Robinhood fails to beat all market manipulation claims in “short squeeze” lawsuit
Robinhood has failed to secure dismissal of all the market manipulation claims related to the trading restrictions it introduced back in January 2021. Judge Cecilia M Altonaga of the Florida Southern District Court has sided with investors harmed by Robinhood’s actions during the January 2021 short squeeze and has agreed that most of the market manipulation claims are well pleaded.
In January 2021, market volatility prompted regulators to raise deposit requirements for clearing brokers, including Robinhood, to ensure that they could cover the costs of unexecuted trades. Robinhood could not afford the new deposit requirements and sought another way to appease regulators. It succeeded after regulators agreed to waive the deposit requirements so long as Robinhood restricted its customers’ access to certain stocks.
What followed is disputed, but investors characterize it as market manipulation. While Robinhood agreed to restrict access to certain stocks, it did not want knowledge of its lack of liquidity to become widespread because such information might undermine Robinhood’s credibility with customers and investors alike. To divert the public’s attention away from Robinhood’s lack of liquidity, Robinhood blamed market volatility for its restrictions and vehemently denied any trouble with its own liquidity.
Robinhood asked the Court to dismiss the pleading setting forth Plaintiffs’ market manipulation theory.
The Consolidated Class Action Complaint (CCAC) contains two claims for relief. Count I alleges that Robinhood manipulated the prices of the Affected Stocks in violation of section 9(a) of the Securities Exchange Act of 1934. Count II alleges an identical theory, but it relies on section 10(b) and rule 10b-5 promulgated thereunder.
- Count I contains two subclaims under sections 9(a)(2) and 9(a)(4), respectively. Plaintiffs allege that Robinhood violated section 9(a)(2) by intentionally manipulating the market to artificially depress the prices of the Affected Stocks. As for section 9(a)(4), Plaintiffs allege that Robinhood misstated or omitted material facts to mislead investors into thinking that it did not have a liquidity problem — a problem that would cause Robinhood to lose investors, customers, money, and relatedly, the chance at a lucrative initial public offering.
- Count II alleges that Robinhood manipulated the market when it (1) raised margin requirements (2) canceled purchase orders for the Affected Stocks, (3) closed out options in AMC and GME early, and (4) prohibited and restricted purchases of the Affected Stocks on its platform. These actions allegedly “created a false impression of actual demand for the Affected Stocks” and “artificially increased supply of the Affected Stocks[.]”
The Court has carefully considered the Consolidated Class Action Complaint (CCAC), the parties’ written submissions, the record, and applicable law.
The short squeeze stretched Robinhood thin, straining its ability to simultaneously provide unconstrained access to markets and comply with regulators. In the end, balancing the two proved too much for Robinhood, so it imposed restrictions that hampered its customers’ access to markets. These restrictions impacted the natural state of supply and demand for the Affected Stocks, but they alone did not amount to market manipulation. Rather, Robinhood’s allegedly opaque and conflicting statements made to hide its lack of capital, coupled with its restrictions, evince an intent on the part of Robinhood to artificially depress share prices for its personal benefit.
At this stage, the Court explains, its task is to assess whether the well-pleaded allegations, taken as true, are sufficiently particularized to satisfy heightened pleading requirements.
In siding with the investors, the Judge noted that the Complaint does more than simply rely on Robinhood’s financial desperation as a basis to infer scienter. When combined with Robinhood’s employees’ statements, the Complaint alleges with particularity that Robinhood knew its restrictions would artificially depress the Affected Stocks, sought to do so, and benefitted from its efforts.
Vlad Tenev hinted to this in a statement on January 31, 2021: “In a matter of days, our clearinghouse-mandated deposit requirements related to stocks increased ten-fold. . . . They are what led us to put temporary buying restrictions in place on a small number of securities that the clearinghouses had raised their deposit requirements on.”
And in selling his AMC shares before imposing restrictions, including the margin calls, Jim Swartwout, Robinhood Securities’ President and COO, implicitly acknowledged that he knew Robinhood’s restrictions would lower the price for Affected Stocks.
“I sold my AMC today. FYI — tomorrow morning we are moving GME to 100% margin — so you are aware[.]”
Robinhood’s staff’s observations that Robinhood would “get crucified for pco’ing” and “the blowback from this is going to be exponentially worse as time goes on” further demonstrate that Robinhood expected the Affected Stocks’ price to drop.
The Judge said:
“Tenev’s statements also show not only what Robinhood stood to gain, or rather avoid losing, but the deception used to protect these interests. Tenev admitted that if Robinhood could not meet its “capital requirements, or [its] deposit requirements, then [it was] essentially dead[.]” When the media interviewed Tenev, he categorically denied any liquidity problem and insisted that Robinhood implemented restrictions to combat market volatility. He repeated the same line to Robinhood’s customers.
These statements boil down to a rhetorical sleight of hand, if not an outright lie. Plaintiffs allege that Robinhood implemented the restrictions because it did not have capital to pay the collateral requirements spawned by the volatile market. Even Gretchen Howard, Robinhood Markets’s COO, conceded on January 28, 2021, that Robinhood had a “major liquidity issue[.]”
Also, an interview with Portnoy, when aggregated with other statements of Robinhood employees, create a strong inference that Robinhood acted with the intent to artificially depress the price of the Affected Stocks.
The Court ordered that the Motion to Dismiss the Securities Tranche Complaint is granted in part. Count I’s misrepresentation claim under 15 U.S.C. section 78i(a)(4) is dismissed. The remaining market manipulation claims under Counts I and II may proceed.