Traders clash with Citadel over SEC report in short squeeze lawsuit
Citadel Securities has come under fire for its referral to a recent report by the Securities and Exchange Commission (SEC), as the market maker fights antitrust allegations in multi-district litigation targeting dozens of companies involved in the January short squeeze.
According to the plaintiffs, this case is about individual investors who invested their money in the stock market and were stripped of their rights to control their own investments. The traders accuse the defendants and other market players of hatching an anticompetitive scheme to restrict Retail Investors’ access to the stock market and prevent the market from operating freely and fairly.
The defendants argue that the plaintiffs have utterly failed to plead a cognizable antitrust claim that can survive a motion to dismiss. According to the defendants, what is missing from the complaint are, inter alia,
- sufficient factual allegations of any agreement between any Defendants (let alone among all of them) to restrict trading in any security;
- any attempt to identify any benefit that any of the brokers (self-clearing or otherwise) received from allegedly restricting trading to help Citadel Securities; or
- any plausible explanation for how a conspiracy arose that resulted in the members imposing disparate restrictions on disparate sets of stocks, while at the same time other brokers not alleged to be part of the conspiracy and/or now voluntarily dismissed from the case took similar steps.
As FX News Group has reported, Citadel has referred to SEC’s Staff Report on Equity and Options Market Structure Conditions in Early 2021.
In the Report, the SEC reviewed the causes of the January 2021 trading restrictions. Although the SEC noted “one narrative” that “attributed the broker-dealer trading restrictions to pressure from hedge funds and their commercial partners,” the SEC instead concluded: “A number of clearing brokers experienced intraday margin calls from a clearinghouse. In reaction, some broker-dealers decided to restrict trading in a limited number of individual stocks in a way that some investors may not have anticipated.”
According to Citadel, the Report pertains to, inter alia:
- Plaintiffs’ argument that “Government investigations are indicative of anticompetitive collusion” and specifically that it is “indicative of collusion” that the SEC is “investigating the events concerning the January 28, 2021 trading restrictions”;
- Defendants’ argument that “the enforcement of Plaintiffs’ claims would create . . . conflict between the Exchange Act and the Sherman Act . . . because the SEC is currently investigating the January 2021 short squeeze events”.
Now, the plaintiffs wants this supplemental authority stricken. This becomes clear from a document filed with the Florida Southern District Court on November 4, 2021.
According to the traders, Citadel mischaracterizes the Staff Report, cherry picks portions that expand its arguments in its Motion to Dismiss, and omits key portions of the Staff Report.
The traders note that, for instance, Citadel references page 43 of the Staff Report to argue that the SEC concluded that broker-dealers restricted trading due to intraday margin calls from a clearinghouse. The plaintiffs argue that this argument mischaracterizes the Staff Report’s findings, as Citadel omits that this statement was included by the Staff under the subsection “Forces that may cause a brokerage to restrict trading.”
Further, the Staff Report expressly disclaims any legal or factual effect. Hence, no legal conclusions can be drawn from the Staff Report and it has no preclusive effect with respect to any factual matter addressed by Citadel in their motion papers.
The traders explain:
“To the extent that Citadel attempts to introduce the Staff Report as a means to show conflict between the Securities Exchange Act and the Sherman Act, the Staff Report does no such thing as, by its terms, it has “no legal force or effect.”
Finally, the traders say that the Staff Report does not report on collusion by or between Robinhood, Citadel or other market participants. Likewise, and consistent with the above, by its terms the Staff Report does not reach any conclusions on the subject.