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EXHIBIT A
(First Amended Complaint for Josh Gossett, et al. v. Robinhood Financial, et al. [2:21-
cv-00837] before the Central District of California)
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MAURICE D. PESSAH (SBN: 275955)
maurice@pessahgroup.com
MICHAEL MORRIS-NUSSBAUM (SBN: 317146)
mmnussbaum@pessahgroup.com
SUMMER E. BENSON (SBN: 326398)
sbenson@pessahgroup.com
PESSAH LAW GROUP, PC
661 N. Harper Ave., Suite 208
Los Angeles, CA 90048
Tel. (310) 772-2261
STUART CHELIN (SBN: 320357)
stuart@chelinlaw.com
CHELIN LAW FIRM
1801 Century Park East, Suite 2500
Los Angeles, CA 90076
Tel. (310) 556-9664
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA – WESTERN DIVISION
JOSH GOSSETT, JAMES LAPLANT,
DANIELLE PERREAULT, MAURICE
SCARBOROUGH, and SCOTT
SCHILLER each individually, and on
behalf of all others similarly situated,
Plaintiffs,
v.
ROBINHOOD FINANCIAL, LLC, a
Delaware limited liability company;
ROBINHOOD SECURITIES, LLC, a
Delaware limited liability company;
ROBINHOOD MARKETS, INC., a
Delaware Corporation; and DOES 1-10,
inclusive,
Defendants.
Case No.: 21-cv-00837-VAP-MRW
FIRST AMENDED COMPLAINT
CLASS ACTION FOR
(1)
BREACH OF CONTRACT;
(2)
BREACH OF IMPLIED TERMS
AND COVENANTS;
(3)
BREACH OF THE IMPLIED
COVENANT OF GOOD FAITH AND
FAIR DEALING;
(4)
NEGLIGENCE;
(5)
BREACH OF FIDUCIARY DUTY;
(6)
FALSE PROMISE;
(7)
NEGLIGENT
MISREPRESENTATION;
(8)
UNLAWFUL BUSINESS
PRACTICES, [Cal. Bus. & Prof. C.
§17200 et seq.];
(9)
VIOLATION OF SEC RULE 10B-5
DEMAND FOR JURY TRIAL
Attorneys for Plaintiffs and the Putative Class
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Plaintiffs JOSH GOSSETT, JAMES LAPLANT, DANIELLE PERREAULT,
MAURICE SCARBOROUGH and SCOTT SCHILLER (“Plaintiffs”), on behalf of
themselves and all those similarly situated, bring this class action complaint against
Defendants, ROBINHOOD FINANCIAL, LLC, a Delaware limited liability company;
ROBINHOOD SECURITIES, LLC, a Delaware limited liability company;
ROBINHOOD MARKETS, INC., a Delaware Corporation (collectively referred to
herein as “Defendants,” “Robinhood,” or the “Company”); and DOES 1-100, inclusive,
based on the following allegations:
NATURE OF THE ACTION
1.
Robinhood, famous as the champion of the small retail investor, is a multi-
billion-dollar online brokerage which prides and markets itself on “democratizing
finance for all.” In a March 23, 2016 tweet, the company asserted what one would
expect from the self-professed “Robin Hood” of retail trading: “Let the people trade.”
Robinhood’s raison d’etre was to bring the advantages of market participation to
millions of non-institutional, retail investors. Robinhood owes various contractual
obligations to its clients. As a broker-dealer, Robinhood also owes its clients certain
legal duties. These include the duty of reasonable care, loyalty, good faith and best
execution. That is what Robinhood’s clients expected and that is what they deserved.
To be treated with the same good faith as institutional market players. However, on or
about January 27, 2021, Robinhood switched sides.
2.
Indeed, the Company plunged into infamy when it deliberately, willfully
and knowingly breached its duties to its clients in favor of other, competing interests.
Acting against its defenseless clients, Robinhood wantonly brought the ability of
millions of its clients to freely trade on its platform to a screeching and unceremonious
halt. This, despite the fact that Robinhood had sufficient knowledge and opportunity
to forewarn its clients prior to the stock market’s opening bell on the morning of
January 28, 2021, and perhaps even sooner.
3.
By CEO Vladimir Tenev’s own admission, his “operations team” was
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contacted by the National Securities Clearing Corporation (“NSCC”), an “industry
consortium” that, by using a combination of “factors” and its own “discretion,”
requested an immediate cash deposit of approximately $3 billion in order to allow
trades of certain securities made over the app to be processed. In an interview with
Elon Musk on the newly minted social media app, Clubhouse, Mr. Tenev disclosed that
Robinhood’s eleventh-hour negotiations with the NSCC culminated in a decision
whereby: (1) the Company would deposit $700 million (instead of the initially
demanded $3 billion) as collateral to cover trades emanating from its online brokerage
platform; and (2) certain securities (i.e., GME, AMC, NOK, etc.) would be marked
“position closing only.” About “one hour before market opening,” the $700million was
deposited, Tenev confirmed to an inquisitive Mr. Musk.
4.
Upon information and belief, Robinhood’s actions immediately erased
hundreds of millions of dollars in client gains (and opportunities for gains).
Defendants’ actions and omissions including, without limitation, their failure to notify,
warn or disclose their “preemptive”1 actions caused massive losses to Robinhood’s
client and prevented them from mitigating significant losses as certain securities began
to nosedive at a pace only understood and known to whomever had knowledge of the
“closing position only” restriction known to Robinhood “one hour prior” to the
market’s opening.
5.
Indeed, Robinhood deliberately, willfully and knowingly disabled the
“buy” function for any investor on its app who attempted to trade the following stocks
or derivatives thereof: GameStop (“GME”), AMC Entertainment Holdings, Inc.
(“AMC”), BlackBerry Ltd. (“BB”), Nokia (“NOK”) and American Airlines (“AAL”)
among others. Collectively, GME, AMC, BB, NOK and AAL shall be referred to as,
the “Securities.” Options involving the Securities, shall be referred to as the
“Derivatives.”
1 This is a quote from Mr. Tenev’s now infamous January 28, 2021 interview on CNBC’s Squawk Box.
clients
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6.
In addition to being incredibly damaging to millions of its retail investor
clients, Robinhood’s actions were diametrical to Robinhood’s advertised selling point
of “democratizing finance” for all. Robinhood knew, or reasonably should have known,
that the effect of its actions would be inimical to the interests of its clients. Worse still,
the Company, which, in return for money, sends well over half (approx. 65%) of its
“order flow”2 to Citadel Securities, an affiliate of powerhouse hedge fund Citadel, LLC
(“Citadel”), knew of the benefit that Citadel stood to gain from the “closing position
only” restrictions. Upon information and belief, Citadel either held short positions in
all or some of the Securities, and/or held significant interests in certain companies with
short positions in the Securities. Upon information and belief, the financial interests of
the presumptive constituents of Robinhood’s financial “democracy,” were sacrificed in
favor of large institutions and Robinhood’s own interests.
7.
A significant number of retail investors who relied on Robinhood to be
their champion, and who entrusted their trades to Defendants, were told that “ongoing
volatility” was the reason for the sudden suspension of certain basic and crucial account
trading functions.
8.
Robinhood’s CEO, Vladimir Tenev, rushed to hold a damage control
interview on CNBC, during which he averred that Robinhood’s sudden trading
restrictions were “preemptive.” Mr. Tenev then followed up by assuring the public that
Robinhood had no liquidity problems. Later Mr. Tenev changed the story and claimed
that a regulatory call to increase cash deposits (which Robinhood was unable or
unwilling to fulfill) had caused the need for the restrictions. Robinhood then proceeded
to raise $3.4 billion in under a week, demonstrating an ability to raise whatever cash it
needs to keep its business going, including to make any requested deposits with NSCC.
Notwithstanding Mr. Tenev’s equivocations, it is clear that massive amounts of damage
were incurred by Robinhood clients who were left in the dark about why their ability
2 Plaintiffs’ trade orders.
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to trade in their chosen investments had been “pre-emptively” suspended, without any
warning and by the very entity entrusted to facilitate and process their trades.
PARTIES
9.
At all times herein mentioned, Plaintiff JOSH GOSSETT was and is an
individual residing in Los Angeles, California.
10.
At all times herein mentioned, Plaintiff JAMES LAPLANT was and is an
individual residing in San Francisco, California.
11.
At all times herein mentioned, Plaintiff DANIELLE PERREAULT was and
is an individual residing in the State of Maine.
12.
At all times herein mentioned, Plaintiff MAURICE SCARBOROUGH was and
is an individual residing in Los Angeles, California.
13.
At all times herein mentioned, Plaintiff SCOTT SCHILLER was and is an
individual residing in Los Angeles, California.
14.
Plaintiffs are informed and believe, and based thereon allege, that
Defendant ROBINHOOD FINANCIAL, LLC, is, and at all times herein mentioned
was, a Delaware limited liability company, with its principal place of business located
at 85 Willow Road, Menlo Park, California 94025.
15.
Plaintiffs are informed and believe, and based thereon allege, that
Defendant ROBINHOOD SECURITIES, LLC, is, and at all times herein mentioned
was, a Delaware limited liability company, with its principal place of business located
at 500 Colonial Center Parkway, Suite 100, Lake Mary, Florida 32746.
16.
Plaintiffs are informed and believe, and based thereon allege, that
Defendant ROBINHOOD MARKETS, INC., is, and at all times herein mentioned was,
a Delaware corporation, with its principal place of business located at 85 Willow Road,
Menlo Park, California 94025.
17.
Defendants Does 1 through 100, inclusive, are sued herein under fictitious
names. Their true names and capacities are unknown to Plaintiffs. When their true
names and capacities are ascertained, Plaintiffs will amend this complaint by inserting
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their true names and capacities herein. Plaintiffs are informed and believe, and based
thereon allege, that each of the fictitiously named defendants is the agent, servant,
employee, representative, partner, and/or joint venturer of their co-defendants, and so
ratifies all of their acts and conduct. Therefore, each Doe Defendant is responsible in
some manner for the occurrences herein alleged, and Plaintiffs’ damages as herein
alleged were proximately caused by said Defendants.
18.
At all relevant times, each Defendant was the agent of the other
Defendants and was at all times acting within the purpose and scope of such agency.
Moreover, in committing the acts and omissions asserted herein, Defendants, and each
of them, were acting in concert together, in the course and scope of their respective
relationship with each other, whether as employees, agents, representatives,
independent contractors, providers, service providers, as agents or representatives of
each other, respectively, or as joint venturers, co-conspirators or otherwise.
JURISDICTION
19.
This Court has subject-matter jurisdiction over this action pursuant to 28
U.S.C. § 1332(d)(2). The aggregate claims of all members of the proposed Class and
are in excess of $5,000,000, exclusive of interest and costs, and there are more than one
hundred (100) putative class members. Further, several members of the putative class
are citizens of a state different from Defendants.
VENUE
20.
Venue is proper pursuant to 28 U.S.C. §1391(b) because, on information
and belief, a substantial part of the events or omissions giving rise to the claims
occurred in this judicial district, and Plaintiffs’ cause of action arose in this district.
CLASS ACTION ALLEGATIONS
21.
Plaintiffs bring claims pursuant to Federal Rule of Civil Procedure 23 on
behalf of the Class as follows:
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All Robinhood clients and/or users within the United States
who held positions and/or were unable to execute any
trade(s) of the Securities or the Derivatives on or after
January 28, 2021, and who were harmed by Robinhood’s
actions to bar or otherwise restrict trading of the same.
22.
Explicitly excluded from the Class are: (i) Robinhood entities and their
current officers, agents and employees; (ii) counsel for either party; and (iii) the Court
and its personnel presiding over this action.
23.
Numerosity/Impracticability of Joinder: The precise number of
members of the proposed Class is unknown to Plaintiffs at this time. However,
Plaintiffs are informed and believe, and based thereon allege, that the members of the
Class are so numerous that joinder of all members would be impractical and unfeasible.
Plaintiffs are informed and believe, and based thereon allege, that there are hundreds
of thousands of persons (if not more) within the Class. All members may be notified of
the pendency of this action by reference to Defendants’ records, or via alternative
means.
24.
Commonality and Predominance: There are questions of law and fact
that are common to the claims of Plaintiffs and members of the proposed Class. These
common questions of law and fact exist as to all Class members and predominate any
questions affecting only individual members. Common questions of law and fact,
include, but are not limited to, the following:
(a) Whether Defendants breached their agreement with Named Plaintiffs and
the Class to permit trading of the Securities on the Defendants’ platform;
(b) Whether Defendants’ conduct unfairly divested Named Plaintiffs and the
Class of the benefit of their agreement with the Defendants;
(c) Whether Defendants breached their duty to Named Plaintiffs and the Class
to diligently execute or permit reasonable trading requests;
(d) Whether Defendants failed to meet their duty of care when they wantonly,
and without justification or notice, disabled certain trading privileges of
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the Named Plaintiffs and the Class;
(e) Whether Defendants intentionally, and without justification or notice,
restricted certain abilities of Named Plaintiffs and the Class to freely
participate in the trading of the Securities, thereby causing Named
Plaintiffs and the Class to suffer damages;
(f) Whether Defendants violated Financial Industry Regulator Authority
(FINRA) Rule, 5310;
(g) Whether Defendants breached their fiduciary duties to Named Plaintiffs
and the Class;
(h) Whether Defendants made a false promise to the Named Plaintiffs and to
the Class regarding the continuing ability to trade in the Securities which
was relied upon to the detriment of the Named Plaintiffs and the Class.
(i) Whether Defendants engaged in unlawful business practices in violation
of Cal. Bus. & Prof. Code § 17200;
(j) Whether Defendants’ conduct violated SEC Rule 10b-5;
(k) Whether Named Plaintiffs and the Class were injured as a result of
Defendants’ conduct.
25.
Typicality: Plaintiffs’ claims are typical of the claims of the members of
the proposed Class. All members of the proposed Class have been injured by
Defendants’ unlawful conduct. Plaintiffs’ claims arise from the same practices and
course of conduct giving rise to the claims of the members of the proposed Class.
Plaintiffs will fairly and adequately represent the interest of the proposed Class
because Plaintiffs are members of the proposed Class and do not have an interest that
is contrary to or in conflict with those members. There is a well-defined community
of interest in the questions of law and fact affecting the class of persons that Plaintiffs
represent as a whole. Plaintiffs were unable to trade the Securities and the Derivatives
as a result of Defendants’ unlawful conduct and sustained damages as a result.
26.
Superiority: A class action is superior to any other form of action for the
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fair and efficient adjudication of this lawsuit. Individual consumers such as Plaintiffs
have a difficult time prosecuting an individual action against large corporations like
Defendants. Even if any class member could afford individual litigation against
Defendants, it would be unduly burdensome to the court system. Individual litigation
of such numerous claims magnifies the delay and expense to all parties and the court
system. By contrast, a class action presents far fewer management obstacles and
affords the benefits of unitary adjudication, economies of scale, and comprehensive
supervision by a single court. A class action will promote judicial economy and parity
among the claims of the individual class members, as well as judicial consistency.
Notice of the pendency and any resolution of this action can be efficiently provided
to class members by mail, print, broadcast, internet, and/or multimedia publication.
Requiring each class member to both establish individual liability and pursue an
individual remedy would discourage the assertion of lawful claims by customers who
would be disinclined to pursue an action against a corporate defendant like
Robinhood. Proof of a common business practice or factual pattern, of which the
Plaintiffs experienced, is representative of the proposed Class and will establish the
right of each of the members of the proposed Class to relief on the claims alleged
herein.
27.
Prosecution of separate actions by individual members of the proposed
Class would create a substantial risk of inconsistent or varying adjudications, which
may produce incompatible standards of conduct for Defendants. Prosecution of
separate actions by individual members of the proposed Class would create a risk of
adjudications with respect to individual members which may, as a practical matter, be
dispositive of the interest of other members not parties to the adjudication or
substantially impair or impede their ability to protect their interest. Further, the
individual claims are not sufficiently large to warrant vigorous individual prosecution
given the concomitant costs and expenses attending thereto. This class action presents
no material difficulties in management.
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28.
Adequacy of Representation: Plaintiffs are representatives who will
fully and adequately assert and protect the interest of the Class and have retained
competent counsel who are experienced and qualified in prosecuting class actions.
Neither Plaintiffs nor their attorneys have any interests contrary to or in conflict with
the Class.
29.
Plaintiffs request permission to amend the complaint to include other
individuals as class representatives in the event any named Plaintiff is deemed an
inadequate representative of the Class. Plaintiffs further request permission to amend
the Complaint to revise the Class definition as appropriate following discovery.
30.
California is the proper and desirable forum for the claims made against
Robinhood herein. Robinhood is based in California and its customer agreement (the
“Customer Agreement”) specifies California law as governing. In particular the
Customer Agreement provides that “all transactions made in My account shall be
governed by the laws of the State of California regardless of the choice of law rules
thereof)…” Therefore, each contract-based claim brought against Robinhood herein
must be governed by California law and appropriately brought in this State and before
this Court. Further, any tort-based claims, even if determined to be outside the scope
of the governing law provision of the Customer Agreement, can be adequately and
appropriately adjudicated, with adequate and appropriate remedies to Plaintiffs and
each member of the Class.
GENERAL ALLEGATIONS
31.
Plaintiffs hereby incorporate by reference Paragraphs 1 through 30 of this
Complaint as though fully set forth herein.
I.
ROBINHOOD’S BUSINESS AND EXPERTISE IN THE
SECURITIES MARKET
32.
Robinhood is a multi-billion-dollar online brokerage firm that promotes
and offers its brokerage services to the general public. The Company’s services are
accessible via its web-based platform and mobile application (the “App”).
33.
At least two characteristics make Robinhood distinctive. The first is its
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promise not to charge a commission on trades (free trading). The second is the
accessibility to margin and other riskier methods of trading (options trading, etc.)
typically reserved for experienced high net worth investors, that it markets and in fact
offers to everyday retail investors.
34.
Robinhood is a highly sophisticated participant in the market for stocks
and derivatives and possesses a high degree of understanding, knowledge, experience
and expertise about the workings of that market including, without limitation, the
clearing and settlement of trades.
35.
Indeed, after approximately two years in development, Robinhood
launched its own proprietary clearing system, which it claimed was “the only system
built from scratch on modern technology in the last decade.” In about October 2018,
Robinhood publicly released statement, the Company represented that it had built the
clearing system:
“[i]n order to move faster and offer more financial services to you, we
realized we had to build our own clearing system—a core piece of
infrastructure for brokerages—instead of relying on a third party.”
Further, Robinhood advised that its new and improved clearing practices would help
“welcome
millions
of
more
people
to
the
financial
system.”(See
https://blog.robinhood.com/news/2018/10/9/introducing-clearing-by-robinhood; last
accessed February 2, 2021) Robinhood also represented to its clients that, in light of
its status as a “clearing broker,” it had “complete control over giving you the best
experience out there!” (Id.) Robinhood boasted that its new clearing system gave it
“more account and trade information” and thus an ability to offer “better customer
support” and “quicker responses.”
36.
Robinhood makes a significant amount of its revenues and profits from,
among other sources, (i) payments of rebates on a per-transaction basis from middle-
men (known as market makers) through whom Robinhood routes trades or “order
flow”, (ii) selling its clients’ trading and other data to large institutions such as hedge
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funds and others, (iii) uninvested cash in client accounts, and (iv) charging its clients
fees for upgraded and/or expanded services on the Robinhood platform.
37.
Thus, Robinhood directly benefits from the increased use of, and trading
on, its platform as the more cash that clients maintain in their accounts and the more
trading that occurs, the more revenue will be generated through the above-mentioned,
and other, revenue channels. This is a fundamental component of Robinhood’s business
model. Indeed, high volume trading on its platform is of great benefit to Robinhood.
The more trading that occurs, the more money Robinhood earns. Upon information and
belief, Robinhood earned approximately $180 million in revenues in the second quarter
of 2020 alone from its lucrative rebate business.
38.
As such, Robinhood’s objective is to gain as many clients, or users, as it
can. As Robinhood states on its website, www.robinhood.com (the “Site”), it is “on a
mission to democratize finance for all” and believes “the financial system should be
built to work for everyone.” (https://robinhood.com/us/en/support/articles/our-
mission/; last accessed February 2, 2021) (emphasis added)
39.
In furtherance of gaining as many clients as possible, Robinhood offers
investments in fractional shares and the concomitant enticement of investing “in
thousands of stocks for as little as $1.”
40.
Robinhood has been extremely successful in inducing a vast amount of
retail investors to use its platform and become clients. The one thing Robinhood neither
advertises nor draws any attention to whatsoever are the unconscionable terms and
conditions in the Customer Agreement, or the illusory nature of any Robinhood
obligations thereunder.
41.
Upon information and belief, Robinhood has more than 13 million clients
who use its brokerage services, a significant portion of whom are unsophisticated stock
market investors. According to the company, “[m]ore than half of Robinhood
customers are opening their first brokerage account, and the median customer age is 31
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years old.”3
42.
Upon information and belief, Robinhood has had, and is required to have,
extensive dealings and involvement with the National Securities Clearing Corporation
(“NSCC”).
43.
Upon information and belief, at all material times prior to January 28,
2021, Robinhood was aware that the an important and crucial component for successful
and continued operation of its business and ability to provide services to its massive
clientele involved the following mechanisms and factors: (i) that trades made on its
platform were ultimately cleared financially through NSCC, (ii) that Robinhood was
required to post collateral with NSCC to guarantee that there would be settlement of
the trades made through Robinhood’s brokerage business, (iii) that Robinhood is or can
be subject to calls for increased collateral from NSCC, and (iv) that there are a variety
of factors which will cause NSCC to demand that Robinhood increase its collateral,
including, without limitation, trading risk and volatility, in accordance with risk
formulas used by NSCC and at the discretion of NSCC.
44.
Moreover, upon information and belief, at all material times prior to
January 28, 2021, Robinhood was aware, or had a basic understanding, of (i) the
amount of collateral it had on deposit with NSCC, (ii) the various market situations
which would or could precipitate an increase in NSCC imposed collateral requirements,
and (iii) the formulas and criteria upon which NSCC relied when making a decision to
demand increased collateral from Robinhood.
45.
As was known to Robinhood, in the event that Robinhood is required to
increase its collateral with NSCC, this operates against the financial interests of
Robinhood because it will have more money at risk in the event that the collateral must
be used and because it costs Robinhood to raise the additional collateral either because
it must draw on its credit lines, route monies from other investments or offer incentives
3
https://www.cnbc.com/2020/06/17/robinhood-drives-retail-trading-renaissance-during-markets-wild-
ride.html#:~:text=More%20than%20half%20of%20Robinhood,old%2C%20according%20to%20the%20company
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to investors to invest in Robinhood in order to raise the additional funds.
46.
When Robinhood began using its own clearing services, it ceased using
the services of its former clearing broker, Apex Clearing Corporation (“Apex”). Upon
information and belief, Apex had in excess of $4.3 billion in cash and securities
segregated and deposited for regulatory purposes, as disclosed in its 2019 Financial
Statements and Supplemental Schedules. In contrast, and based on information and
belief, when Robinhood switched to become a clearing broker and ceased using Apex’s
services, Robinhood only maintained approximately $300 million on deposit with
NSCC. Robinhood and failed to disclose this drastic reduction in its necessary collateral
deposits, and the risks associated therewith, to its clients.
47.
Robinhood is also a FINRA regulated broker-dealer and is a FINRA
member. As a FINRA regulated broker-dealer, Robinhood, and the terms of its
Agreement, are subject to FINRA Rule 5310, which provides in part that in “any
transaction for or with a customer or a customer of another broker-dealer, a member
and persons associated with a member shall use reasonable diligence to ascertain the
best market for the subject security and buy or sell in such market so that the resultant
price to the customer is as favorable as possible under prevailing market conditions”.
II.
ROBINHOOD
MARKETS
ITSELF
AND
ACTS
AS
AN
INVESTMENT RESOURCE AND TRUSTED FIDUCIARY TO ITS
CLIENTS
48.
Robinhood is an online brokerage and relies heavily and primarily on the
Site to market, promote and explain its services, as well as to solicit potential clients.
The more clients, the better.
49.
Upon information and belief, the very name “Robinhood” was carefully
and purposely chosen by Robinhood to evoke the image and characteristics of the
mythical “Robin Hood,” archetypal champion and protector of the interests of the
everyday citizen, or, in Robinhood’s case, its clients who are the everyday investor.
50.
Robinhood represents on the Site that every “time you place a trade, your
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trust is in our hands”. (See https://robinhood.com/us/en/about-us/our-execution-
quality/; last accessed Feb. 2, 2021) (emphasis added)
51.
Robinhood provides resources which it describes as the “building blocks
of your financial journey” and what “you need to know about investing.” The purpose
of these resources is obviously to prompt new client engagement and conversion, since
the “sign up” button is conveniently and ubiquitously located on each and every page
of the Site, sometimes multiple times.
(https://learn.robinhood.com/articles/1hr6ec2LQfbMQNlTGJSNVI/what-is-fiduciary-
duty/; last accessed February 2, 2021)
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(https://learn.robinhood.com/articles/1hr6ec2LQfbMQNlTGJSNVI/what-is-fiduciary-
duty/)
52.
Robinhood’s marketing is simply masquerading as seemingly neutral
literature designed to help retail investors understand the market, and the duties of
brokers who facilitate trades thereon. Topics such as “what is a fiduciary duty,” the
benefits of being diversified and considerations for navigating the ins and outs of
market volatility are consistently and deliberately combined with offers to receive “free
stock” and “sign up” to the App.
53.
Importantly, Robinhood provides a lengthy explanation of fiduciary duties
on the Site. That explanation includes explicitly explaining that “a fiduciary duty is a
legal and ethical responsibility that certain individuals have to act in the best interests
of the clients….they serve” and includes a duty of care and of loyalty “to put the
interests of a client ahead of” the fiduciary’s interests. Other examples included on the
Here, Defendants combine
their explanation of
fiduciary duty with an
offer to grant “new users”
free stock.
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Site (of course never without the “sign up” button out of reach) are the duty of good
faith and the duty of disclosure, which requires being “fully transparent with clients.”
54.
After Robinhood’s analysis of the role of a fiduciary and repeated
solicitation of clients amidst that discussion, Robinhood presents a link to another
Robinhood created resource entitled “What is a Financial Advisor?” According to that
learning resource, Robinhood explains that different “types of financial advisors
include Certified Financial Planners, accountants, attorneys, brokers, and investment
advisors.” The word brokers is highlighted in the passage and can be contains a click
through link where users are directed to a Robinhood authored article entitled “What is
a Broker?”.
55.
The “What is a Broker” article states clearly that there “are dozens of
brokerage firms in the US. You’ve got Robinhood (of course) as well as others like
Charles Schwab, E* Trade, and Fidelity…..”
(https://learn.robinhood.com/articles/3AalDDtYuWx4fp46eEZpxq/what-is-a-broker/;
last accessed Feb. 2, 2021) (emphasis added)
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56.
Remarkably, at no point in the voluminous materials presented by
Robinhood, which are specifically designed to attract potential clients to the Site and
the App, does the Company ever assert that it is not a fiduciary or does not owe
fiduciary duties to its clients, despite explaining that it is a broker which is a type of
financial advisor which often automatically gives rise to fiduciary status. Moreover,
none of the onerous and unconscionable terms of the Agreement are, in any
conspicuous manner, mentioned amidst the panoply of other information designed to
draw new clients to trade on the App.
57.
Further, Robinhood entices new clients with an offer of free stock.
Fulfilling the free stock offer is one of the first actions that Robinhood performs on
behalf of new clients. The free stock is selected from a basket of stocks chosen by
Robinhood and not the clients.
58.
As well, Robinhood offers other services on the App, such as cash
management similar to banking, which is another traditional relationship understood to
give rise to fiduciary duties.
III.
ROBINHOOD
WATCHES
AND
BENEFITS
FROM
A
SIGNIFICANT RISE IN TRADING AND VOLATILTIY IN
PARTICULAR STOCKS
59.
Commencing in January 2021 and until the morning of January 28, 2021,
Robinhood permitted its clients to take, often risky, positions in the Securities and the
Derivatives. Upon information and belief, significant numbers of Robinhood clients
took positions in the Securities and the Derivatives.
60.
Upon information and belief, Robinhood was aware of the increased
interest and trading in the Securities and the Derivatives both from its own internal
ability to process and analyze this data, and because of the robust and pervasive
discussion and speculation in the media and other social media outlets, such as Reddit.
During his January 28, 2021 interview on CNBC’s Squawk Box, Mr. Tenev
acknowledged that the App was “No. 1 on the [Apple] App Store,” which was yet
another indication that Defendants were positioned to anticipate the high volume of
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trading being conducted on the App and, in particular, in the Securities and the
Derivatives. The notion that Robinhood had no way to predict the increased trading
activity of its clients with respect to the Securities or the Derivatives is as disingenuous
as it is far-fetched. Robinhood abandoned its clients’ interest, and its duties to them,
when it “pre-emptively” and deliberately restricted and disrupted trading on the App in
such a way that even someone with the most basic understanding of the markets would
know to be detrimental to Plaintiffs’ interests. A “position closing only” restriction on
its clients was the most obvious way to artificially depress and otherwise manipulate
the price of the Securities and the Derivatives.
61.
Significantly, it was well publicized and known to Robinhood that a
primary driver of activity among its clients in taking positions involving the Securities
and the Derivatives was to pursue a “short squeeze” strategy whereby the holders of
extremely large short positions in a stock are forced to compete in the market for shares
in order to close their short positions and minimize losses, thereby rapidly raising the
prices of those stocks.
62.
Upon information and belief, Robinhood was aware that the volatility in
the Securities was a risk to its clients who had taken positions involving the Securities.
On the Site, Robinhood advised its clients that in volatile markets “Short-term investors
might perceive volatility as a potential risk” and that how its clients approached risk
“depends on your financial portfolio, what information you trust, and how you interpret
your findings.”
63.
Further upon information and belief, Robinhood’s clients taking positions
involving the Securities and the Derivatives was an important and contributing factor
to the rise in the value of the Securities, and this was fully known to, and understood
by, Robinhood.
64.
Indeed, Robinhood was aware at all material times, including as of
January 28, 2021 that (i) a significant number of its clients were taking positions
involving the Securities and the Derivatives, (ii) there was a very high volume of
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trading in positions in the Securities and the Derivatives being undertaken by
Robinhood’s clients through their Robinhood accounts on Robinhood’s platform, (iii)
the trading by Robinhood’s clients in their positions involving the Securities and
Derivatives was having a significant impact on value of, volume of trading of, positions
in, and overall market interest in the Securities and the Derivatives, and on the
volatility of the foregoing, and (iv) trading in the Securities and the Derivatives could
be subject to time-sensitive circumstances requiring the ability to execute trades
quickly in order to realize profits or minimize losses, especially in light of the increased
volatility in the Securities.
65.
Plaintiffs took positions in the Securities and the Derivatives through their
Robinhood accounts until the morning of January 28, 2021 in reliance (i) on the fact
that they could continue to freely manage their holdings and make investment and
divestment decisions in relation thereto in the manner that they determined was in their
best interests and by using the Robinhood platform to timely engage in the market to
execute their trading, and (ii) the fact that Robinhood had organized and arranged its
business and affairs, including without limitation its financial affairs, such that the high
volumes and volatility of the trading in the Securities and the Derivatives would not be
an impediment to Robinhood executing trading orders or having trades made on its
platform cleared.
66.
Upon information and belief, Robinhood benefitted significantly from the
high volume of trading activity in the Securities and the Derivatives by its clients, who
were relying on the continued full functionality of trading choices through the
Robinhood platform and the stability of Robinhood’s business, as this high trading
volume generated significant amounts of rebates and client trading data that Robinhood
would be able to sell.
IV.
ROBINHOOD KNEW OR OUGHT TO HAVE KNOWN THAT IT
MAY BE REQUIRED TO, OR WOULD, RESTRICT TRADING IN
THE SECURITIES, YET IT NEVERTHELESS ALLOWED
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TRADING TO CONTINUE BEFORE ABRUPTLY RESTRICTING
PLAINTIFFS’ ACCOUNTS WITHOUT NOTICE
67.
Prior to January 28, 2021, the exact particulars of which are known to
Robinhood and unknown to the Plaintiffs, Robinhood became aware that the volume
and volatility of trading in the Securities and the Derivatives by its clients would, or
would likely, result in NSCC requiring Robinhood to dramatically increase its
collateral deposits with NSCC in order for trades of the Securities and the Derivatives
to continue through Robinhood’s brokerage. Robinhood failed to give any notice or
warning to its clients, including without limitation the Plaintiffs, of the foregoing.
68.
Further, or in the alternative, prior to January 28, 2021, in all the
circumstances as pleaded herein, Robinhood reasonably ought to have been aware that
the volume and volatility of trading in the Securities and the Derivatives by its clients
would, or would likely, result in NSCC requiring Robinhood to dramatically increase
its collateral deposits with NSCC in order for trades in the Securities and the
Derivatives to continue. Robinhood failed to give any notice or warning to its clients,
including without limitation the Plaintiffs, of the foregoing.
69.
In any event, Robinhood has averred that early in the morning of January
28, 2021, prior to the market for trading or taking positions in the Securities opening,
NSCC informed Robinhood that it was immediately required to significantly raise the
amount of its collateral deposit with NSCC in order to continue settling trades and other
positions by Robinhood’s clients. Robinhood failed to give any notice or warning to
its clients including, without limitation, the Plaintiffs, of the foregoing.
70.
Based on information and belief, Robinhood was unable to provide the
initial collateral deposit required by NSCC. Upon information and belief, Robinhood
negotiated the collateral requirement to $700 million (from $3 billion) and decided to
mark the Securities “position closing only,” effectively barring Plaintiffs from buying,
or otherwise trading, the Securities and/or the Derivatives other than to allow a
liquidation of their positions in the Securities. This “position closing only” restriction,
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although known to Robinhood prior to the opening bell on January 28, 2021, was not
announced to Plaintiffs. Rather, approximately one hour into the trading day,
Robinhood barred its clients including, without limitation, the Plaintiffs, from using its
services to buy, or otherwise trade, in the Securities or the Derivatives, other than to
sell their Securities and liquidate their accounts of the Securities. Further on January
28, 2021, Robinhood removed the Securities from its platform such that they were
unavailable, and did not appear, to its clients even though the Securities are publicly
traded companies.
71.
The steps taken by Robinhood as described in paragraph 70 above are
hereinafter referred to as the “Robinhood Trading Restrictions”
72.
Robinhood imposed the Robinhood Trading Restrictions without
providing any advance notice to its clients, including without limitation the Plaintiffs,
that it would be taking these steps.
73.
After January 28, 2021, Robinhood modified, and continued to keep in
place, strict restrictions on, at least, the Securities, and in particular, imposed severely
low ceilings that each client, including without limitation the Plaintiffs, could purchase
of each of the Securities (“Modified Trading Restrictions”).
Named Plaintiff LaPlant’s Experience
74.
On the morning of January 28, 2021, Mr. LaPlant attempted to purchase
stock in each of GME, AMC, and BB through the Robinhood platform. However, Mr.
LaPlant, through no fault of his own, was prohibited from doing so by Robinhood.
75.
Each time Mr. LaPlant attempted to purchase the above-referenced stocks,
he received a notification from Robinhood stating, “You can close out your position in
this stock, but you cannot purchase additional shares.” Mr. LaPlant, who was not given
any notice or warning, was effectively divested of certain critical trading functions
typically available through his Robinhood trading account including without limitation,
being divested of the ability to purchase shares of GME, AMC or BB.
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Named Plaintiff Gossett’s Experience
76.
On the morning of January 28, 2021, Mr. Gossett accessed his Robinhood
account to place an order for GME and AMC. However, Mr. Gossett found that he was
prevented by Robinhood from purchasing additional stock in these companies for his
account. Mr. Gossett, like Mr. LaPlant, received a notification that he could only “close
[his] position in this stock[.]” Mr. Gossett, who was not given any notice or warning,
was also effectively divested of certain critical trading functions typically available
through his Robinhood trading account, including without limitation, being divested of
the ability to purchase shares of GME and AMC.
Named Plaintiff Perreault’s Experience
77.
On January 27, 2021, Ms. Perreault purchased shares of GME and NOK.
On the morning of January 28, 2021, Ms. Perreault attempted to purchase additional
shares of GME, as well as shares of AMC. However, Ms. Perreault was prevented from
making these purchases, without warning or notice, by the Robinhood app.
78.
Ms. Perreault saw the value of her Securities holdings plummet in a matter
of minutes as a result of Robinhood’s actions. Worse yet, Ms. Perreault was unable to
mitigate her losses by buying additional Securities at the depressed prices. As a result
of Robinhood’s trading restrictions, Ms. Perreault suffered losses and lost out on
significant earnings opportunities.
Named Plaintiff Scarborough’s Experience
79.
Prior to January 28, 2021, Mr. Scarborough owned call option contracts
for NOK and AMC, as well as shares of AMC and GME.
80.
On January 28, 2021, Mr. Scarborough attempted to purchase shares of
GME, AMC, and NOK through his Robinhood app. Yet, Mr. Scarborough, like other
similarly situated, received a notification informing him that he could not purchase
shares of these stocks.
81.
Additionally, Mr. Scarborough attempted to purchase additional options
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contracts for NOK stock on January 28, 2021. However, when he attempted to do so,
he received a notification advising that “This stock is not supported on Robinhood.”
82. Mr. Scarborough was therefore forced to watch the value of his Securities
and Derivatives fall while being unable to mitigate his losses by buying additional
shares and options at the depressed prices. Mr. Scarborough suffered losses as a result
of Robinhood’s actions and lost out on additional earnings opportunities.
Named Plaintiff Schiller’s Experience
83.
On January 28, 2021, owned approximately 108 call option contracts in
American Airlines (AAL). On said date, Schiller, a Robinhood client, was unable to
effectuate trades on or for AAL. Moreover, Mr. Schiller was unable to even look up
AAL via the Robinhood Ap, as the ticker symbol was totally unavailable on
Robinhood’s platform thereby prohibiting Mr. Schiller from effectuating trades on or
relating to the positions he held in AAL.
84.
Mr. Scarborough suffered losses as a result of Robinhood’s actions and
lost out on additional earnings opportunities.
V.
ROBINHOOD’S
FAILURE
TO
PROVIDE
NOTICE
OR
WARNING
AND
ITS
UNILATERAL
RESTRICTIONS
SEVERELY DAMAGED ITS CLIENTS AND THE MARKET FOR
AND VALUE OF THE SECURITIES
85.
Robinhood imposed the Robinhood Trading Restrictions, and has
continued with the Modified Robinhood Trading Restrictions, with the willful, specific
and deliberate intention of negatively affecting the market for the Securities and the
Derivatives in order to dramatically deflate and depress the price and value of the
Securities and the Derivatives.
86.
Further, or in the alternative, Robinhood imposed the Robinhood Trading
Restrictions, and continued operating with the Modified Robinhood Trading
Restrictions when it was aware, or reasonably ought to have been aware, that those
steps would negatively affect the market for the Securities and the Derivatives and
would dramatically deflate and depress the price and value of the Securities and the
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Derivatives.
87.
Further, when Robinhood imposed the Robinhood Trading Restrictions,
vast amounts of Robinhood clients including, without limitation, the Plaintiffs,
attempted to take positions, or increase their positions, in the Securities and the
Derivatives, leading to a near term increase in their value. Upon information and belief,
including that such imminent trading in the Securities and the Derivatives was publicly
discussed on various, well-known and widely publicized investor forums and groups
on the internet, Robinhood was aware of the imminent trading in the Securities and the
Derivatives that was about to occur.
88.
Commencing on or about January 28, 2021, there was a precipitous and
dramatic fall in the value of the Securities and the Derivatives.
89.
The imposition of the Robinhood Trading Restrictions and the Modified
Robinhood Trading Restrictions by Robinhood caused and contributed to the
precipitous and dramatic fall in the value of the Securities and the Derivatives.
90.
As a result of Robinhood’s imposition of the Robinhood Trading
Restrictions and continuation with the Modified Robinhood Trading Restrictions,
Robinhood’s clients who owned the Securities and the Derivatives were significantly
harmed as the value of those positions and holdings steeply declined.
91.
As a result of Robinhood’s imposition of the Robinhood Trading
Restrictions and continuation with the Modified Robinhood Trading Restrictions,
Robinhood’s clients were harmed in their ability to use the full functionality of their
accounts to freely trade in the Securities and the Derivatives in such fashion as they
deemed fit in order to mitigate the losses they were experiencing as a result of the fall,
and continuing fall, in the value of their Securities and their Derivatives.
92.
As a result of Robinhood’s imposition of the Robinhood Trading
Restrictions and continuation with the Modified Robinhood Trading Restrictions,
Robinhood’s clients who intended to purchase any of the Securities and/or the
Derivatives were significantly harmed and lost earning opportunities in the event that
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the price of any of the Securities or the Derivatives rises.
93.
As a result of Robinhood’s imposition of the Robinhood Trading
Restrictions and continuation with the Modified Robinhood Trading Restrictions,
Robinhood’s clients who intended to take “short” positions in any of the Securities
were unable to do so and were harmed and lost earning opportunities in the event that
the price of any of the Securities falls.
94.
As a result of Robinhood’s imposition of the Robinhood Trading
Restrictions and continuation with the Modified Robinhood Trading Restrictions,
Robinhood’s clients were forced and/or influenced to take and suffer losses, rather than
potentially suffer greater losses, by selling Securities and otherwise in respect of their
Derivatives in the face of downward spiraling prices of the Securities and the
Derivatives due to the actions taken by Robinhood and the dramatic effect of those
actions on the market for the Securities and the Derivatives.
95.
Further, Robinhood’s failure to provide notice to, or warn, Plaintiffs of
any of the matters referred to hereinabove, caused damage to Plaintiffs in that they
continued to trade and take other positions in the Securities and the Derivatives, and,
as a result, suffered losses and damages as described above. Moreover, Plaintiffs were
prevented from taking any steps to prevent or mitigate the loss and damage that was
caused, or was going to be caused, including without limitation by making strategic
and timely arrangements to deal with their Robinhood accounts and trade and take
positions with other brokers who were still permitting free trading such that the damage
to the market for and value of the Securities and the Derivatives could have been
prevented or severely diminished.
96.
As a result of Robinhood’s conduct, Mr. LaPlant, and the Class, lost out
on earning opportunities in GME, AMC, and BB, was damaged in the Securities and
Derivatives that he held and/or was prevented from mitigating losses in those Securities
and Derivatives.
97.
As a result of Robinhood’s conduct, Mr. Gossett, and the Class, lost out
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on earning opportunities in GME and AMC, was damaged in the Securities and the
Derivatives that he held and/or was prevented from mitigating losses in those Securities
and the Derivatives.
98.
As a result of Robinhood’s conduct, Ms. Perrault, and the Class, lost out
on earning opportunities in GME, AMC and NOK, was damaged in the Securities and
the Derivatives that she held and/or was prevented from mitigating losses in those
Securities and the Derivatives.
99.
As a result of Robinhood’s conduct, Mr. Scarborough, and the Class, lost
out on earning opportunities in GME, AMC, and NOK, was damaged in the Securities
and the Derivatives that he held and/or was prevented from mitigating losses in those
Securities and the Derivatives.
100. AS a result of Robinhood’s conduct, Mr. Schiller, and the Class, lost out
on earning opportunities in AAL, and was damages in the Securities and the Derivatives
that he, and other similarly situated, held and/or was prevented from mitigating losses.
VI.
ROBINHOOD ENGAGED IN ITS CONDUCT IN ORDER TO
PROTECT AND FURTHER INTERESTS IN CONFLICT WITH
THE INTERESTS OF ITS CLIENTS
101. Robinhood imposed the Robinhood Trading Restrictions, and continued
with the Modified Robinhood Trading Restrictions, with the specific, deliberate and
malicious intent to advance and protect its own financial and other interests at the
expense and sacrifice of the interests of its clients, including without limitation the
Plaintiffs.
102. Further, or in the alternative, Robinhood imposed the Robinhood Trading
Restrictions, and continued with the Modified Robinhood Trading Restrictions, with
the specific, deliberate and malicious intent to advance and protect the interests of other
companies and financial institutions at the expense and sacrifice of the interests of its
clients including, without limitation, the Plaintiffs. Those other companies and
financial institutions include, among others, investors and equity holders in Robinhood,
and financial institutions, organizations and companies (such as hedge funds), some or
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all of whom had an interest in the price of the Securities being devalued because they
had taken large “short” positions in respect of the Securities among other reasons.
103. Robinhood’s conduct as alleged herein, including without limitation
imposing the Robinhood Trading Restrictions, and continuing with the Modified
Robinhood Trading Restrictions was and is in contravention of FINRA Rule 5310.
VII. ROBINHOOD HAS FAILED TO MAINTAIN CONSISTENT
REASONS FOR ITS CONDUCT
104. On January 28, 20201, Robinhood’s CEO, Vladimir Tenev, rushed to hold
a damage control interview on CNBC’s Squawk Box, during which he averred that the
Robinhood Trading Restrictions were “pre-emptive.” What exactly Robinhood was
attempting to “pre-empt” is yet to be determined and was not explained by Mr. Tenev.
105. Also, during this interview, Mr. Tenev averred that the Robinhood
Trading Restrictions were not as a result of any liquidity concern or deficiency within
the Company.
106. Then, in a publicly disseminated discussion with Elon Musk on the night
of January 31, 2021, Mr. Tenev came up with a new explanation for the suddenly
imposed Robinhood Trading Restrictions, being that in the early morning of January
28, 2021, NSCC requested, initially, a $3 billion collateral deposit from Robinhood,
and then a $1.4 billion collateral deposit before finally settling on $700 million
provided that Robinhood impose the Robinhood Trading Restrictions.
107. However, based on information and belief, Robinhood has been able to
raise $3.4 billion in capital in less than 1 (one) week since it imposed the Robinhood
Trading Restrictions, suggesting that Robinhood could have quickly averted any
disruption to the market for the Securities and the Derivatives, or imposition of the
Robinhood Trading Restrictions or the Modified the Robinhood Trading Restrictions,
had it desired.
//
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FIRST CAUSE OF ACTION
BREACH OF CONTRACT
(Against All Defendants; and DOES 1-10)
108.
Plaintiffs hereby reallege and incorporate by reference Paragraphs 1
through 107 of this Complaint as though fully set forth herein.
109.
Plaintiffs each entered into a contract with Defendants pursuant to which
Defendants agreed to make the Robinhood trading platform, and the services associated
therewith, available to Plaintiffs in order to carry out market trading, including without
limitation the purchase and sale of securities such as stocks, options and futures
(“Customer Agreement”).
110.
The Customer Agreement obligates Robinhood to execute the Plaintiffs
orders from their accounts and have those transactions cleared.
111.
The Customer Agreement expressly provides that:
All orders for the purchase of Securities given for My Account
will be authorized by Me and executed in reliance on My promise
that an actual purchase is intended.
I understand that Robinhood Financial has entered into a
clearing agreement with Robinhood Securities whereby
Robinhood Financial will introduce my Account to Robinhood
Securities, and Robinhood Securities will clear all transactions.
If [Robinhood] [does] not complete a transaction to or from your
Account on time or in the correct amount, according to our
Agreement with you, we will be liable for your losses or
damages.
112.
The Customer Agreement further provides that in the event Robinhood
discontinued a client account or any services related thereto, that it would “immediately
providing written notice” to its client.
113.
The Plaintiffs fulfilled their obligations under the Customer Agreement
and adhered to the terms thereof. Further the Plaintiffs provided valuable consideration
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under the Customer Agreement including without the opportunity to earn rebates and
access to private client trading data to sell to third parties.
114.
The Customer Agreement is a type of agreement known as “clickwrap”
and contains standard terms drafted by Defendants which are not open to negotiation.
115.
The Customer Agreement specifically provides that it is governed by
California law, “except to the extent governed by….FINRA Rules”.
116.
Defendants breached the Customer Agreement with Plaintiffs by
imposing the Robinhood Trading Restrictions and the Modified Robinhood Trading
Restrictions and otherwise, from and after the morning of January 28, 2021, restricting
its services on the Robinhood platform and preventing the ability to buy, or otherwise
trade or take positions, involving the Securities and the Derivatives and by failing and
refusing to clear Plaintiffs’ trades in the Securities and Derivatives.
117.
Further, Defendants breached the Customer Agreement by acting in
contravention of FINRA Rule 5130 as alleged above in this Complaint.
118.
As a direct and proximate result of the foregoing breaches of the Customer
Agreement, Plaintiffs have been materially prejudiced and have sustained damages in
an amount to be proven at trial.
SECOND CAUSE OF ACTION
BREACH OF CONTRACT (IMPLIED TERMS AND COVENANTS)
(Against All Defendants; and DOES 1-10)
119.
Plaintiffs hereby reallege and incorporate by reference Paragraphs 1
through 118 of this Complaint as though fully set forth herein.
120.
In all of the circumstances surrounding and including the Agreement, the
formation of the Agreement, the past history between Defendants and Plaintiffs
regarding the use of the Robinhood platform for trading and the customs, norms and
standards surrounding trading in stocks, options and futures, and as needed for the sake
of the Customer Agreement’s business efficacy, the Customer Agreement included
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certain implied terms and covenants (“Implied Terms”).
121. The Implied Terms included: (i) that Defendants would give Plaintiffs
reasonable advanced notice or warning prior to taking any steps out of the ordinary and
reasonable industry customs, norms and standards regarding brokerage accounts,
including without limitation placing any blanket restrictions across its platform which
would affect their accounts or their ability to trade from their accounts, (ii) that
Defendants would give Plaintiffs reasonable advanced notice or warning upon
Defendants being aware that Defendants would be taking any steps out of the
reasonable and ordinary industry customs, norms and standards regarding brokerage
accounts, including without limitation placing any blanket restrictions across its
platform which would affect their accounts or their ability to trade from their accounts
(iii) that Defendants would not take steps to interfere with the Plaintiffs’ trading from
their accounts for reasons not specifically related to their accounts, (iv) Defendants
would not take any steps, or exercise any discretions, to deliberately harm and interfere
with, or which Defendants reasonably knew would harm or interfere with, the interests
of Plaintiffs, (v) that Defendants would not take any steps, or exercise any discretions,
with the specific and deliberate intent of harming or sacrificing, or which Defendants
reasonably knew would harm or sacrifice, the interests of Plaintiffs in order to prefer
the interests of Defendants or others, (vi) that Defendants would not take any steps, or
exercise any discretions, to deliberately manipulate, interfere with and/or harm, or
which Defendants reasonably knew would manipulate, interfere with and/or harm, the
operation of the market for, or the values and prices of, stocks and derivatives, in which
Plaintiffs were trading or intended to trade, (vii) that the Defendants would not restrict
the free trading in any particular stocks or derivatives, which were being freely traded
by others in the public market and which were not the subject of a halt by the Securities
Exchange Commission or any stock exchange; and (viii) that the Defendants would
operate the Robinhood platform and provide its brokerage services in compliance with
applicable licensing requirements, regulations and laws.
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122. Plaintiffs fulfilled their obligations under the Customer Agreement and
adhered to the terms thereof. Further the Plaintiffs provided valuable consideration
under the Customer Agreement including without limitation the opportunity to earn
rebates and access to private client trading data to sell to third parties.
123. The Customer Agreement is a type of agreement known as a “clickwrap”
and its terms are not open to negotiation.
124. Defendants drafted each and every term of the Customer Agreement.
125. Defendants, a multi-billion dollar business, have vastly superior
bargaining power compared to Plaintiffs.
126. The Customer Agreement is a very lengthy and technical document laden
with complicated legal terms and terminology regarding the securities market and the
operation of Plaintiffs’ account.
127. Defendants, knew, or ought to have known, that Plaintiffs did not, or could
not, fully understand or appreciate, and lacked the sophistication to fully understand or
appreciate, the terms of the Customer Agreement including, without limitation, their
rights thereunder.
128. The Customer Agreement provides that compliance with its essential
terms are optional for Defendants, yet mandatory for Plaintiffs.
129. The
Customer
Agreement
is
procedurally
and
substantively
unconscionable without the Implied Terms being a part thereof.
130. The Defendants, by engaging in their conduct as alleged hereinabove,
breached the Implied Terms of the Customer Agreement, and each of them.
131. As a direct and proximate result of the foregoing breaches of the Implied
Terms of the Customer Agreement, Plaintiffs have been materially prejudiced and have
sustained damages in an amount to be proven at trial.
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THIRD CAUSE OF ACTION
BREACH OF IMPLIED COVENANT OF
GOOD FAITH AND FAIR DEALING
(Against All Defendants; and DOES 1-10)
132.
Plaintiffs hereby reallege and incorporate by reference Paragraphs 1
through 131 of this Complaint as though fully set forth herein.
133.
Plaintiffs fulfilled their obligations under the Customer Agreement and
adhered to the terms thereof. Further, Plaintiffs provided valuable consideration under
the Customer Agreement including, without limitation, , the opportunity to earn rebates
and access to private client trading data to sell to third parties.
134.
Every contract imposes upon each party a duty of good faith and fair
dealing in the performance of the contract such that neither party shall do anything
which will have the effect of destroying or injuring the right of the other party to receive
the fruits of the contract.
135.
Defendants materially breached the covenant of good faith and fair dealing
implied in the Customer Agreement as a matter of law, and unfairly and in bad faith
interfered with the right to receive the benefit of the Customer Agreement by, among
other things, failing to provide notice that certain critical account trading functions of
Plaintiffs would be restricted, actually and in fact restricting such account functions,
and knowingly undertaking certain acts that undermined the rights of Names Plaintiffs
and the proposed Class under the Customer Agreement and their interests in the
Securities and the Derivatives.
136.
Defendants breached the covenant of good faith and fair dealing implied
in the Customer Agreement as a matter of law, and unfairly and in bad faith interfered
with the right to receive the benefit of the Customer Agreement, by engaging in their
conduct as alleged hereinabove, including without limitation by imposing the
Robinhood Trading Restrictions and the Modified Robinhood Trading Restrictions.
137.
Plaintiffs expected that Defendants would use their best efforts to take
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actions in support of and to fulfill the terms of the Customer Agreement. The actions
of Defendants as hereinbefore described, are in violation of the implied covenant of
good faith and fair dealing and have caused Plaintiffs to suffer damages in an amount
to be determined at trial.
138.
As a direct and proximate result of the foregoing breach, Plaintiffs have
been materially prejudiced and have sustained damages in an amount to be proven at
trial.
FOURTH CAUSE OF ACTION
NEGLIGENCE
(Against All Defendants; and DOES 1-10)
139.
Plaintiffs hereby reallege and incorporate by reference Paragraphs 1
through 138 of this Complaint as though fully set forth herein.
140.
Defendants had a duty to exercise reasonable care in conducting and
facilitating trading on behalf of its clients. Defendants had a duty to exercise reasonable
care to facilitate, or otherwise permit, Plaintiffs to trade on their Robinhood accounts.
Defendants had a duty to exercise reasonable care to refrain from taking steps which
caused injury to the Plaintiffs in their trading activities and market positions.
141.
Further, Defendants had a duty to exercise reasonable care to give
reasonable advance notice to, or warn, Plaintiffs that Defendants intended to impose,
inter alia, the Robinhood Trading Restrictions that would cause injury to the Plaintiffs
in their trading activities and market positions prior to taking such steps.
142.
Defendants had a duty to exercise reasonable care to monitor, supervise
and oversee the operation of its financial services business in order to guard against
foreseeable instances whereby Defendants would be pressured or required to undertake
actions which would cause injury to the Plaintiffs in the manner alleged hereinabove.
143.
Defendants had a duty to exercise reasonable care to monitor, supervise
and oversee its financial affairs including, without limitation, its collateral
requirements, so that its business could continue to operate in line with the foreseeable
and actual volume and volatility of trading being undertaken by its clients on its
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platform.
144.
Defendants, by engaging in their conduct as alleged hereinabove,
breached their duties to exercise reasonable care as described hereinabove.
145.
Plaintiffs were harmed as a result.
146.
Defendants’ negligence was a substantial factor in causing Plaintiffs’
harm.
147.
As a direct and proximate result of the foregoing breach, Plaintiffs have
been materially prejudiced and have sustained damages in an amount to be proven at
trial.
FIFTH CAUSE OF ACTION
BREACH OF FIDUCIARY DUTY
(Against All Defendants; and DOES 1-10)
148.
Plaintiffs hereby re-allege and incorporate by reference Paragraphs 1
through 147 of this Complaint as though fully set forth herein.
149.
A fiduciary duty arises by and between parties to a transaction, wherein
one of the parties is duty bound to act with the utmost good faith and for the benefit of
the other party. Plaintiffs voluntarily, and at significant enticement from Defendants
through targeted marketing activity on the Site, reposed their trust and confidence in
Robinhood to execute their trades and to allow access to the capabilities that the App
purports to extend.
150.
Plaintiffs allege that in all of the circumstances surrounding and
concerning the dealings and relationship between the Plaintiffs and the Defendants,
Plaintiffs entrusted Defendants with, among other things, their trades and market orders
with respect to the Securities and the Derivatives, among others.
151.
Defendants’ disregarded their duties to Plaintiffs by, inter alia, bartering
and sacrificing their clients’ ability to freely trade in exchange for more lenient
clearinghouse deposit requirements.
152.
Plaintiffs allege that, at all times herein mentioned, Defendants owed
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fiduciary duties including, without limitation, the duties of loyalty, to make full
material disclosure, to exercise reasonable care, good faith, and to avoid choosing
conflicting interests over that of its clients. Plaintiffs further alleges that Defendants
breached their fiduciary duties to Plaintiffs by participating in and facilitating improper
and unlawful actions, or omissions, and otherwise engaging in their conduct, as alleged
hereinabove.
153.
At all times relevant herein mentioned, Defendants failed to act loyally, to
make full material disclosure, in good faith or in the best interests of Plaintiffs.
154.
Plaintiffs were harmed as a result.
155.
Defendants’ conduct was a substantial factor in causing Plaintiffs’ harm.
156.
As a direct and proximate result of Defendants breaching their fiduciary
duties, Plaintiffs have been materially prejudiced and have sustained damages in an
amount to be proven at trial.
SIXTH CAUSE OF ACTION
FALSE PROMISE
(Against All Defendants; and DOES 1-10)
157.
Plaintiffs hereby reallege and incorporate by reference Paragraphs 1
through 156 of this Complaint as though fully set forth herein.
158.
Defendants allowed Plaintiffs to continue trading and taking positions in
the Securities and the Derivatives through their Robinhood accounts up until the
morning of January 28, 2021 regardless of the high volume of trading in the Securities
and the Derivatives and regardless of the increased volatility in the foregoing.
Defendants further allowed such trading, albeit only for a brief period, despite knowing
that they would be implementing the Robinhood Trading Restrictions without any
warning to Plaintiffs, and without regard for the fact that such actions would harm and
injure Plaintiffs.
159.
Indeed, there was extensive publicity through the media and on the
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Internet about the volume and prices at which the Securities and the Derivatives were
trading. Nonetheless, and despite that publicity, Defendants continued to allow trading
and taking positions in the Securities and the Derivatives as they had always done in
the past and as was required under the Customer Agreement. As such, the Defendants’
conduct in this regard constituted a continuing promise made to Plaintiffs that they
could continue to trade and take positions in the Securities and their derivatives (the
“Promise”).
160. At some point prior to January 28, 2021, the full particulars of which are
known to Defendants and not to Plaintiffs, Defendants decided that they would, might
or would likely place restrictions on Robinhood’s clients regarding trading or taking
positions in the Securities and the Derivatives as pleaded above in this Complaint, such
that Defendants did not intend on performing the Promise, which Defendants continued
to make.
161. Defendants intended Plaintiffs to rely on the Promise so that Defendants
could continue to earn fees, rebates and collect valuable data by Plaintiffs continuing
to trade or take positions in the Securities and the Derivatives.
162. Plaintiffs reasonably relied on the Promise and traded or took positions in
the Securities and the Derivatives, and did not take profits, suffered losses and/or did
not take steps to minimize losses prior to the morning of January 28, 2021.
163. Defendants did not perform the Promise by engaging in their conduct as
pleaded above in this Complaint.
164. Plaintiffs were harmed as a result.
165. Defendants’ conduct was a substantial factor in causing Plaintiffs’ harm.
166. As a direct and proximate result of Defendants failure to perform the
Promise, Plaintiffs have been materially prejudiced and have sustained damages in an
amount to be proven at trial.
//
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FIRST AMENDED CLASS ACTION COMPLAINT
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SEVENTH CAUSE OF ACTION
NEGLIGENT MISREPRESENTATION
(Against All Defendants; and DOES 1-10)
167.
Plaintiffs hereby reallege and incorporate by reference Paragraphs 1
through 166 of this Complaint as though fully set forth herein.
168.
Robinhood represented to the Plaintiffs as true that its new clearing system
would help it “move faster,” would give Robinhood “complete control over giving you
the best experience out there!”, and give Robinhood the ability to offer “better customer
support and quicker responses” among other representations that its new clearing
system was an improvement over its use of Apex as a clearing broker (“Robinhood
Clearing Representations”).
169.
The Robinhood Clearing Representations were not true.
170.
Robinhood had no reasonable grounds for believing that the Robinhood
Clearing Representations were true including, without limitation, because Robinhood
was aware of its liquidity and level of capitalization and that Apex had vastly greater
amounts of segregated funds for regulatory and clearing purposes.
171.
Robinhood intended that Plaintiffs rely on the Robinhood Clearing
Representations, which were made to make Robinhood clients believe that Robinhood
was operating its business and managing its financial obligations such that it was a
reliable platform for its brokerage services.
172.
Plaintiffs relied on the Robinhood Clearing Representations.
173.
Plaintiffs were harmed as a result.
174.
Defendants’ conduct was a substantial factor in causing Plaintiffs’ harm
175.
As
a
direct
and
proximate
result
of
Defendants
negligent
misrepresentations, Plaintiffs have been materially prejudiced and have sustained
damages in an amount to be proven at trial.
//
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FIRST AMENDED CLASS ACTION COMPLAINT
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EIGHTH CAUSE OF ACTION
UNLAWFUL BUSINESS PRACTICES
(CAL. BUS. & PROF. CODE § 17200, et seq.)
(Against All Defendants; and DOES 1-100)
176.
Plaintiffs hereby reallege incorporate by reference Paragraphs 1 through
175 of this Complaint as though fully set forth herein.
177.
By the engaging in the conduct pleaded above in this Complaint,
Defendants have engaged in an unlawful and unfair business acts or practices in
violation of Cal. Bus. & Prof. Code § 17200, et seq.
178.
Plaintiffs were harmed as a result.
179.
Defendants’ conduct was a substantial factor in causing Plaintiffs’ harm.
180.
As a direct and proximate result of Defendants unfair and unlawful
business acts or practices, Plaintiffs have been materially prejudiced and have sustained
damages in an amount to be proven at trial.
NINTH CAUSE OF ACTION
(VIOLATIONS OF SECTION 10(b) OF THE EXCHANGE ACT AND
RULE 10b-5 THEREUNDER)
(Against All Defendants; and DOES 1-10)
181. Plaintiffs hereby reallege and incorporate by reference Paragraphs 1
through 180 of this Complaint as though fully set forth herein.
182.
SEC Rule 10b-5 provides as follows:
"Rule 10b-5: Employment of Manipulative and Deceptive Practices":
It shall be unlawful for any person, directly or indirectly, by the use of any
means or instrumentality of interstate commerce, or of the mails or of any
facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a
material fact necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or
would operate as a fraud or deceit upon any person,
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in connection with the purchase or sale of any security."
183.
By engaging in their conduct as pleaded hereinabove, Defendants violated
SEC Rule 10b-5.
184.
Defendants, individually and in concert with one another: (a) premeditated
and deployed a scheme and artifice to defraud Plaintiffs, who are, and at all relevant
times were, members of the investing public; (b) made untrue statements of material
fact including, without limitation, about their liquidity and ability to cover trades
through their internal clearing department; and (c) omitted material facts in order
deceive Plaintiffs and the investing public, and to create the false impression amongst
Plaintiffs that their statements were not misleading.
185.
Defendants acted with scienter, intentionally, taking the steps it did,
including without limitation any material statements made or omitted by Defendants to
the public or its clients, and avoiding taking other available steps, in order to deflate
the value of the Securities as pleaded above in this complaint, in order to defraud or
deceive the Plaintiffs and other members of the Class. Defendants acted with
knowledge, recklessly and purposely.
186.
Defendants conduct and material statements made or omitted as pleaded
above in this complaint were material to the Plaintiffs, including without limitation by
having actual significance in the deliberations of Plaintiffs because such conduct and
material statements and omissions significantly altered the total mix of information
available to the Plaintiffs in making their decisions concerning trading involving the
Securities.
187.
Plaintiffs were buyers and/or sellers of the Securities.
188.
As a direct and proximate result of Defendants breach and violation of
SEC Rule 10b-5, Plaintiffs have been materially prejudiced and have sustained
damages in an amount to be proven at trial.
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PRAYER
WHEREFORE, Plaintiffs pray for judgment against Defendants as follows:
1.
For compensatory damages, in an amount according to proof;
2.
For consequential damages, in an amount according to proof;
3.
For restitution of all wrongfully acquired amounts and disgorgement of all
ill-gotten profits, in an amount according to proof;
4.
For a declaration that the Customer Agreement is unenforceable due to
unconscionability;
5.
For all statutory penalties authorized by law;
6.
For punitive and/or exemplary damages in an amount sufficient to punish
Defendants for the wrongful conduct alleged herein and to deter such
conduct in the future;
7.
For Plaintiffs’ reasonable attorneys’ fees and costs pursuant to all
applicable provisions of law;
8.
For all costs of suit incurred herein;
9.
For prejudgment and post judgment interest at the maximum legal rate;
and
10.
For such other relief as the Court may deem proper.
Dated: February 4, 2021
PESSAH LAW GROUP, PC
By: /s/ Maurice D. Pessah
Maurice D. Pessah
Michael Morris-Nussbaum
Summer E. Benson
Attorneys for Plaintiffs
and the Class
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CHELIN LAW FIRM
By: /s/ Stuart N. Chelin
Stuart Chelin
Attorneys for Plaintiffs
and the Class
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DEMAND FOR JURY TRIAL
Plaintiffs hereby demand a trial by jury.
Dated: February 4, 2021
PESSAH LAW GROUP, PC
By: /s/ Maurice D. Pessah
Maurice D. Pessah
Michael Morris-Nussbaum
Summer E. Benson
Stuart Chelin
Attorneys for Plaintiffs and the Class
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