Court sides with Apex Clearing in short squeeze trading lawsuit
Apex Clearing has secured another win in the multi-district litigation brought by traders caught up in the January short squeeze.
The putative class action is brought on behalf of Apex’s customers and other individual investors who claim to have suffered losses as a result of the defendant’s decision to block them from purchasing shares of AMC Entertainment Holdings, Inc, GameStop Corporation, and Koss Corporation for nearly three-and-a-half hours on January 28, 2021.
The defendant is a broker-dealer for certain direct customers and provides clearing broker services to introducing broker-dealers and their customers.
Leading up to January 28, 2021, individual investors began purchasing large numbers of shares of AMC, GME, and KOSS. The increased demand for these stocks drove share prices up and led to a “short squeeze.” In a “short squeeze,” individual investors like the plaintiffs typically “stand to benefit . . . as the value of the stocks they purchased increases. Short sellers, on the other hand, risk further losses, as stock prices rise as a natural consequence of market forces.”
In response to the ongoing market volatility, at approximately 10:31 a.m. on January 28, 2021, Apex blocked its direct customers and directed its introducing broker-dealers to block their customers from purchasing shares of AMC, GME, and KOSS.
The defendant has maintained it restricted trading due to potential future collateral requirements the National Securities Clearing Corporation (“NSCC”) appeared it may impose on the defendant as part of the margin system NSCC maintains to comply with the Securities and Exchange Commission’s standards for covered clearing agencies.” Specifically, the defendant received an NSCC report at 8:30 a.m. projecting substantially increased collateral requirements.
The traders who brought this action argue that the defendant did not take any action to “confirm the higher collateral number” from the NSCC. Moreover, documents submitted to regulators reveal the defendant knew its NSCC collateral deposit requirement was lower than initially expected at 10:00 a.m. — approximately 30 minutes before it implemented the trading restrictions.
And despite having the opportunity to confirm the lower number on a call with the Depository Trust and Clearing Corporation at 10:47 a.m., the defendant waited until 1:55 p.m. to lift the trading restrictions. In any event, the defendant has subsequently admitted it was never unable to meet its capital requirements.
The plaintiffs claim that as a result of Apex’s one-way trading restrictions, they were prevented from purchasing additional shares of these stocks, the prices of these stocks fell, and that the plaintiffs were forced to either sell at artificially suppressed prices or continue holding their shares despite depreciating values.
Traders assert claims for negligence, breach of fiduciary duty, and tortious interference with a business relationship.
In an order issued on January 10, 2022, Judge Cecilia M Altonaga says that the plaintiffs, Erik Chavez and Peter Jang, did not file lawsuits in other districts that were then transferred to the Court through the Judicial Panel on Multidistrict Litigation, nor did they file a separate action in this District that was then consolidated with this multidistrict litigation (MDL).
Instead, Plaintiffs assert claims related to the events of January 28 for the first time directly in this MDL.
Apex has moved to dismiss the amended complaint on the grounds that:
- Plaintiffs’ claims are not properly before the Court as part of this MDL proceeding;
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Plaintiffs lack Article III standing;
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Plaintiffs fail to state claims upon which relief can be granted; and
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Plaintiffs’ state law tort claims are preempted by federal securities laws.
On January 10, 2022, the Court dismissed the complaint against Apex on purely formal gronds. The Judge said that, because the Court agrees that Plaintiffs’ claims have not been properly consolidated in this MDL, and hence the Court lacks subject matter jurisdiction, the Court does not reach Defendant’s remaining arguments.
The Court ordered that Apex Clearing Corporation’s motion to dismiss the traders’ complaint in the other broker tranche of the lawsuit is granted. The complaint was dismissed without prejudice.
If the plaintiffs, Chavez and Jang, wish to assert their claims in this MDL, they must follow the proper procedures for doing so. Plaintiffs in the Other Broker Tranche of the Multidistrict Litigation have until February 14, 2022 to file a final amended complaint.
Let’s recall that, in November 2021, Apex was among the companies to secure dismissal of the complaint in the anti-trust tranche the MDL.