Robinhood fails to secure early dismissal of “short squeeze” lawsuit
Online trading company Robinhood has hit the curb while trying to secure early dismissal of a lawsuit brought by traders harmed by the stock trading restrictions introduced during the January short squeeze.
As FX News Group has reported, on August 30, 2021, Robinhood filed a motion to dismiss the lawsuit. The main argument of the company was that the Customer Agreement permits the trading restrictions.
The Court, however, did not dive deeply into Robinhood’s arguments. After a status conference held on September 23, 2021, Chief Judge Cecilia M. Altonaga issued an order denying Robinhood’s motion to dismiss as moot. This usually means that the motion was not filed in a timely manner, that is, that it might be re-filed later.
Robinhood will have to file another motion to dismiss on or before October 15, 2021.
Let’s note that Robinhood’s key argument is that the Customer Agreement allows the company to restrict stock trading. The plaintiffs’ amended complaint challenges this claim.
The traders allege that Robinhood Markets tortiously interfered with existing business relations, which are evidenced by the Customer Agreement and standards of care, amongst Plaintiffs, Robinhood Financial and Robinhood Securities.
As alleged, Plaintiffs and the Robinhood Class have a contractual relationship and business relationship with Robinhood Financial and Robinhood Securities, under which Plaintiffs have legal rights and Robinhood Financial and Robinhood Securities have legal obligations to Plaintiffs.
The plaintiffs note that broker-dealers are expected to take reasonable steps to ensure that they can provide access to the securities markets during periods of extreme market volatility.
Despite being on notice of the price volatility and trading volume concentrated on its platform, Robinhood allegedly failed to take any steps to ensure that its trading platform remained available during times of extreme market volatility. The traders accuse Robinhood of putting the entire market at risk by admittedly failing to meet its capital requirements to support the market activity that it was facilitating and then abruptly imposing a one-sided, self-declared circuit breaker in the form of a PCO (position closing only) policy designed to drive prices down and protect itself at the expense of its customers and investors, including Plaintiffs and the Class.
According to Robinhood’s website, PCO occurs in very narrow circumstances:
-
when a company’s stock is delisted;
-
during mergers and acquisitions, when a symbol may no longer be trading on the exchange or is planned to be delisted;
-
in response to an Executive Order; and
-
for unsupported security types, such as certain closed end funds, limited partnerships and other non-standard listed securities, and when a company merges with a foreign company not listed in the U.S.
The traders argue that Robinhood’s decision to move the same Suspended Stocks its customers held in high positions to PCO because of “extreme volatility” does not fit in any of these defined events and had never been done in response to market volatility.
In its Registration Statement, Robinhood describes these PCO restrictions not as discretionary, but rather as an example of being “forced to restrict trading in certain stocks in order to limit clearinghouse deposit requirements.”
The traders stress that discretion means freedom to decide what should be done in a particular situation. By saying that the restrictions in early January 2021 are an example of Robinhood being “forced to restrict trading,” Robinhood did not, by definition, exercise “discretion” to restrict trading under its Customer Agreement.
The traders go on to explain that there is an industry-recognized mechanism in which trading is halted during volatility: A circuit breaker is an emergency-use regulatory measure imposed by an exchange to temporarily halt trading on an exchange. When an exchange employs a “circuit breaker,” it is done for a limited time period, typically lasting mere minutes—not days, which is a figurative lifetime in the multi-trillion-dollar public markets.
There exists no mechanism by which an exchange imposes a circuit breaker that restricts only one side of trading such that sales are permitted, but purchases are not. Either all trading is or is not halted by an exchange. Exchanges do not employ “circuit breakers” to allow only one-sided trading. The traders argue that “nowhere do the securities laws or rules contemplate that any broker-dealer will ever employ a self-declared circuit breaker and unilaterally halt buy-side trading in any security for an indefinite period of time and without direction from an exchange”.
“This is part of what makes Robinhood’s actions in January 2021 extraordinary, unprecedented, and grossly negligent,” the plaintiffs conclude.
The lawsuit continues at the Florida Southern District Court.
Anonymous
September 26, 2021 @ 10:43 am
5
Anonymous
October 2, 2021 @ 1:42 am
4.5