Defendant Robinhood Markets, Inc., Robinhood Financial LLC and Robinhood Securities LLC's Reply in Support of Its Motion to Dismiss the Federal Securities Tranche Complaint — In re January 2021 Short Squeeze Trading Litigation (Dkt. 455, S.D. Fla.)
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Defendants Robinhood Markets, Inc., Robinhood Financial LLC and Robinhood Securities, LLC's Reply in Support of Its Motion to Dismiss the Federal Securities Tranche Complaint in In re: January 2021 Short Squeeze Trading Litigation, Case 1:21-md-02989-CMA (Case No. 21-MD-2989-ALTONAGA/TORRES, Document 455, 27 pages), in the U.S. District Court for the Southern District of Florida, entered February 11, 2022, relating to the Federal Securities Tranche. Robinhood repeats that Plaintiffs do not plead market manipulation under either Section 9(a) or Section 10(b) of the Securities Exchange Act. The reply answers Plaintiffs' opposition and asks that the Federal Securities Tranche complaint be dismissed.
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- Date
- 2022-02-11
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“Defendant Robinhood Markets, Inc., Robinhood Financial LLC and Robinhood Securities LLC's Reply in Support of Its… (Dkt. 455).”
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Case 1:21-md-02989-CMA Document 455 Entered on FLSD Docket 02/11/2022 Page 1 of 27
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF FLORIDA
CASE NO. 21-MD-2989-ALTONAGA/TORRES
In re:
JANUARY 2021 SHORT SQUEEZE
TRADING LITIGATION
_____________________________________/
This Document Relates to the Federal Securities Tranche
DEFENDANT ROBINHOOD MARKETS, INC., ROBINHOOD FINANCIAL LLC AND
ROBINHOOD SECURITIES, LLC’S REPLY IN SUPPORT OF ITS MOTION TO
DISMISS THE FEDERAL SECURITIES TRANCHE COMPLAINT
Case 1:21-md-02989-CMA Document 455 Entered on FLSD Docket 02/11/2022 Page 2 of 27
TABLE OF CONTENTS
TABLE OF AUTHORITIES .......................................................................................................... ii
INTRODUCTION ...........................................................................................................................1
ARGUMENT ...................................................................................................................................3
I. PLAINTIFFS DO NOT PLEAD MARKET MANIPULATION UNDER EITHER
SECTION 9(a) OR SECTION 10(b) OF THE SECURITIES EXCHANGE ACT.............3
A. Plaintiffs Do Not Adequately Plead Manipulative Conduct. ...................................3
1. Plaintiffs Do Not Allege that Robinhood Deceived Investors About Its
Purchase Restrictions. ..................................................................................3
2. Plaintiffs Do Not Allege a Violation of Any Subsection of Section 9(a). ...7
3. Plaintiffs’ Section 10(b) Market Manipulation Claim Fails. .....................14
B. Plaintiffs Do Not Adequately Plead the Requisite State of Mind. .........................15
1. Plaintiffs Do Not Adequately Plead Scienter for the Subsection 9(a)(2) and
Section 10(b) Market Manipulation Claims. .............................................16
2. Plaintiffs Do Not Adequately Plead Scienter for the Subsection 9(a)(4)
Claim. .........................................................................................................18
II. PLAINTIFFS DO NOT PLEAD A MISREPRESENTATION CLAIM UNDER
SECTION 10(b) OF THE SECURITIES EXCHANGE ACT. .........................................20
III. PLAINTIFFS’ CLAIMS SHOULD BE DISMISSED WITH PREJUDICE. ....................20
CONCLUSION ..............................................................................................................................20
Case 1:21-md-02989-CMA Document 455 Entered on FLSD Docket 02/11/2022 Page 3 of 27
TABLE OF AUTHORITIES
Page(s)
Cases
ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007) ........................4, 16, 19, 20
In re Barclays Liquidity Cross and High Frequency Trading Litigation,
390 F. Supp. 3d 432 (S.D.N.Y 2019).................................................................................13, 14
Baum v. Phillips, Appel & Walden, Inc., 648 F. Supp. 1518 (S.D.N.Y. 1986) .....................4, 8, 18
In re Blech Securities Litigation, 928 F. Supp. 1279 (S.D.N.Y. 1996) ...........................................5
Carvelli v. Ocwen Fin. Corp., 934 F.3d 1307 (11th Cir. 2019) .....................................................13
Chemetron Corp. v. Bus. Funds, Inc., 682 F.2d 1149 (5th Cir. 1982)...........................................15
Chemetron Corp. v. Bus. Funds, Inc., 718 F.2d 725 (5th Cir. 1983).......................................14, 15
City of Providence, R.I. v. Bats Glob. Markets, Inc., 878 F.3d 36 (2d Cir. 2017) .....................8, 17
Crane Co. v. Westinghouse Air Brake Co., 419 F.2d 787 (2d Cir. 1969)........................................4
Denny v. Barber, 574 F.2d 465 (2d Cir. 1978) ..............................................................................13
Dura Pharms., Inc. v. Broudo, 544 U.S. 336 (2005) .....................................................................11
FindWhat Investor Group v. FindWhat.com, 658 F.3d 1282 (11th Cir. 2011) .......................12, 16
GFL Advantage Fund, Ltd. v. Colkitt, 272 F.3d 189 (3d Cir. 2001) ...................................3, 14, 15
Gibbons v. McBride, 124 F. Supp. 3d 1342 (S.D. Ga. 2015) ........................................................19
Gurary v. Winehouse, 190 F.3d 37 (2d Cir. 1999) ..........................................................................3
In re Hamilton Bankcorp., Inc. Securities Litigation, 194 F. Supp. 2d 1353
(S.D. Fla. 2002)........................................................................................................................17
Henningsen v. ADT Corp., 161 F. Supp. 3d 1161 (S.D. Fla. 2015)...............................................12
Hughes v. Santa Fe Int’l Corp., 847 F.2d 239 (5th Cir. 1988) ......................................................15
Huls v. Llabona, 437 Fed. Appx. 830 (11th Cir. 2011) .................................................................19
I.B. Trading, Inc. v. Tripoint Glob. Equities, LLC, 280 F. Supp. 3d 524
(S.D.N.Y. 2017) .......................................................................................................................11
ii
Case 1:21-md-02989-CMA Document 455 Entered on FLSD Docket 02/11/2022 Page 4 of 27
Jones v. Bank of Am., N.A., 564 F. App’x 432 (11th Cir. 2014)....................................................20
Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (2011) ..........................................................13
McDonald v. Alan Bush Brokerage Co., 863 F.2d 809 (11th Cir. 1989) ......................................19
In re Merrill Lynch Auction Rate Sec. Litig., 704 F. Supp. 2d 378
(S.D.N.Y. 2010) ........................................................................................................................5
Ray v. Lehman Bros. Kuhn Loeb, 624 F. Supp. 16 (N.D. Ga. 1984) .............................................18
Robbins v. Koger Properties, Inc., 116 F.3d 1441 (11th Cir. 1997)..............................................15
Santa Fe Indus., Inc. v. Green, 430 U.S. 462 (1977) .......................................................................5
Schultz v. Applica, 488 F. Supp. 2d 1219 (S.D. Fla. 2007) ..........................................................12
SEC v. Conaway, 698 F. Supp. 2d 771 (E.D. Mich. 2010) ............................................................18
SEC v. Lek Sec. Corp., 276 F. Supp. 3d 49 (S.D.N.Y. 2017) ..........................................................7
SEC v. Malenfant, 784 F. Supp. 141 (S.D.N.Y. 1992) ....................................................................4
SEC v. Masri, 523 F. Supp. 2d 361 (S.D.N.Y. 2007) ......................................................................6
SEC v. Resch-Cassin & Co., 362 F. Supp. 964 (S.D.N.Y. 1973) ....................................................4
Set Capital LLC v. Credit Suisse Group AG, 996 F.3d 64 (2d Cir. 2021) .......................................6
Sharette v. Credit Suisse International, 127 F. Supp. 3d 60 (S.D.N.Y. 2015) ...................... passim
Skiadas v. Acer Therapeutics Inc., 1:19-cv-6137-GHW, 2020 WL 3268495
(S.D.N.Y. 2020) .......................................................................................................................17
Spicer v. Chicago Bd. Options Exch., Inc., No. 88 C 2139, 1990 WL 172712
(N.D. Ill. Oct. 30, 1990) .........................................................................................................4, 8
In re Time Warner Inc. Sec. Litig., 9 F.3d 259 (2d Cir. 1993) ......................................................13
Wilson v. Merrill Lynch & Co., 671 F.3d 120 (2d Cir. 2011)......................................................5, 7
Zwick Partners, LP v. Quorum Health Corp., No. 3:16-cv-2475,
2018 WL 2933406 (M.D. Tenn. 2018) ....................................................................................17
Statutes & Rules
15 U.S.C. § 78i....................................................................................................................... passim
17 C.F.R. § 240.15c3-1 ....................................................................................................................1
iii
Case 1:21-md-02989-CMA Document 455 Entered on FLSD Docket 02/11/2022 Page 5 of 27
Other Authorities
Order Dismissing the Antitrust Amended Complaint, In re January 2021 Short
Squeeze Trading Litigation, 21-2989-MDL-ALTONAGA/Torres
(S.D. Fla. Nov. 17, 2021), Dkt. No. 438 ..................................................................................12
iv
Case 1:21-md-02989-CMA Document 455 Entered on FLSD Docket 02/11/2022 Page 6 of 27
INTRODUCTION
For Plaintiffs, “at bottom, this is a case about a retail broker that . . . inexcusably
found itself grossly undercapitalized.” (Opp. at 1.) Plaintiffs return to this theme repeatedly in
their Opposition, as they argue that Robinhood’s alleged undercapitalization led Robinhood to
implement the purchase restrictions to save itself from a supposed risk of liquidation and live to
carry out its future IPO.1 (See, e.g., id. at 6-7, 28-29, 32, 37.) Plaintiffs’ allegations, which are
false,2 have nothing whatsoever to do with whether Robinhood manipulated the market for
GameStop, AMC or any of the other so-called “Affected Stocks.” Plaintiffs’ own theme
demonstrates why Plaintiffs have no claim for market manipulation. Plaintiffs allege that
Robinhood took the actions it did on January 28 with the intent to save itself from liquidation.
Market manipulation under the federal securities laws, however, is concerned with a very
different type of intent: an intent to move the price of the relevant securities. Plaintiffs
completely fail to allege that any of Robinhood’s actions were taken for the purpose of moving
the price of the Affected Stocks.
Faced with this clear mismatch between their allegations and what the law
requires to state a market manipulation claim, Plaintiffs are forced to concede that Robinhood’s
conduct “does not fit into prior market manipulation fact patterns.” (Id. at 10.) Nonetheless,
absent any legal authority to support the existence of a claim on facts like these, Plaintiffs ask
this Court to interpret the law of market manipulation “broadly” to make new law expanding the
reach of Sections 9(a) and 10(b) of the Securities Exchange Act (“Exchange Act”). (Id. at 8, 10.)
They invite the Court to do so because “investors, media outlets, and members of Congress
loudly decried” Robinhood’s decision, when faced with NSCC deposit requirements, to put in
place temporary purchasing restrictions for certain stocks. (Id. at 10.) But Plaintiffs’
disappointment over the events of January 2021 does not make out a federal securities violation.
1
In their Opposition, Plaintiffs do not distinguish which Robinhood entity imposed the
purchase restrictions; as Robinhood explained in its Motion (see Mot. at 1-2), it was Robinhood
Securities that made the decision to implement the PCO restrictions.
2
Robinhood’s required capitalization is governed by the SEC’s Net Capital Rule, 17 C.F.R.
§ 240.15c3-1, and Plaintiffs do not allege (nor could they) that Robinhood violated this rule at
any point in time.
Case 1:21-md-02989-CMA Document 455 Entered on FLSD Docket 02/11/2022 Page 7 of 27
This Court should decline Plaintiffs’ invitation to dramatically extend the scope of the Exchange
Act and should dismiss Plaintiffs’ claims.
The threshold problem with Plaintiffs’ claim for market manipulation under either
Section 9(a) or Section 10(b) is that they do not adequately plead manipulative conduct. To
plead manipulative conduct, Plaintiffs must make specific factual allegations of deceptive
conduct regarding market transactions. Conceding that investors were “generally aware of
Robinhood’s actions” (Opp. at 15), Plaintiffs instead put forth the erroneous position that
Robinhood’s purchasing restrictions can still be manipulative even if they were fully disclosed.
This theory is contrary to well-established law which requires that market manipulation claims
under either Section 9(a) or Section 10(b) involve deceptive conduct, and there can be no
deception where the conduct is publicly disclosed to the market. Further, despite finally
identifying in their Opposition the subsections of Section 9(a) that they claim Robinhood
violated—9(a)(2) and 9(a)(4)—Plaintiffs fail to plead the elements of a claim under either
subsection. Nor do Plaintiffs identify any case in which a Section 10(b) market manipulation
claim has survived where the court dismissed an accompanying Section 9(a) claim for failure to
plead the required elements. (See Section I.A.)
Plaintiffs also fail to plead that Robinhood acted with the requisite state of mind
to state a claim under either Section 9(a) or Section 10(b). Plaintiffs’ implausible theory that
Robinhood implemented the purchasing restrictions to save itself from liquidation does not
support a market manipulation claim because Plaintiffs do not allege that Robinhood had
anything to gain from depressing the price of the Affected Stocks. Specifically, Plaintiffs do not
(and cannot) allege that a decline in the price of GameStop or AMC after Robinhood
implemented the purchase restrictions would have helped Robinhood meet its NSCC deposit
requirements. Nor do Plaintiffs provide any other particularized facts or even a reason to infer
that Robinhood had such an intent (it did not). Thus, Plaintiffs fail to allege that Robinhood
acted with the intent to drive up or down the prices of the Affected Stocks—a core requirement
for a market manipulation claim. (See Section I.B.)
Plaintiffs do not respond to Robinhood’s showing that they fail to state a Section
10(b) misrepresentation claim, and have therefore abandoned that claim. (See Section II.)
2
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Accordingly, for these reasons and the reasons set forth in Robinhood’s Motion to
Dismiss (“Motion”) and below, Plaintiffs’ claims should be dismissed with prejudice. (See
Section III.)
ARGUMENT
I. PLAINTIFFS DO NOT PLEAD MARKET MANIPULATION UNDER EITHER
SECTION 9(a) OR SECTION 10(b) OF THE SECURITIES EXCHANGE ACT.
Plaintiffs’ market manipulation claims, under both Sections 9(a) and 10(b), are
fatally flawed in two key respects: (1) Plaintiffs do not plead manipulative conduct and
(2) Plaintiffs do not plead the requisite state of mind.
A. Plaintiffs Do Not Adequately Plead Manipulative Conduct.
1. Plaintiffs Do Not Allege that Robinhood Deceived Investors About Its
Purchase Restrictions.
Robinhood never deceived the market about its purchase restrictions. It is well
established that “[t]he gravamen of manipulation is deception of investors.” GFL Advantage
Fund, Ltd. v. Colkitt, 272 F.3d 189, 205 (3d Cir. 2001) (quoting Gurary v. Winehouse, 190 F.3d
37, 45 (2d Cir. 1999)). Plaintiffs confusingly oscillate between contending that Robinhood
somehow deceived investors by sending “false signals” (Opp. at 13) and acknowledging that
Robinhood’s conduct was not deceptive but contending that Robinhood is nevertheless liable for
market manipulation (id. at 14). These contradictory assertions are both wrong.
i. Robinhood Did Not Send False Price Signals.
Plaintiffs try to rescue a claim that Robinhood’s conduct was deceptive by
contending that Robinhood sent various “false signals” to the market. (Opp. at 13-14.)
Specifically, Plaintiffs contend that Robinhood sent false signals about “the desires of
Robinhood’s millions of customers” and about “its customers’ valuation of the Affected Stocks.”
(Id.) Plaintiffs contend Robinhood did so by “canceling purchase orders submitted after markets
closed on January 27” and “preemptively closing out in-the-money options for GME and AMC.”
(Id. at 13.) Contrary to Plaintiffs’ assertion, none of this conduct sent a “false signal” or
otherwise constituted deceptive conduct.
First, Plaintiffs’ “false signal” theory fails as a matter of law because, in
considering whether conduct is manipulative, “courts generally ask whether a transaction sends
3
Case 1:21-md-02989-CMA Document 455 Entered on FLSD Docket 02/11/2022 Page 9 of 27
a false pricing signal to the market.” ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 100
(2d Cir. 2007) (emphasis added). An example of a false signal is where “trading engineered to
stimulate demand . . . mislead[s] investors into believing that the market has discovered some
positive news and seeks to exploit it, . . . [and] the duped investors then transact accordingly.”
Id. at 100. The seminal market manipulation cases that Robinhood described in its Motion (see
Mot. at 15-16) follow this fact pattern—that is, the defendant sends a false pricing signal by
engaging in some sort of deceptive market transaction to mislead investors and profit at their
expense. See, e.g., SEC v. Resch-Cassin & Co., 362 F. Supp. 964, 978 (S.D.N.Y. 1973)
(involving “pump and dump” scheme); SEC v. Malenfant, 784 F. Supp. 141, 142 (S.D.N.Y.
1992) (same); Crane Co. v. Westinghouse Air Brake Co., 419 F.2d 787, 795 (2d Cir. 1969)
(involving large-scale purchases and secret sell-offs). These cases confirm that to send a “false
signal,” the defendant must actually itself engage in a transaction. See ATSI, 493 F.3d at 100.
Here, Plaintiffs do not allege that Robinhood engaged in any market transactions.
They do not allege that Robinhood bought, sold or otherwise transacted in any of the Affected
Stocks. Instead, they theorize that Robinhood somehow manipulated the market by limiting its
customers’ ability to engage in market transactions. This theory, which lacks the foundational
element of a transaction by the defendant, has been rejected repeatedly. See, e.g., Spicer v.
Chicago Bd. Options Exch., Inc., No. 88 C 2139, 1990 WL 172712, at *2 (N.D. Ill. Oct. 30,
1990) (dismissing market manipulation claim because allegations “might show that [the
exchange] affected the price to be paid for options . . . [b]ut the [exchange] did not itself, simply
by opening the market, ‘effect a series of transactions in any security’”), aff’d sub nom. Spicer v.
Chicago Bd. of Options Exch., Inc., 977 F.2d 255 (7th Cir. 1992); Baum v. Phillips, Appel &
Walden, Inc., 648 F. Supp. 1518, 1530 (S.D.N.Y. 1986) (dismissing market manipulation claim
based on trades the brokerage did not execute rather than on transactions), aff’d sub nom. Asch v.
Philips, Appel & Walden, Inc., 867 F.2d 776 (2d Cir. 1989). Plaintiffs have cited no cases
holding otherwise.3
3
Plaintiffs’ contention that Robinhood’s failure to disclose “how many shares were
transacted or when” constitutes a false pricing signal (Opp. at 14) fails for similar reasons.
Plaintiffs do not cite any cases (nor could they) suggesting that a broker must disclose how many
shares it transacts in on a given day—or conversely, how many transactions it declines to
execute. In re Blech Securities Litigation, 928 F. Supp. 1279 (S.D.N.Y. 1996), on which
4
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Second, even if Plaintiffs could make out a “false signal” theory without alleging
transactions by Robinhood—and they cannot—their deception theory would still fail because
none of the alleged signals were actually false. Plaintiffs acknowledge that Robinhood fully
disclosed its decisions to cancel purchase orders and close out in-the-money options in real time
via messages to customers and Twitter, and Plaintiffs do not allege that Robinhood’s description
of these actions was inaccurate. (Compl. ¶¶ 52-54, 62.) Plaintiffs also acknowledge that
Robinhood told its customers it was taking these actions to “reduce risk” in light of the “current
volatile market conditions.” (Id. ¶¶ 52, 62.) Those statements also are not alleged to have been
false. To state the obvious, a defendant cannot send false signals when it tells the truth about its
conduct in public statements. See, e.g., In re Merrill Lynch Auction Rate Sec. Litig., 704 F.
Supp. 2d 378, 391 (S.D.N.Y. 2010) (finding defendant did not send a “false pricing signal”
where defendant disclosed its conduct “in numerous publicly available documents”), aff’d sub
nom. Wilson v. Merrill Lynch & Co., 671 F.3d 120 (2d Cir. 2011).4
ii. Plaintiffs Cannot Avoid Their Obligation to Plead Deceptive
Conduct.
Plaintiffs’ fallback contention that Robinhood’s conduct could constitute market
manipulation even absent deceptive conduct also fails. (Opp. at 14.) The Supreme Court and the
Courts of Appeals have repeatedly confirmed that the critical threshold question in a market
manipulation case is whether the conduct was misrepresented or hidden by the defendant. See
Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 477 (1977) (“[N]ondisclosure is usually essential to
the success of a manipulative scheme.”); Wilson v. Merrill Lynch & Co., 671 F.3d 120, 130 (2d
Cir. 2011) (“In order for market activity to be manipulative, that conduct must involve
misrepresentation or nondisclosure.”).
Plaintiffs rely, says nothing about false price signals. In Blech, the defendants allegedly engaged
in a covert scheme in which they agreed to receive certain securities at nominal prices in
exchange for purchasing stock in those same companies at inflated prices after their public
offerings. Id. at 1287. The conduct in Blech—i.e., engaging in deceptive market transactions
that affect the price of securities for the defendants’ pecuniary benefit—constitutes manipulative
conduct, not imposing publicly disclosed purchase restrictions during periods of volatility.
4
As discussed further below, Plaintiffs also cannot explain how any of the alleged false
signals relate in any way to the price of the Affected Stocks.
5
Case 1:21-md-02989-CMA Document 455 Entered on FLSD Docket 02/11/2022 Page 11 of 27
Not one case cited by Plaintiffs even suggests otherwise. (See Opp. at 15-16.) In
Set Capital LLC v. Credit Suisse Group AG, 996 F.3d 64 (2d Cir. 2021), the court considered the
limited question of whether “open market transactions”—that is, transactions that are “visible to
the market and reflect[] otherwise legal activity”—can constitute manipulative conduct when
accompanied by manipulative intent.5 Id. at 77. Specifically, the plaintiffs in Set Capital alleged
that defendant Credit Suisse engaged in manipulative conduct by selling “millions of XIV Notes
before engineering a near-total collapse in their price through just 15 minutes of its own trading.”
Id. at 69. In assessing this conduct, the Set Capital court reaffirmed the core principle that “some
misrepresentation or nondisclosure is required” to state a claim for market manipulation, even in
cases where the defendant engages in open market transactions. Id. at 76. As the Second Circuit
noted, “[d]eception is the gravamen of a claim for market manipulation, and the market is not
misled when a transaction’s terms are fully disclosed.” Id. (citations and internal quotations
omitted). Even though Credit Suisse’s transactions were “done openly,” the court found its
“undisclosed scheme to profit at [its] investors’ expense,” which started when Credit Suisse sold
the XIV Notes (not just when it later hedged and destroyed the value of those notes), stated a
claim for market manipulation. Id. at 77-78. This case is nothing like Set Capital; Plaintiffs do
not allege that Robinhood sold any of the Affected Stocks for its own account or otherwise
engaged in any open market transactions—in other words, Plaintiffs are missing any allegation
that Robinhood engaged in a market transaction or did so without disclosure.
Plaintiffs also rely on Sharette v. Credit Suisse International, 127 F. Supp. 3d 60,
73 (S.D.N.Y. 2015), but that case similarly fails to advance Plaintiffs’ contention that fully
disclosed conduct may be actionable as market manipulation. There, the court found the
plaintiffs had stated a claim for market manipulation because they had alleged deceptive
conduct—specifically, they alleged the underwriter defendants “misled investors” by facilitating
transactions that were “contrary to the representations” the defendants had made in the relevant
agreement between the parties. Id. at 73. Additionally, the court in Sharette broadly reaffirmed
the principle that “[i]n order for market activity to be manipulative, that conduct must involve
5
SEC v. Masri, 523 F. Supp. 2d 361, 372 (S.D.N.Y. 2007), on which Plaintiffs also rely,
considered the same question.
6
Case 1:21-md-02989-CMA Document 455 Entered on FLSD Docket 02/11/2022 Page 12 of 27
misrepresentation or nondisclosure.” Id. at 77 (quoting Wilson, 671 F.3d at 130). Here, the
conduct was openly and accurately disclosed and thus could not be deceptive.
In short, to state a claim for market manipulation, Plaintiffs must plead that
Robinhood deceived investors. They cannot do so and thus cannot state a claim under either
Section 9(a) or Section 10(b).
2. Plaintiffs Do Not Allege a Violation of Any Subsection of Section 9(a).
Plaintiffs’ claims under Section 9(a) fail for the independent reason that Plaintiffs
do not plead facts sufficient to sustain a violation of any subsection of Section 9(a). In their
Opposition, Plaintiffs for the first time identify the subsections of Section 9(a) that Robinhood
purportedly violated—namely, Subsections 9(a)(2) and 9(a)(4). (See Opp. at 25.) As explained
in Robinhood’s Motion and below, Plaintiffs cannot state a claim under either subsection.6
i. Plaintiffs Do Not Plead a Claim Under Subsection 9(a)(2).
Plaintiffs’ Subsection 9(a)(2) claim must be dismissed because Plaintiffs fail to
allege two essential conduct elements: (1) that Robinhood engaged in a “series of transactions”
and (2) that Robinhood acted with a “purpose of inducing the purchase or sale of [a] security.”
15 U.S.C. § 78i(a)(2). (Plaintiffs also fail to plead scienter, discussed in Section I.B, below.)
First, Plaintiffs appear to misunderstand the statutory requirements for the first
element. As Robinhood explained in its Motion, engaging in “a series of transactions” for the
purpose of a Subsection 9(a)(2) claim involves purchasing, selling, bidding or ordering purchases
or sales of any securities. See SEC v. Lek Sec. Corp., 276 F. Supp. 3d 49, 62 (S.D.N.Y. 2017).
Plaintiffs contend that (separate from the purchase restrictions) Robinhood allegedly “distorted
supply and demand by prematurely closing out in-the-money options, involuntarily canceling
submitted purchase orders, and liquidating shares of the Affected Stocks held in margin
accounts.”7 (Opp. at 26.) But these types of interactions between a broker and a customer are
6
As Robinhood showed in its Motion, Plaintiffs also cannot state a claim under any of the
other subsections of Section 9(a). (See Mot. at 19-23.) Plaintiffs do not contest this.
7
Notably, Plaintiffs do not even try to explain how these actions—which affected only a
small subset of the Robinhood customers who traded or attempted to trade in the Affected Stocks
(see Compl. ¶¶ 52-53, 62, 125) and had no effect on non-Robinhood customers (see id. ¶ 70)—
could have distorted demand in the market for the Affected Stocks and affected the prices of
those stocks, and it is entirely implausible that these actions could have done so.
7
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not what Subsection 9(a)(2) covers. Plaintiffs do not allege that Robinhood purchased, sold, bid
or ordered the purchase or sale of the Affected Stocks—either with respect to the purchase
restrictions or in these separate actions—and therefore have not alleged that Robinhood engaged
in “a series of transactions.” See Spicer, 1990 WL 172712 at *2; Baum, 648 F. Supp. at 1530.8
The cases Plaintiffs cite are inapposite. (Opp. at 26.) In both City of Providence
and Sharette, the court addressed only whether the plaintiffs had pleaded a market manipulation
claim under Section 10(b), and did not consider whether the defendants engaged in a “series of
transactions,” as required by Subsection 9(a)(2).9 See City of Providence, R.I. v. BATS Glob.
Markets, Inc., 878 F.3d 36, 40 (2d Cir. 2017); Sharette, 127 F. Supp. 3d at 80-86. Sharette is
inapposite for the additional reason that the defendants in that case were the lead underwriters in
the allegedly manipulative transactions, meaning they actually lent or sold the relevant shares to
investors. See 127 F. Supp. 3d at 69. Here, Plaintiffs do not allege that Robinhood engaged in
any transactions, let alone a “series of transactions.”
Second, Plaintiffs’ attempt to satisfy the second element of Subsection 9(a)(2)
fares no better. To satisfy this element, Plaintiffs must plead that Robinhood acted with “the
purpose of inducing the purchase or sale of such security by others.” 15 U.S.C. § 78i(a)(2).
Plaintiffs contend that “Robinhood’s goal was to lower the price of the Affected Stocks so that it
could meet its core deposit requirements with the NSCC with respect to its customers’ long
positions.” (Opp. at 30.)10 But Plaintiffs provide no support for this contention and none exists.
Nowhere do Plaintiffs allege that a reduction in the price of the Affected Stocks would have
helped Robinhood meet its NSCC deposit requirements. Rather, Plaintiffs allege that the core
deposit requirement “is calculated based upon the estimated risk in [an NSCC] member’s
8
Plaintiffs erroneously try to distinguish Baum on the ground that the plaintiffs there failed
to satisfy the “in connection with” requirement. (Opp. at 26 n.26.) The Baum plaintiffs’ failure
to satisfy the “in connection with” requirement was the basis for the court’s dismissal of the
Section 10(b) and Rule 10b-5 claims, 648 F. Supp. at 1525-26, but the court dismissed the
Subsection 9(a)(2) claim because the plaintiffs failed to satisfy the “series of transactions”
requirement, id. at 1530.
9
Indeed, in City of Providence, the plaintiffs did not even bring a claim under Section 9(a).
878 F.3d at 40.
10
Plaintiffs do not argue (nor can they) that Robinhood acted with the purpose of inducing
the purchase (as opposed to the sale) of the Affected Stocks.
8
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unsettled portfolio” (Compl. ¶ 58) and cite to testimony by the head of the NSCC explaining that
the core deposit requirement was driven by “increased volume and price volatility in these
securities.”11 In other words, to manage its NSCC deposit requirements, Robinhood needed to
put a temporary halt to additional customer purchases of the Affected Stocks. That is why
Robinhood put the purchasing restrictions in place; indeed, Plaintiffs concede that “Robinhood
prohibited purchases . . . of the Affected Stocks to decrease the amount of the core charge it was
required to deposit with the NSCC . . . .” (Compl. ¶ 71.) But Robinhood did not benefit from
its customers’ selling GameStop, AMC or any of the other Affected Stocks, or if customers
chose to sell, whether they sold at a reduced price.
In short, Plaintiffs do not allege that Robinhood’s deposit requirements would
decrease if investors sold the Affected Stocks at a reduced price or that Robinhood stood to
benefit in any way from sales of the Affected Stock at a reduced price.12 This is contrary to
every successful reported market manipulation case, where defendants were trying to move the
stock price. (See Section I.A.1.) Because Plaintiffs cannot allege that Robinhood acted with the
purpose to induce the sale of the Affected Stocks, Plaintiffs cannot satisfy this element of
Subsection 9(a)(2).
ii. Plaintiffs Do Not Plead a Claim Under Subsection 9(a)(4).
In the Complaint, Plaintiffs allege that Robinhood made false or misleading
statements in violation of both Section 9(a) and Section 10(b) and Rule 10b-5(b). (Compl.
¶¶ 139, 142-149.) In their Opposition, Plaintiffs abandon their Section 10(b) and Rule 10b-5
misrepresentation claim entirely, but continue to pursue a misrepresentation claim under
11
See Written Testimony of Michael C. Bodson, CEO of the Depository Trust & Clearing
Corporation, before the Committee on Financial Services of the U.S. House of Representatives,
May 6, 2021, at 5, available at https://www.dtcc.com/-/media/Files/PDFs/Testimony-of-
Michael-Bodson-050621.pdf (cited in Compl. ¶ 58 n.34).
12
In their opposition, Plaintiffs misleadingly cite paragraph 71 of the Complaint for the
proposition that “Robinhood’s goal was to lower the price of the Affected Stocks so that it could
meet its core deposit requirements with the NSCC.” (Opp. at 30.) But paragraph 71 does not
contain such an allegation. Paragraph 71 alleges that Robinhood imposed purchase restrictions
“to decrease the amount of the core charge it was required to deposit with the NSCC.” (Compl.
¶ 71.) That is entirely different from whether the NSCC deposit requirements gave Robinhood a
purpose to induce the sale of the Affected Stocks at a reduced price.
9
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Subsection 9(a)(4).13 (Opp. at 30-39.) However, as Robinhood explained in its Motion (Mot. at
21-22), Plaintiffs’ Subsection 9(a)(4) claim fails for many of the same reasons as the Section
10(b) misrepresentation claim that Plaintiffs have abandoned.
In their Opposition, Plaintiffs try to support their Subsection 9(a)(4) claim by
focusing on one alleged misstatement and one alleged omission. (See Opp. at 30-39.) The
alleged misstatement is Mr. Tenev’s statement on the evening of January 28, 2021 that “[t]here
was no liquidity problem.” (Compl. ¶ 79; Opp. 36-39.)14 The alleged omission is that
Robinhood purportedly waited too long in the day on January 28, 2021, to disclose that the
NSCC’s deposit requirement was a reason for the purchasing restrictions. (Opp. at 31-35.) The
alleged misstatement and alleged omission cannot support a violation of Subsection 9(a)(4) for at
least four reasons (one of which is state of mind and is discussed below in Section I.B).
First, Plaintiffs fail to plead that Robinhood made the supposed misstatements
“for the purpose of inducing the purchase or sale of [a] security.” 15 U.S.C. § 78i(a)(4).
Plaintiffs do not even try to explain how they meet this element of Subsection 9(a)(4) and instead
simply refer back to their discussion of Subsection 9(a)(2). (See Opp. at 31 n.34 (incorporating
their Subsection 9(a)(2) argument by reference).) But that ignores the distinction between their
claims under Subsections 9(a)(2) and 9(a)(4). Under Subsection 9(a)(2), the question is whether
Robinhood acted with the requisite purpose in imposing the purchasing restrictions. As
described above, Plaintiffs fail to allege that it was. Under Subsection 9(a)(4), the relevant
question is whether Robinhood’s alleged misstatements (as opposed to the underlying
purchasing restrictions) had the purpose of inducing customers to sell the Affected Stocks. See
15 U.S.C. § 78i(a)(4) (prohibited conduct is making a “false or misleading” “statement” for the
purpose of inducing purchase or sale). Plaintiffs offer no explanation—and there is none—for
13
Because Plaintiffs do not defend their Section 10(b) and Rule 10b-5 misrepresentation
claim in their Opposition, that claim should be dismissed. (See infra Section II.)
14
In their Opposition, Plaintiffs abandon the allegations in their Complaint that three
additional Robinhood statements were false or misleading: (1) Mr. Tenev’s statement on
January 29 that temporary trading restrictions on certain symbols are common; (2) Mr. Tenev’s
statement on January 31 that “other brokers basically restricted the same activity”; and
(3) Mr. Tenev’s statement that Robinhood implemented PCO restrictions because of customer
preferences. (See Compl. ¶¶ 92, 100, 101.) These allegations cannot, therefore, support
Plaintiffs’ Subsection 9(a)(4) claim. (See infra Section II.)
10
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how Mr. Tenev’s statement that there was no liquidity problem, or the fact that Robinhood did
not refer to the NSCC deposit requirement in its initial customer communications the morning of
January 28, could possibly have had the purpose of inducing Robinhood customers to sell
GameStop, AMC or any of the other Affected Stocks. Any such argument would defy logic.
This alone requires dismissal of Plaintiffs’ Subsection 9(a)(4) claim.
Second, Plaintiffs fail to plead loss causation, i.e., that Robinhood’s statements (as
opposed to the purchasing restrictions or some other factor) affected the price of the Affected
Stocks. (Mot. at 34-36.)15 The Section 9(f) private right of action requires Plaintiffs to allege
they bought or sold a security at a price “which was affected” by the underlying violation of
Subsection 9(a)(4), 15 U.S.C. § 78i(f). Courts have construed this price effect element to be
coextensive with the loss causation element of a Section 10(b) claim. See I.B. Trading, Inc. v.
Tripoint Glob. Equities, LLC, 280 F. Supp. 3d 524, 540 (S.D.N.Y. 2017); Sharette, 127 F. Supp.
3d at 80. Critically, the price effect must come from Robinhood’s alleged misstatements (as
opposed to the purchasing restrictions or anything else), as Section 9(f) requires that the security
price be affected by the “act or transaction in violation of subsection[] (a),” 15 U.S.C. § 78i(f),
and the predicate act that violates Subsection 9(a)(4) is making a false or misleading statement,
id. § 78i(a)(4). Plaintiffs do not even address this issue in their Opposition. Perhaps that is
because Plaintiffs have not alleged, as they must, that the prices of the Affected Stocks ever
increased after the market learned the full facts. See Dura Pharms., Inc. v. Broudo, 544 U.S.
336, 347 (2005); (Mot. at 35-36). Plaintiffs’ failure to plead loss causation is an independent
reason why their Subsection 9(a)(4) claim should be dismissed.
Third, Plaintiffs fail to plead adequately that either the alleged misstatement or the
alleged omission was false or misleading.
The “no liquidity problem” alleged misstatement. Plaintiffs allege in their
Complaint that Mr. Tenev’s statement on the evening of January 28, 2021 that “there was no
liquidity problem” that morning was false because it was supposedly inconsistent with an earlier
statement made by Gretchen Howard. (Compl. ¶ 79.) Plaintiffs now concede, as this Court has
already found, that “the statements are consistent.” (Opp. at 38; see also Antitrust Tranche
15
Robinhood argued specifically that dismissal of a Section 9(a)(4) claim is appropriate
when a plaintiff fails to plead any element of a Rule 10b-5 violation. (Mot. at 21-22.)
11
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Decision at 46-47, Dkt. No. 438 (concluding the statements “are not conflicting”).) Plaintiffs
also concede that the statement may have been “literally true on the evening of January 28,”
when Mr. Tenev made the statement. (Opp. at 38.) Plaintiffs nonetheless contend that the
statement was misleading based on their speculation that Robinhood “could have [had] a
liquidity problem” at some point after Mr. Tenev made the statement if its deposit requirements
increased again. (Id. at 37-38.) However, a “statement is misleading if in light of the facts
existing at the time of the statement a reasonable investor, in the exercise of due care, would
have been misled by it.” Henningsen v. ADT Corp., 161 F. Supp. 3d 1161, 1181-82 (S.D. Fla.
2015) (citing FindWhat Investor Group v. FindWhat.com, 658 F.3d 1282, 1305 (11th Cir.
2011)). When Mr. Tenev said “there was” no liquidity problem when asked about the events of
that morning (Compl. ¶ 79 (emphasis added)), no reasonable investor could have heard that
statement as a guarantee that Robinhood would never have a liquidity problem in the future.
Instead, as Plaintiffs themselves allege, the statement would have been understood to mean “that
Robinhood did not have a liquidity problem on the morning of January 28.” (Id. ¶ 80.)
Plaintiffs’ reliance on Schultz v. Applica, 488 F. Supp. 2d 1219, 1229 n.6 (S.D. Fla. 2007) (see
Opp. at 38), is misplaced because the defendants there omitted material information about
existing facts known to them at the time they made the statement. Here, by contrast, Plaintiffs do
not and cannot allege that Robinhood in fact had a liquidity problem on the morning (or evening)
of January 28. Plaintiffs’ Subsection 9(a)(4) claim with respect to Mr. Tenev’s “no liquidity
problem” statement therefore fails for this additional reason.
The alleged omission on the morning of January 28, 2021. Even though they
do not allege this in their Complaint, Plaintiffs contend in their Opposition that there was a
material omission in two communications that Robinhood sent to customers in close succession
on the morning of January 28. The first statement advised customers of the importance of being
informed during periods of market volatility and directed them to articles discussing market
volatility. The second informed customers of Robinhood’s decision to PCO thirteen identified
securities due to the market volatility. (Compl. ¶¶ 62-63; Opp. at 32-33.) There was nothing
false about these communications, and Plaintiffs do not contend otherwise. Instead, Plaintiffs
contend that these true statements were “hardly a model of [ ] transparency” (Compl. ¶ 64) and
were rendered misleading because Robinhood did not also say at the same time that the NSCC
deposits were a reason that Robinhood put the PCO restrictions in place. (Opp. at 31-34.)
12
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While Robinhood did discuss the NSCC deposit requirements later that day, it is
of no moment that the communications on the morning of January 28 did not include a similar
reference.16 The alleged omission of a fact is not actionable “merely because a reasonable
investor would very much like to know that fact.” In re Time Warner Inc. Sec. Litig., 9 F.3d 259,
267 (2d Cir. 1993). Instead, “[d]isclosure is required . . . only when necessary to
make . . . statements made, in light of the circumstances under which they were made, not
misleading.” Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 44 (2011). Omissions are also
immaterial as a matter of law when “no reasonable investor would have considered them in
making investment decisions.” Carvelli v. Ocwen Fin. Corp., 934 F.3d 1307, 1322 (11th Cir.
2019). Here, there is no allegation—nor could there be—that a reasonable investor on January
28, 2021—knowing already of Robinhood’s purchasing restrictions and Robinhood’s statement
that they were caused by market volatility—would have considered making different decisions in
buying or selling GameStop, AMC or other Affected Stocks based on the additional detail about
the NSCC deposit requirements. And even if some Robinhood customers may have wanted to
know this specific information about the NSCC deposit requirements as Robinhood brokerage
customers, the additional information has nothing whatsoever to do with trading in the Affected
Stocks. In other words, whether Robinhood was imposing the purchase restrictions because of
the NSCC deposit requirements is irrelevant to the price of a share in GameStop, AMC or any of
the other Affected Stocks. Because it is utterly implausible that a reasonable investor would
have considered this additional piece of information in making trading decisions in the Affected
Stocks, the information is immaterial as a matter of law.17
16
Plaintiffs acknowledge that Mr. Tenev disclosed the role that the NSCC deposit
requirements played that same evening of January 28. (Compl. ¶¶ 77-78.) Even if this
information had been relevant to anyone making a decision about trading in the Affected
Stocks—and it was not—Plaintiffs cannot sustain an omission theory simply because the
allegedly omitted facts are later disclosed. See, e.g., Denny v. Barber, 574 F.2d 465, 470 (2d Cir.
1978) (rejecting misrepresentation claims alleging “fraud by hindsight” where plaintiff “seized
upon disclosures made” later and alleged “that they should have been made” earlier).
17
Comparing the situation here to a case like In re Barclays Liquidity Cross and High
Frequency Trading Litigation, on which Plaintiffs rely (Opp. at 33-34), only underscores that
Robinhood’s alleged delay in identifying the NSCC deposit requirements was not materially
misleading. In Barclays, the defendant exchanges disclosed that they provided certain services
to high-frequency trading firms, but did not disclose how those services could be used to the
13
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Plaintiffs also suggest that the customer communications on the morning of
January 28 were misleading because of Mr. Tenev’s later statement that “no doubt we could have
communicated this a little better to customers.” (Compl. ¶ 64; Opp. at 34.) This argument
misses the mark. Mr. Tenev was simply making the point that Robinhood could have provided a
“little better” customer service on the hectic morning of January 28. This moment of self-
reflection does not change the fact, described in the preceding paragraph, that not referring to the
deposit requirements was completely immaterial to the prices of the Affected Stocks and not
misleading. The securities laws do not hold companies to a standard of perfection in customer
communications.
3. Plaintiffs’ Section 10(b) Market Manipulation Claim Fails.
Plaintiffs assert the same market manipulation claim under both Sections 9(a) and
10(b). As Robinhood explained in its Motion, courts analyze market manipulation claims under
the two sections together, and dismissal of one claim leads to dismissal of the other. (Mot. at 23
(citing cases).) Plaintiffs cannot escape that conclusion. In fact, Plaintiffs do not cite a single
case in which a market manipulation claim was dismissed for failure to state a claim under
Section 9(a), but nevertheless sustained under Section 10(b). Instead, Plaintiffs cite two cases—
Chemetron Corp. v. Business Funds, Inc., 718 F.2d 725 (5th Cir. 1983) and GFL Advantage
Fund, Ltd. v. Colkitt, 272 F.3d 189 (3rd Cir. 2001) (Opp. at 11)—but neither supports Plaintiffs’
position.
First, as described above, the threshold reason that Plaintiffs’ Section 9(a) claims
must be dismissed is that there are no allegations of deception. And, as noted above (see Section
I.A.1), deception is also a threshold element of a Section 10(b) market manipulation claim.
Chemetron and GLF both confirm this requirement, which leads to dismissal here. See
Chemetron, 718 F.2d at 727 (noting that jury had found there was a misstatement or omission);
GFL, 272 F.3d at 204 (noting that courts considering manipulation claims look to whether the
detriment of investors. 390 F. Supp. 3d 432, 449 (S.D.N.Y. 2019). In other words, the
defendants denied investors the key information that would allow them to realize they were
being duped. That is nothing like the situation here, where Robinhood disclosed to investors that
it was imposing purchase restrictions and that it was doing so because of market volatility.
14
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“manipulator injected inaccurate information into the market or created a false impression of
market activity”).
Second, neither case involved a claim under Subsection 9(a)(2), so neither case
can support the proposition that a Section 10(b) market manipulation claim can stand where a
Subsection 9(a)(2) case cannot. Chemetron involved a Subsection 9(a)(4) claim and a Section
10(b) claim, 718 F.2d at 727, and GFL did not involve any claim under Section 9(a), 272 F.3d at
207.
Third, with respect to the interplay between Subsection 9(a)(4) and Section 10(b),
Robinhood explains that Plaintiffs’ Subsection 9(a)(4) claim fails for four specific reasons in
addition to the lack of deceptive conduct: (1) the alleged misstatements or omissions were not
made for the purpose of inducing a purchase or sale; (2) there is no loss causation; (3) there were
no misleading statements; and (4) Robinhood did not act with scienter. In Chemetron, elements
1, 3 and 4 were present for the Subsection 9(a)(4) claim. See Chemetron Corp. v. Bus. Funds,
Inc., 682 F.2d 1149, 1157 (5th Cir. 1982). Chemetron does not, therefore, support the
proposition that a Section 10(b) claim can stand where those elements are missing. Instead, the
only relevant issue that Chemetron even arguably touches on is whether a Section 10(b) market
manipulation claim can stand where there is no loss causation. Here, Chemetron seems to
suggest the answer is yes. But that is incorrect; loss causation is an element of Section 10(b).
See, e.g., Robbins v. Koger Properties, Inc., 116 F.3d 1441, 1447 (11th Cir. 1997).18
In short, the reasons that preclude Plaintiffs’ Section 9(a) claims also require
dismissal of Plaintiffs’ Section 10(b) claim, and Plaintiffs can offer no authority to the contrary.
B. Plaintiffs Do Not Adequately Plead the Requisite State of Mind.
Plaintiffs’ market manipulation claims also fail for the independent reason that
Plaintiffs do not plead with particularity that Robinhood had the requisite state of mind (or
scienter) under either Section 9(a) or Section 10(b). To state a claim under Section 10(b) and
18
Moreover, the Chemetron decision on which Plaintiffs rely for a potentially contrary
holding has no precedential value because it was vacated pending rehearing en banc and the
parties settled before the rehearing. 718 F.2d at 730; see also Hughes v. Santa Fe Int’l Corp.,
847 F.2d 239, 242 (5th Cir. 1988) (noting Chemetron has no precedential force). While GFL
cites to that decision, it does so without recognizing that it lacks precedential value and does so
in dicta given that no Section 9(a) claim was even asserted in GFL. 272 F.3d at 207.
15
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Rule 10b-5, Plaintiffs must plead specific facts supporting a “strong inference” that Robinhood
acted intentionally or with severe recklessness. See FindWhat, 658 F.3d at 1299-1300. To state
a claim for a violation of Section 9(a), Plaintiffs must satisfy an even higher standard by alleging
intentional and “willful” conduct. See 15 U.S.C. § 78i(f).
1. Plaintiffs Do Not Adequately Plead Scienter for the Subsection 9(a)(2)
and Section 10(b) Market Manipulation Claims.
With respect to Plaintiffs’ Subsection 9(a)(2) and Section 10(b) market
manipulation claims, Plaintiffs’ only remaining theory of motive is that Robinhood was trying to
avoid defaulting on its deposit requirements to avoid liquidation and survive until the company’s
“lucrative IPO.”19 (Compl. ¶¶ 12, 15, 67, 71.) They describe this theory as Robinhood’s
supposed “financial desperation.” (Opp. at 20-22.) This theory cannot support an inference of
manipulative intent under either Subsection 9(a)(2) or Section 10(b) for a variety of reasons.
First, the potential success (or lack thereof) of Robinhood’s then-hypothetical
IPO had absolutely nothing to do with the price of the Affected Stocks. As noted above,
Robinhood had no pecuniary interest in the price of the Affected Stocks. Plaintiffs do not allege
that Robinhood held any positions in those securities, and, as explained in Section I.A.2.i above,
Robinhood would not benefit from its customers’ selling those securities at a reduced price. As a
result, even if Robinhood had acted to protect its own possible IPO—and it did not—that does
nothing to establish “a strong inference that [Robinhood] intended to deceive investors by
artificially affecting the market price of [the Affected Stocks].” ATSI, 493 F. 3d at 102. Instead,
this “financial desperation” theory essentially boils down to a general motive to profit, which is
inadequate to plead scienter as a matter of law. (See Mot. at 37.)20
19
In their Complaint, Plaintiffs also allege that Robinhood wanted to assist Citadel LLC and
Citadel Securities by driving down the price of the Affected Stocks to help them cover alleged
proprietary short positions in those stocks. (Id. ¶ 71.) Plaintiffs abandon this theory in their
Opposition. (See Opp. at 25 n.23.)
20
Plaintiffs argue that Mr. Swartwout’s statement on February 8, 2021, after the class
period, that Robinhood did not restrict customers’ ability to exercise in-the-money options is
evidence of scienter because Plaintiffs wrongly believe Mr. Swartwout’s statement was false.
(Opp. at 32 n.35.) Plaintiffs’ arguments reflect a basic misunderstanding of how options work.
Robinhood’s PCO on options on GameStop and AMC stock (Compl. ¶ 52) restricted customers
from buying more options; it had no effect on customers’ ability to exercise existing in-the-
16
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None of the cases Plaintiffs cite compels a different conclusion. Most of the cases
on which Plaintiffs rely (Opp. at 21 n.20) are not even market manipulation cases. Skiadas v.
Acer Therapeutics Inc., 1:19-cv-6137-GHW, 2020 WL 3268495, at *11 (S.D.N.Y. 2020),
involved claims by Acer stockholders who claimed the company had made misleading
statements to inflate its own stock price. Similarly, Zwick Partners, LP v. Quorum Health Corp.,
No. 3:16-cv-2475, 2018 WL 2933406, at *10 (M.D. Tenn. 2018), involved claims by Quorom
stockholders that the company failed to comply with accounting standards to inflate its own
stock price in advance of a spin-off. Here, by contrast, Plaintiffs allege that Robinhood made
misleading statements about its own business to manipulate the price of the Affected Stocks, but
they fail to allege any reason to believe Robinhood actually cared about the price of the Affected
Stocks. A desire to protect Robinhood’s own financial condition cannot support an inference of
intent to depress the stock price of unrelated companies.
The same flaw characterizes the market manipulation cases that Plaintiffs do cite.
In Sharette, the plaintiffs alleged that scienter could be inferred because the underwriter
defendants acted with a “goal of securing a specific, highly profitable new business opportunity”
and “benefitted in [a] concrete and personal way from the purported fraud.” 127 F. Supp. 3d at
96. Likewise, in In re Hamilton Bankcorp., Inc. Securities Litigation, where the fraud was
motivated to complete an IPO, the defendants had a direct pecuniary interest in the price of the
allegedly manipulated stock and had allegedly engaged in insider sales. 194 F. Supp. 2d 1353,
1359 (S.D. Fla. 2002).21 Again, neither of these cases supports Plaintiffs’ allegations, as each
involved circumstances in which the defendants had a direct pecuniary interest in the price of
whatever stock they were alleged to have manipulated. Those allegations are missing here.
money options. Separately, Robinhood acted proactively in the normal course of business to
protect certain customers who held options that were about to expire in the money, where the
customer did not have the funds to exercise the option; instead of allowing the option to expire
without value, Robinhood reserved the right sell the option for the customer before expiring to
ensure that the customer received a return. (Id. ¶ 53.) This is because to exercise a call option, a
customer must have the cash on hand to purchase 100 shares of the underlying security. Neither
of these measures is in any way inconsistent with Mr. Swartwout’s truthful statement on
February 8 that Robinhood did not restrict customers’ ability to exercise in-the-money options.
21
In City of Providence, the court explicitly declined to address whether plaintiffs
adequately pleaded scienter because the district court did not reach the question. 878 F.3d at 52.
17
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Second, Plaintiffs argue that scienter can be inferred because Robinhood knew (or
was severely reckless in not knowing) that its actions would affect the price of the Affected
Stocks. (Opp. at 18-20.) But again, Robinhood would not benefit from its customers’ selling
those securities at a reduced price, and Plaintiffs’ factual allegations—that Robinhood employees
were concerned about “blowback” from the purchasing restrictions (Compl. ¶ 102 n.60; Opp. at
19)—show awareness of how Robinhood customers might react as brokerage customers, not that
the price of the Affected Stocks would decline. See Baum, 648 F. Supp. at 1531 (finding no
manipulative intent where the defendant broker did not “st[and] to gain anything from artificially
driving [down] the price” of the securities); Ray v. Lehman Bros. Kuhn Loeb, 624 F. Supp. 16,
22 (N.D. Ga. 1984) (finding no manipulative intent where defendant did not hold the stock “for
his own account” at the relevant time and therefore had no pecuniary interest in the stock).
Third, Plaintiffs contend that scienter can be inferred because Robinhood
allegedly mischaracterized its actions as “standard operations,” and Plaintiffs contend this
attempt “to deflect attention” is evidence of manipulation. (Opp. at 23.) But the case on which
Plaintiffs rely, SEC v. Conaway, 698 F. Supp. 2d 771, 887-88 (E.D. Mich. 2010), involved a
CEO’s alleged deflecting statements to distract from the company’s own financial condition with
the desire to boost the company’s own stock price. Robinhood’s explanation that other brokers
engaged in similar activity—which in any event was a truthful statement (see Mot. at 32)—
cannot support an inference of intent to manipulate the stock prices of unrelated companies.
Accordingly, Plaintiffs fail to plead specific facts to support a strong inference of
scienter as to their Subsection 9(a)(2) and Section 10(b) market manipulation claims.
2. Plaintiffs Do Not Adequately Plead Scienter for the Subsection 9(a)(4)
Claim.
With respect to Plaintiffs’ claim under Subsection 9(a)(4), Plaintiffs also fail to
allege that Robinhood acted with the requisite scienter when making either the alleged
misstatement or the alleged omission.
The “no liquidity problem” alleged misstatement. Plaintiffs contend that
Mr. Tenev admitted that Robinhood had a liquidity crisis in an interview with Dave Portnoy on
February 23, 2021, and therefore the Court should infer he was acting with scienter when he
stated on January 28 that Robinhood did not have a liquidity problem. But there is no
inconsistency between the Portnoy interview and Mr. Tenev’s January 28 statement.
18
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Mr. Tenev’s statement in the Portnoy interview that “if [Robinhood] had a bunch more
headroom, yes, we probably would have let things continue” (Compl. ¶ 80(d); Opp. at 21, 36)
simply reiterates Mr. Tenev’s point in his January 28 statement that the NSCC deposit
requirements led Robinhood to impose the purchasing restrictions. Mr. Tenev’s statement in the
Portnoy interview that he “could have been a little bit more clear in the short-form interviews”
(Opp. at 36 n.36)22 simply acknowledges that, in hindsight, Robinhood could have done an even
better job of communicating on the hectic day of January 28. (See Section I.A.2.ii.)
The alleged omission on the morning of January 28, 2021. Plaintiffs contend
that Robinhood was “severely reckless” in not specifying the NSCC deposit requirements as a
cause of the purchasing restrictions on the morning of January 28 because it should have known
that omission would cause investors to sell the Affected Stocks. (Opp. at 35.) As an initial
matter, the internal Robinhood communications that “several ‘very large’ firms are having really
bad nights too” (Compl. ¶ 50 n.29; Opp. at 35) simply shows awareness of market volatility, not
awareness of an intent to affect the price of the Affected Stocks. See ATSI, 493 F.3d at 102
(requiring such intent for scienter on a market manipulation claim). Further, Plaintiffs concede
that Robinhood disclosed the market volatility and its PCO decision on the morning of January
28 (Opp. at 32-33), and consequently any delay in providing additional detail cannot rise to the
level of “highly unreasonable omissions or misrepresentations that involve not merely simple or
even inexcusable negligence, but an extreme departure from the standards of ordinary care,” as
required for severe recklessness. McDonald v. Alan Bush Brokerage Co., 863 F.2d 809, 814
(11th Cir. 1989). Moreover, allegations of severe recklessness are inadequate to state a claim
under Subsection 9(a)(4) as a matter of law. 15 U.S.C. § 78i(f) (requiring willful conduct).
Accordingly, Plaintiffs fail to plead specific facts to support a strong inference of
scienter as to their Subsection 9(a)(4) claim.
* * *
Plaintiffs fail to plead a plausible inference of scienter sufficient to state a claim
under either Section 9(a) or Section 10(b). Where “there is a ‘plausible nonculpable
22
As Plaintiffs acknowledge (Opp. at 36 n.36), this statement is not in the Complaint.
Therefore, even if the statement helped Plaintiffs’ case—and it does not—the Court may not
consider it in ruling on Robinhood’s Motion. See Huls v. Llabona, 437 Fed. Appx. 830, 832 n.5
(11th Cir. 2011); see also Gibbons v. McBride, 124 F. Supp. 3d 1342, 1381 (S.D. Ga. 2015).
19
Case 1:21-md-02989-CMA Document 455 Entered on FLSD Docket 02/11/2022 Page 25 of 27
explanation[] for the defendants’ actions that is more likely than any inference that the
defendants intended to manipulate the market,” a court should not infer scienter. ATSI, 493 F.3d
at 104. That is precisely the situation here. Robinhood imposed the purchase restrictions to
control the risk related to its deposit requirements and to avoid liquidation of all of its customers’
positions during a period of unprecedented market volatility. (Compl. ¶¶ 12, 58-60.)
Robinhood’s conduct had nothing to do with a desire to affect the price of any Affected Stocks.
II. PLAINTIFFS DO NOT PLEAD A MISREPRESENTATION CLAIM UNDER
SECTION 10(b) OF THE SECURITIES EXCHANGE ACT.
Robinhood showed in its Motion that Plaintiffs do not plead a Section 10(b)
misrepresentation claim. (See Mot. at 26-39.) Plaintiffs offer no response and the claim should
be dismissed for that reason alone. See Jones v. Bank of Am., N.A., 564 F. App’x 432, 434 (11th
Cir. 2014) (“[W]hen a party fails to respond to an argument or otherwise address a claim, the
Court deems such argument or claim abandoned.”) (citation omitted).
III. PLAINTIFFS’ CLAIMS SHOULD BE DISMISSED WITH PREJUDICE.
Plaintiffs’ claims should be dismissed with prejudice. Plaintiffs’ claims have
fundamental defects that cannot be cured through amendment, including that (1) Robinhood’s
purchase restrictions were fully disclosed, and therefore not manipulative, and (2) Robinhood
had no pecuniary interest in the value of any of the Affected Stocks. Plaintiffs’ recognition that
their claims are viable only if the Court significantly expands the definition of market
manipulation and creates new law simply underscores the futility of allowing Plaintiffs to amend.
It has now been over a year since the first actions related to the events of
January 28, 2021 were filed. Plaintiffs have had the benefit of seeing two other plaintiff groups
in this MDL test myriad (unsuccessful) legal theories as well as several decisions by this Court.
(See, e.g., Dkt. Nos. 438, 453.) Plaintiffs still have not come close to stating a claim. Their
claims should be dismissed with prejudice.
CONCLUSION
For the foregoing reasons, Robinhood respectfully submits that the Consolidated
Class Action Complaint for the Federal Securities Tranche should be dismissed with prejudice.
20
Case 1:21-md-02989-CMA Document 455 Entered on FLSD Docket 02/11/2022 Page 26 of 27
Dated: February 11, 2022 /s/ Samuel A. Danon
HUNTON ANDREWS KURTH LLP
Samuel A. Danon (FBN 892671)
Gustavo Javier Membiela (FBN 513555)
María Castellanos Alvarado (FBN 116545)
333 S.E. 2 Avenue, Suite 2400
Miami, FL 33131
Telephone: (305) 810-2500
Facsimile: (305) 810-2460
sdanon@huntonak.com
gmembiela@huntonak.com
mcastellanos@hunton.com
CRAVATH, SWAINE & MOORE LLP
Antony L. Ryan
Kevin J. Orsini
Brittany L. Sukiennik
825 Eighth Avenue
New York, NY 10019
Telephone: (212) 474-1000
Facsimile: (212) 474-3700
aryan@cravath.com
korsini@cravath.com
bsukiennik@cravath.com
Counsel for Defendants Robinhood Markets,
Inc., Robinhood Financial LLC and
Robinhood Securities, LLC
21
Case 1:21-md-02989-CMA Document 455 Entered on FLSD Docket 02/11/2022 Page 27 of 27
CERTIFICATE OF SERVICE
I HEREBY CERTIFY that on February 11, 2022, I electronically filed the
foregoing document with the Clerk of the Court using CM/ECF. I further certify that the
foregoing document is being served this day on all counsel of record via transmission of Notices
of Electronic Filing generated by CM/ECF or in some other authorized manner for those counsel
or parties who are not authorized to receive Notices of Electronic Filing.
Dated: February 11, 2022 /s/ Samuel A. Danon
Samuel A. Danon (FBN 892671)
22
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