‘Gen Z’ screaming at boomers, saying you screwed up our planet; you screwed up our economics; you screwed up our future — and screw you.”

In the market for GameStop shares, prominent and unknown investors fed off each other’s actions, joined by a shared disdain for received wisdom.

“Hey Burry thanks a lot for jacking up my cost basis,” Gill wrote in a good-natured Sept. 8, 2019, post alluding to the temporary rise in GameStop shares that was making it more expensive for him to continue accumulating the stock.

The initial reaction to Gill’s wager on GameStop was dismissive. “That ship is sinking,” user cmcewen posted.

In September, the company posted disappointing earnings, which Gill lampooned as a “Chernobyl experience.” But as the stock enjoyed a late 2019 rally, helped by disclosure of Burry’s interest, Gill’s holdings grew, according to screenshots of his monthly E-Trade investment account that he posted on Reddit. By the end of November, the $53,566 he had invested between June and September had grown to $230,628.

Three months later, GameStop again posted what Gill called a “nightmare” earnings report. “Did I sell? Y’all for real? I added,” he wrote, appending the acronym “YOLO,” meaning “you only live once.”

His declaration drew mostly profane gibes at his enthusiasm for such a poor performing stock. His balance now read $83,077. “Damn you’re real determined to make that money disappear,” LincolnAtTheTheatre wrote.

But Gill, who as “Roaring Kitty” was also touting the stock on YouTube, described himself as a long-term investor, untroubled by poor quarterly results. Even as his balance dipped as low as $42,000, he held on and by April 2020, he reaped the rewards.

“GME YOLO update following the start of the Big Short Squeeze,” he wrote atop a screenshot of his E-Trade account showing a balance of $298,394.

On April 3, 2020, it became clear that Burry wasn’t the only investor who doubted the board’s competence. Two hedge funds that owned a combined 7.5 percent of the company filed a proxy challenge, seeking to replace two directors.

“The Board has repeatedly failed stockholders through suboptimal strategic planning, poor capital allocation, inadequate oversight of management and ineffective communications to stockholders, customers and GameStop employees,” wrote Hestia Capital Partners and Permit Capital Enterprise Fund.

The ensuing, albeit brief, rebound in GameStop’s stock wrong-footed other hedge funds that had borrowed shares in a bet on them to decline in value. That forced them to buy other shares to repay their borrowings, a preview on a small scale of the trading action that would bring the company to prominence last month.

Gill’s balance oscillated through the conclusion of the proxy fight in June, which saw the hedge funds win board representation. Then, on the last day of August, the company disclosed that Ryan Cohen, the billionaire co-founder of Chewy, an online pet food retailer, had bought 9 percent of the company.

Over the next two months, the stock price almost tripled. Gill’s balance, which had been below $45,000 in February, topped $1.5 million by late September and $2.6 million one month later. On wallstreetbets, Gill’s fans debated whether he could retire and live off his dividends.

“What a god,” wrote SourceCodeSeller.

On Dec. 8, as the market awaited GameStop’s third-quarter earnings, Gill posted a screenshot of his E-Trade account with a $3 million balance. After CEO George Sherman disclosed a 30 percent decline in revenue and a deeper quarterly loss, Gill posted again. He was down to $2.2 million.

“Seriously, what’s your exit strategy?” user Kerpl asked.

“What’s an exit strategy?” Gill replied, brandishing his diamond hands.

For the next few weeks, GameStop languished below its year-end $18.84 share price. But on Jan. 11, the company announced several changes to its much-maligned board of directors, including the addition of Cohen. News that the accomplished digital commerce pro was joining the leadership helped the stock more than quadruple over the next two weeks.

Trading grew more frenzied. On Jan. 22, investors swapped nearly 200 million shares, up from around 5 million on a typical day earlier in the month.

GameStop began attracting wider notice, as word spread that Melvin Capital, a prominent hedge fund, had absorbed multibillion-dollar losses betting that GameStop would fall.

After Cooperman, the billionaire founder of Omega Advisors, complained on CNBC that people “who don’t have any idea what they’re doing” were “sitting at home, getting their checks from the government” and driving the market frenzy, wallstreetbets was awash in vitriol.

“F— all of these crusty old billionaires, my country’s been destroyed because of them,” wrote Semkee69.

“These hedge funds deserve to burn,” wrote quyensanity.

Yet even as the Reddit crowd celebrated its apparent triumph, there were reasons to worry. GameStop’s share price, which approached $500 at one point, had clearly become untethered from the financial metrics that traditionally justify rising prices. Though similar episodes in the past have ended with small investors getting wrecked, many on Reddit insisted they would stay the course indefinitely.

“Over a long enough time frame, prices should reflect the real business and that’s not $300 a share. Some of these investors will face a day of reckoning. But they don’t care about that,” said Desmund Delaney, 25, a former Goldman Sachs analyst who posts on Reddit as delaneydi.

Many were using borrowed money, a technique that amplifies gains as prices rise — and multiplies losses as they fall. Margin debt reached a record $778 billion in December, up more than one-third over the past year, according to the Financial Industry Regulatory Authority.

Others thought the retail crowd was getting more credit for GameStop’s rise than it deserved. The widespread use of options to support investment in a beaten-down company smelled of professional expertise, some said.

“This is a fairly sophisticated and well-executed strategy. Somebody knew exactly what they were doing,” said Barry Ritholtz, a veteran investment manager. “It’s a mix of retail and pretty sophisticated players with access to real capital.”

Gill’s portfolio kept growing: past $5 million on the 13th, past $11 million on the 22nd, and past $22 million on the 26th. One day later, as the stock more than doubled amid chaotic trading, Gill’s balance reached $47,973,298.84.

On wallstreetbets, users applauded. “Gonna be the world’s first trillionaire,” wrote Michael12390.

“He’s gonna buy the moon when he gets there,” replied TunafishSandworm.

After CNBC identified him as the man behind DeepF—ingValue, Gill went public in an interview with the Wall Street Journal.

In Washington, politicians at opposing ends of the political spectrum, including Rep. Alexandria Ocasio-Cortez (D-N.Y.) and Sen. Ted Cruz (R-Tex.), briefly came together in agreement that there was something wrong about the GameStop situation.

Burry, the first prominent figure to spy promise in the unloved retailer, failed to enjoy the full benefit of this spike. By last fall, he had sold half of his original 3.4 million shares. His current holdings are not publicly known.

As January ended, and Gill posted his latest monthly update, dozens of users replied with the same all-caps endorsement of their unofficial leader: