Shortly after Apex Clearing, a defendant in the “Other Broker” tranche of the multi-district litigation concerning the January trading short squeeze, sought to dismiss the allegations against it, the plaintiffs in this lawsuit replied, reiterating their claims against Apex.

The traders’ reply was filed in the Florida Southern District Court on November 5, 2021.

According to the traders, who brought this lawsuit, on January 28, 2021, Apex imposed an unprecedented, unilateral, unwarranted and one-sided shut down of its securities trading platform and the trading platforms it controls as a clearing broker to prevent its many customers from purchasing certain in-demand securities for approximately three and one-half hours. This Purchase Shutdown was consequential as it decreased and suppressed the price of those securities.

The traders allege that the Purchase Shutdown was unwarranted when it began. Compounding that, Apex maintained the Purchase Shutdown for hours after it knew that there was no justification for it to continue. The plaintiffs say that Apex’s excuse for the Purchase Shutdown is weak. Let’s recall that Apex claims that the reason for the shutdown was a demand by the Depository Trust & Clearing Corporation (DTCC) for a higher collateral deposit.

But that excuse, the traders say, evaporated by 11:47 a.m. (Eastern), January 28th when the DTCC advised Apex that the increased collateral requirement was lower than previously communicated and was within the range Apex found acceptable. This was sixteen minutes after Apex implemented the Purchase Shutdown at 11:31 a.m. Eastern.

Further, the plaintiffs refer to a statement by Rothschild (Apex’s former President) who admitted in an interview that Apex did not restrict trading as a result of capital requirements, stating that Apex had “’headroom’ in terms of the capital available on its balance sheet and also had credit lines it could call upon.”

The traders argue that Apex cannot justify its three-and a-half hour trading suspension as the evidence, provided by DTCC, demonstrates Apex was informed by DTCC no later than 11:47 a.m. Eastern that the collateral requirement was lower than previously communicated and within the range found acceptable by Apex. But Apex did not lift the Purchase Shutdown until 2:55 p.m. Eastern.

In short, if Apex’s then President is to be believed that Apex never faced a cash crisis on January 28th, then Apex’s implementation of an approximately 3.5 hour suspension of the ability to purchase stocks was unjustified. If Apex’s then President is misinformed, and Apex did not have “headroom,” Apex still cannot explain why the Purchase Shutdown lasted for more than three hours after the DTCC informed Apex that the collateral requirement was at a level that Apex found to be acceptable.

The plaintiffs claim that Apex’s imposition of the unwarranted hours-long Purchase Shutdown is classic negligence. Whereas Apex said that it owes no duty of care to the traders, the plaintiff claim that it had a common law duty of care.

The plaintiffs argue that Apex, despite industry requirements, had no plan in place to address increased volatility or increased collateral requirements, and, then once it implemented the Purchase Shutdown, Apex did not timely lift the Purchase Shutdown.

Apex is charged in connection with its dual role as a broker-dealer and as a clearing broker-dealer. Its role as a broker-dealer is straightforward. Various investor customers have broker-dealer accounts with Apex to directly purchase and sell securities through Apex’s platform. On January 28th Apex suspended the ability of each of these customers to purchase shares of (and call options to buy shares of) AMC Entertainment Holdings, Inc. (“AMC”), GameStop Corp. (“GME”), and Koss Corporation (“KOSS”) for three hours and twenty-five minutes.

As a clearing broker-dealer, Apex typically provides back-office services to generally smaller broker-dealers, called “Introducing Broker Dealers” or “Introducing Brokers.” Various investors, such as Plaintiffs, open accounts with Introducing Broker-Dealers, such as Webull Financial LLC and Ally Invest.

When opening accounts with the Introducing Broker-Dealers, investors also, at the same time, enter into agreements with and become customers of Apex, as the clearing broker- dealer. Typically, customers of Introducing Brokers enter their trading orders through the Introducing Broker which are then processed through the Clearing Broker- Dealer. In that regard, each customer of an Introducing Broker-Dealer is also a customer of Apex, the Clearing Broker-Dealer. Because these customers are shared as between the Introducing Broker Dealer and Apex as part of a three-way agreement they are “Shared Customers.”

A Clearing Broker-Dealer typically performs ministerial functions and, therefore, is largely immune from legal liability for any misconduct performed by the Introducing Broker-Dealer. According to the traders, Apex has attempted to mischaracterize its role here.

Apex is not named as a defendant in connection with any ministerial role. Here, Apex, utilizing its power as a Clearing Broker-Dealer, is accused of improperly stepping in front of the Introducing Broker-Dealers and unilaterally shutting down their ability to accept purchase orders for the Suspended Stocks by customers that the Introducing Broker-Dealer and Apex shared.

The traders say:

“Apex pretends that its unprecedented, unilateral, unwarranted one-way shut down of the market for the purchase of securities is permissible risk precaution. It is not. It is insanity. With devastating consequences”.

The plaintiffs conclude that Apex’s Motion to Dismiss the Other Broker Tranche Complaint should be denied.