Exhibit D: Class Action Complaint for Damages (Dkt. 565-6, S.D. Fla.)
Summary
Exhibit D (Document 565-6) in Case 1:21-md-02989-CMA, entered on the FLSD docket May 26, 2023, a 73-page copy of a Class Action Complaint for Damages with a demand for jury trial filed 04/06/23 in the United States District Court for the Central District of California as Case 2:23-cv-02622-FLA-PD. Plaintiffs Maurice Scarborough and Scott Schiller, each individually and on behalf of all others similarly situated, sue Robinhood Financial, LLC, Robinhood Securities, LLC and Robinhood Markets, Inc., described as Robinhood Markets, Inc. and two of its wholly owned subsidiaries. The complaint is signed by Maurice D. Pessah of Pessah Law Group, PC, Stuart N. Chelin of Chelin Law Firm and Jeffrey A. Klafter of Klafter Lesser LLP as Attorneys for Plaintiffs and the Proposed Class.
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- Date
- 2023-05-26
Cite this document
“Exhibit D: Class Action Complaint for Damages (Dkt. 565-6).”
Original at archive.org, dated 2023-05-26. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/2023-05-26-plaintiffs-v-robinhood-financial-llc-a/
, SHA-256 54f92384d0adfcd0936dfbc318f9d260c6386e4571ddd975ef0b9e9d438e49d4.Full text
Case 1:21-md-02989-CMA Document 565-6 Entered on FLSD Docket 05/26/2023 Page 1 of 73
EXHIBIT D
Case Case
1:21-md-02989-CMA
2:23-cv-02622-FLA-PD
Document
Document
565-6 1
Entered
Filed on
04/06/23
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Page 1 of 72
05/26/2023
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2 of 73
1 MAURICE D. PESSAH (SBN: 275955)
maurice@pessahgroup.com
2 PESSAH LAW GROUP, PC
3 9100 Wilshire Boulevard, Suite 850E
Beverly Hills, CA 90212
4 Tel. (310) 772-2261
5 STUART N. CHELIN (SBN: 320357)
6 stuart@chelinlaw.com
CHELIN LAW FIRM
7 16133 Ventura Boulevard, Suite 700
Encino, CA 91436
8 Tel. (310) 556-9664
9
JEFFREY A. KLAFTER (pro hac vice to be requested)
10 jak@klafterlesser.com
KLAFTER LESSER LLP
11 Two International Drive, Suite 350
12 Rye Brook, NY 10573
Tel. (914) 934-9200
13
Attorneys for Plaintiffs and the Proposed Class
14
15 UNITED STATES DISTRICT COURT
16 CENTRAL DISTRICT OF CALIFORNIA
17 MAURICE SCARBOROUGH and Case No.:
SCOTT SCHILLER, each individually,
18 and on behalf of all others similarly CLASS ACTION COMPLAINT FOR
19 situated, DAMAGES
20 Plaintiffs,
21 [DEMAND FOR JURY TRIAL]
v.
22
23
ROBINHOOD FINANCIAL, LLC, a
Delaware limited liability company;
24 ROBINHOOD SECURITIES, LLC, a
Delaware limited liability company; and
25
ROBINHOOD MARKETS, INC.,
26
Defendants.
27
28
1
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CLASS ACTION COMPLAINT
Case Case
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2:23-cv-02622-FLA-PD
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1 Plaintiffs Maurice Scarborough and Scott Schiller (“Plaintiffs”), individually
2 and on behalf of all other persons similarly situated, by Plaintiff’s undersigned attorneys,
3 for Plaintiffs’ Complaint against defendants Robinhood Markets, Inc. and two of its
4 wholly owned subsidiaries, Robinhood Financial, LLC and Robinhood Securities, LLC
5 (unless otherwise noted, collectively “Robinhood” or the “Robinhood Defendants”)
6 alleges the following based upon personal knowledge as to Plaintiff and Plaintiff’s own
7 acts, and information and belief as to all other matters, based upon, inter alia, the
8 investigation conducted by and through their attorneys, which included, among other
9 things, a review of the statements made by defendants and their senior management,
10 SEC filings, court records, Congressional testimony, administrative proceedings, and
11 information readily obtainable on the Internet. Plaintiffs believe that substantial
12 evidentiary support will exist for the allegations set forth herein after a reasonable
13 opportunity for discovery.
14 SUMMARY OF THE ACTION
15 1. This is a class action on behalf of persons or entities who held call options
16 (collectively the “Affected Options”) to purchase common stock in AMC
17 Entertainment Holdings, Inc., GameStop Corp. (“GME”), American Airlines Group
18 Inc. (NASDAQ: AAL), Bed Bath & Beyond Inc. (“BBBY”), BlackBerry Ltd. (“BB”),
19 or American Depositary Shares of foreign-issuers Nokia Corp. (“NOK”) (collectively
20 the “Affected Stocks”), as of the close of trading on January 27, 2021, and who sold such
21 Affected Options at a loss, or whose Affected Options expired between January 28, 2021
22 and February 19, 2021 (the “Class”). Excluded from the Class are the Defendants, the
23 officers and directors of Defendants, members of their immediate families and their
24 legal representatives, heirs, successors or assigns and any entity in which Defendants
25 or any excluded persons have or had a controlling interest.
26 2. Robinhood’s singular actions distorted the prices of the Affected Stocks
27 and of the Affected Options for many weeks because of its domination of the online
28 retail brokerage industry. Robinhood, which claims to have opened nearly 50% of all
2
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1 retail brokerage accounts in the past five years,1 boasted an industry-leading 12.5
2 million online accounts by the end of 2020 and added another 3 million during the
3 month of January 2021. By one estimate, approximately 4% of all shares traded in the
4 U.S. in January 2021 were traded on the Robinhood app.2
5 3. Robinhood violated the bedrock principle of our free-market economy:
6 the price of a stock and options on such stock are meant to be set by the law of supply
7 and demand, unfettered by external controls. Robinhood’s deliberate interference with,
8 and manipulation of, the market changed that.
9 4. Only in rare instances of extreme price volatility, and in accordance with
10 a SEC- regulated plan, would all trading be halted in a particular issuer, and even then
11 for only a few minutes at a time. By completely shutting down, initially, and later
12 restricting, the demand side of the equation for the Affected Stocks and Affected
13 Options in the accounts of more than 15 million very active traders, 3 for days rather
14 than just minutes, Robinhood unlawfully manipulated market prices for the Affected
15 Stocks and the Affected Options.
16 5. Although it was relatively unknown to a national audience before January
17 28, 2021, Robinhood’s name was on everyone’s lips after it roiled the markets for the
18 Affected Stocks and Affected Options through the unique and extreme actions it took
19 that day. Not only were there immediate calls for government investigations, and
20 questions raised about whether Robinhood colluded with hedge funds and market
21 makers to stop an alleged short squeeze by retail investors (Robinhood’s own customer
22
23 1
Robinhood Markets, Inc, S-1, filed July 2021, at 2.
24 2
Caitlin McCabe, “It Isn’t Just AMC. Retail Traders Increase Pull in the Stock Market,” The Wall
25 Street Journal (June 18, 2021).
26 3
In the first quarter of 2020, Robinhood customers traded nine times as many shares as online retail
broker E*Trade’s customers and 40 times the number of shares traded by the customers of Charles
27
Schwab. See Nathaniel Popper,“Robinhood Has Lured Young Traders, Sometimes With
28 Devastating Results,” The New York Times (July 8, 2020, last updated Sept. 25, 2021). The numbers
are even more skewed with respect to options trading.
3
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1 base), but the impact that this single online broker had on the markets suddenly
2 demonstrated Robinhood’s significant market power.
3 6. Despite facing heavy criticism by many in government and in the media,
4 Robinhood became a venture capital darling overnight. By February 1, 2021, only four
5 days after its severe undercapitalization almost caused Robinhood to close its doors as
6 a result of a major liquidity crisis, Robinhood had raised $3.4 billion in 96 hours –
7 significantly more that it had raised in the eight years since its founding. While the
8 national exposure delivered a critical funding boost that propelled Robinhood to its
9 initial public offering (“IPO”) in the summer of 2021; however, Class members were
10 left with staggering losses.
11 7. At the 2014 LAUNCH Festival in San Francisco, Robinhood Markets
12 CEO Vladimir Tenev challenged the supposition that “brokerages exist for the purpose
13 of making money,” claiming instead: “The purpose of Robinhood is to make buying
14 and selling stocks as frictionless as possible. So, if we make money as a side effect of
15 that, you know, that’s great but it will never be at the cost of introducing frictions
16 between our customers and the markets.” (Emphasis supplied.) Commencing on
17 January 28, 2021, substantial frictions between its customers and the markets were the
18 very cost Robinhood forced its customers.
19 8. Throughout 2020 and in January 2021, Robinhood whipped up a frenzy
20 of trading and then shut it down, unevenly reopening the demand spigot over the course
21 of a week, directly affecting the markets’ bid-offer pricing mechanism for the Affected
22 Stocks and the Affected Options. As set forth in greater detail below, with a lucrative
23 IPO already being planned, Robinhood manipulated the share prices of the Affected
24 Stocks and the prices of the Affected Options, which were contributing to the rapid
25 increases in the prices of the Affected Stocks and the Affected Options, to avoid
26 liquidation due to an inability to pay its core charges and excess net capital charges to
27 the NSCC:
28
4
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1 (a) On January 28, 2021, only a combination of disabling the “buy”
2 button for eight (soon thereafter, 13) stocks, including the Affected Stocks and
3 the Affected Options, and the NSCC waiving the excess capital premium charge
4 – more than $2.2 billion of the $3.7 billion deposit requested that day –
5 temporarily solved what Robinhood Markets’ COO described as a “major
6 liquidity issue”. However, the NSCC only used its discretion to waive excess
7 capital premium charges until February 1, 2021, the two days it took transactions
8 from January 27, 2021 and January 28, 2021 to clear.
9 (b) On January 29, 2021, when all other brokers lifted stock purchase
10 restrictions and Robinhood started to do the same, the prices of the Affected
11 Stocks and the Affected Options rebounded so strongly that Robinhood – which
12 had only raised capital of $1 billion on January 28, 2021 – realized that it would
13 be unable to meet an excess capital premium charge on February 2, 2021 for the
14 trading on its platform on January 29, 2021 and could once again face a major
15 liquidity issue. For this reason, at several points throughout the trading day
16 Robinhood – the only retail broker still restricting stock and option purchases –
17 not only tightened the purchase restrictions on the Affected Stocks and the
18 Affected Options but increased the number of issuers to which restrictions
19 applied from 13 to 23 to 50. That Friday was the day set for certain options on
20 the Affected Stocks to expire. Specifically, Robinhood imposed the following
21 purchase limits on the Affected Stocks and the Affected Options on January 29,
22 2021, before market open:
23 Symbol Shares Options contracts
24
AAL 55 50
25
AMC 115 100
26
BB 65 100
27
28
BBBY 30 50
5
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1 Symbol Shares Options contracts
2
CTRM 1650 N/A
3
EXPR 200 100
4
GME 5 10
5
6
KOSS 25 N/A
7 NAKD 750 N/A
8 NOK 110 100
9 SNDL 1200 100
10 TR 25 50
11
TRVG 400 100
12
(c) Over the weekend, Robinhood raised an additional $2.4 billion of
13
capital, which could prevent the NSCC from assessing steep excess capital
14
premium charges for the January 29, 2021 transactions. At that point, Robinhood
15
started the process of easing purchase and option exercise restrictions, a process
16
it dragged out over several days so that Robinhood could avoid a sharp increase
17
in risk in its unsettled portfolio akin to what it had experienced on January 29,
18
2021 when its partial lifting of restrictions caused an upward price spike in the
19
share prices of the Affected Stocks and the Affected Options.
20
9. Robinhood knew the prices of the Affected Stocks and the Affected
21
Options would plummet because of its purchase and option exercise restrictions:
22
(a) As early as January 23, 2021, Robinhood executives were
23
analyzing the impact of making margin calls on its customers with respect to
24
their GameStop positions. They knew that their customers – most of who were
25
just starting on their investment journey – would not have the funds to meet the
26
margin calls, which could force Robinhood to close out their positions
27
potentially exposing Robinhood to financial risk.
28
6
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1 (b) On January 26, 2021, when the President and COO of Robinhood
2 Securities, a 30-year industry veteran, alerted others that Robinhood Securities
3 was moving GameStop to 100% margin the next day, he started his
4 communication with the statement “I sold my AMC today.” This seasoned
5 securities industry executive was well aware (and informed the others with his
6 statement) that the result of the Robinhood’s introduction of frictions between
7 its customers and the markets – be it a margin call or a total inability to purchase
8 shares – would be a sharp decline in the price of the stocks subjected to the
9 restrictions and a decline in the price of the Affected Stocks and the Affected
10 Options.
11 10. Throughout the week it was artificially distorting the price of the
12 Affected Stocks and the Affected Options, Robinhood went to great lengths to convince
13 investors that was not what was occurring. On multiple occasions, Robinhood falsely
14 assured investors that the national exchanges were free of manipulation, to wit, that
15 Robinhood’s actions were the same as its peers and simply part of any retail broker’s
16 “normal operations.” Robinhood even went as far as to blame our national markets’
17 failure to implement a real-time settlement system – something the CEO of the
18 Depositary Trust & Clearing Corporation testified would be unworkable and deprive
19 financial markets of liquidity– rather than its massive undercapitalization for the
20 actions it took to distort the markets.
21 11. The frictions between its customers and the markets introduced and
22 maintained by Robinhood during the Class period, to ensure that its upcoming IPO was
23 not derailed by a liquidity crisis, are against the law. Tenev later rationalized
24 Robinhood’s actions by claiming, during a discussion with Dave Portnoy of Barstool
25 Sports, that “[i]f Robinhood ceases to exist,” that would have caused more harm. Thus,
26 Tenev reasoned, “protecting the firm and protecting the system, ultimately, that was
27 the best thing for customers.” Even if Tenev were correct, unlawful actions undertaken
28
7
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1 to ensure the survival of a company do not get a free pass under our nation’s federal
2 securities laws.
3 JURISDICTION AND VENUE
4 12. The claims asserted herein arise under and pursuant to Sections 9(a)(2)
5 and 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.
6 13. This Court has jurisdiction over the subject matter of this action
7 pursuant to 28 U.S.C. § 1331, and Section 27 of the Exchange Act (15 U.S.C. §78aa).
8 14. Venue is proper in this judicial district pursuant to 28 U.S.C. § 1391(b)(2)
9 and Section 27 of the Exchange Act (15 U.S.C. § 78aa(c)) because defendants conduct
10 business in this District and caused damages within this District.
11 15. In connection with the acts, conduct and other wrongs alleged in this
12 complaint, defendants, directly or indirectly, used the means and instrumentalities of
13 interstate commerce, including but not limited to, the United States mails, interstate
14 telephone communications and the facilities of national securities exchanges.
15 PARTIES
16 16. As of the close on January 27, 2021, Plaintiff Maurice Scarborough
17 (“Scarborough”) owned call option contracts for NOK and AMC.
18 17. During and immediately after the period of Robinhood placing its trading
19 restrictions on the Affected Stocks and the Affected Options, and thereby manipulated
20 their prices, Scarborough, during the period between January 28, 2021 and February
21 19, 2021, was economically damaged through selling some of his options at a loss and
22 being forced to let other options expire since their strike price was unreasonably below
23 the severely detrimental market price manipulated by Robinhood. The options which
24 Scarborough owned and in respect of which he suffered economic damage and losses
25 as a result of Robinhood’s conduct as alleged herein are set forth on his certification
26 attached hereto as part of Exhibit A.
27 18. As of the close on January 27, 2021, Plaintiff Scott Schiller (“Schiller”)
28 owned call option contracts for AAL.
8
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1 19. During and immediately after the period of Robinhood placing its trading
2 restrictions on the Affected Stocks and the Affected Options, and thereby manipulated
3 their prices, Schiller, during the period between January 28, 2021 and February 19,
4 2021, was economically damaged through being forced to let his options expire since
5 their strike price was unreasonably below the severely detrimental market price
6 manipulated by Robinhood. The options which Schiller owned and in respect of which
7 he suffered economic damage and losses as a result of Robinhood’s conduct as alleged
8 herein are set forth on his certification attached hereto as part of Exhibit A.
9 20. Defendant Robinhood Financial, LLC (“Robinhood Financial”) is a
10 brokerage company providing online and mobile application-based discount stock
11 brokerage services that allow users to invest in publicly traded companies and
12 exchange-traded funds. Robinhood Financial, LLC’s business address is 85 Willow
13 Road, Menlo Park, CA 94025.
14 21. Defendant Robinhood Securities, LLC (“Robinhood Securities”) is
15 registered as a broker-dealer with the SEC. Robinhood Securities, LLC acts as a clearing
16 broker and clears trades introduced by its affiliate Defendant Robinhood Financial.
17 Robinhood Securities, LLC’s business address is 500 Colonial Center Parkway, Suite
18 100, Lake Mary, FL 32746.
19 22. Defendant Robinhood Markets, Inc. (“Robinhood Markets”) is the
20 corporate parent of defendants Robinhood Financial LLC and Robinhood Securities,
21 LLC, both of which are wholly owned subsidiaries of Robinhood Markets. Robinhood
22 Markets, Inc.’s business address is 85 Willow Road, Menlo Park, CA 94025.
23 23. Robinhood Markets and its wholly owned subsidiaries operate as one
24 entity, and they are treated as one entity in Robinhood Markets’ IPO Registration
25 Statement. See S-1, Robinhood Markets, at F-7 (“Robinhood Markets, Inc. (‘RHM’,
26 together with its subsidiaries, ‘Robinhood,’ the ‘Company,’ ‘we,’ or ‘us,’)”. The S-1
27 explains that “[t]he consolidated financial statements include the accounts of RHM and
28 its wholly-owned subsidiaries. All intercompany balances and transactions have been
9
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1 eliminated.”). Id. at F-8. The S-1 also describes Robinhood Markets and its subsidiaries
2 as a “Vertically Integrated Platform.” Id. at 6.
3 24. Robinhood Financial and Robinhood Securities are single member,
4 limited liability companies, with all tax effects of income or loss included in the tax
5 returns of their parent, Robinhood Markets.
6 25. Robinhood Markets, Robinhood Financial and Robinhood Securities
7 acted jointly in the market manipulation that is alleged herein. See id. at 41 (explaining
8 that “we temporarily prevented our customers from purchasing certain specified
9 securities”) (emphasis added).
10 26. Unless specified, the named Defendants are collectively referred to
11 herein as “Robinhood.”
12 SUBSTANTIVE ALLEGATIONS
13 Background
14 27. In 2011, Robinhood founders Vlad Tenev and Baiju Bhatt owned and
15 operated Chronos Research, a company that developed backend trading technology
16 which increased the speed of trade execution. That summer, the company introduced
17 Zardoz, software platforms that lowered tick-to-trade4 latencies to either five
18 microseconds or fifteen microseconds. Chronos Research’s products were created to
19 enable hedge funds and other HFTs to use speed to obtain a trading advantage over
20 those without such high-end technology. In fact, HFTs are known to front- run other
21 traders and to exploit differences in the bid-ask spreads across multiple exchanges.
22 28. Several months later, purportedly inspired by the Occupy Wall Street
23 protests, Bhatt and Tenev conceived the idea for Robinhood – a company whose stated
24 mission is to democratize investing by providing access to financial markets at no cost
25 to its customers. In 1973, sculptor and videographer Richard Serra coined the phrase “if
26
27 4
For HFT’s whose trades are automated, “tick-to trade” is the response time between receiving a
28 market “tick” (a price movement in the market, either an uptick or a downtick) presenting the
opportunity to the algorithm and processing the buy or sell order.
10
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1 something is free, you’re the product.” Although most of Robinhood’s revenues came
2 from selling customer orders to HFT market makers – the same firms for whom
3 Chronos Research’s products were designed – for much of its short life, Robinhood had
4 gone to great lengths to hide that fact.
5 29. Although it is now widely known that Robinhood’s revenues come from
6 routing its customers’ orders to a handful of market makers for execution – a practice
7 known as “payment for order flow” (“PFOF”) – a December 17, 2020, SEC Cease-and-
8 Desist Order imposing a $65 million civil penalty exposed how Robinhood Financial
9 had methodically altered its public disclosures about PFOF for a number of years, with
10 each adjustment moving farther away from the truth:
11 (a) Before the app launched, Robinhood had disclosed PFOF as a
12 source of
13 revenue in its FAQ answer to the question “How does Robinhood make
14 money?”;5
15 (b) Apparently concerned about negative publicity surrounding PFOF
16 and HFTs, by late 2014, PFOF was taken out of the answer to “How does
17 Robinhood make money?”, a prominent topic on the Robinhood Help Center
18 webpage, and placed elsewhere. There, Robinhood described PFOF revenue as
19 “indirect” and “negligible” and stated that PFOF would be moved to the “How
20 does Robinhood make money?” page if PFOF became a direct or significant
21 source of revenue. 6
22
23 5
In the Matter of Robinhood Fin., LLC, SEC Admin. Proc. File 3-20171, (“SEC C&D Order”)
Finding of Fact No. 15. https://www.sec.gov/litigation/admin/2020/33-10906.pdf.
24
6
25 Id. at Finding of Fact Nos. 16-17. Consistent with the SEC’s findings, some time before April
2016, the discussion of PFOF was placed into an article entitled “Order Routing and Exchanges”
26 that one would have to click through to reach on the “Trading with Robinhood” section of the Help
Center. Toward the bottom of page is the following statement: “Prior to launching the product, we
27
had some language saying that we intended to generate revenue through PFOF. The reason we
28 removed this was because currently we execute all of our orders through our clearing partner
APEX Clearing; as a result, Robinhood does not directly receive PFOF and any revenue we
11
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1 (c) Although PFOF made up 80% of Robinhood’s income through
2 mid-2016, PFOF was never disclosed as a revenue source, as had been promised,
3 in the answer on the “How does Robinhood make money?” FAQ page. To the
4 contrary, at some point during 2016, Robinhood removed all reference to PFOF
5 from its website and even trained those responding to inquiries that PFOF as a
6 source of revenues was an “incorrect” answer to a question about how Robinhood
7 makes money. This deception continued through late 2018, despite PFOF being
8 Robinhood’s largest revenue source.7
9 30. The SEC also found that Robinhood Financial knowingly violated
10 its duty of “best execution” for customer orders by routing trades only to executing
11 brokers that would split the PFOF 80% to Robinhood and only 20% to price reduction
12 for customers, a reverse of the split paid to large retail broker-dealers. 8 Not
13 surprisingly, an extensive internal analysis conducted by Robinhood in March 2019
14 bluntly concluded: “ ‘[n]o matter how we cut the data, our % orders receiving price
15 improvement lags behind that of other retail brokerages by a wide margin.’ ” The SEC
16 continued: “Robinhood further found that the amount of price improvement obtained
17 for Robinhood customers was far lower than at competing broker-dealers, measured on
18
19
indirectly generate from it is negligible. If we were ever to receive it directly, or if it becomes a
20
significant source of revenue, we will reintroduce that language into the FAQ.”
21 (https://web.archive.org/web/20160412113038/https://support.robinhood.com/hc/en-
us/articles/204336175-Order-Routing-and-Exchanges, last accessed November 29, 2021).
22
7
SEC C&D Order, Finding of Fact Nos. 18, 27, 31-36.
23
8
Id. at Finding of Fact Nos. 21-23, 27. A September 2018 article on Seeking Alpha first noted key
24
differences in PFOF payment reporting in SEC Rule 606 filings. Author Logan Kane queried:
25 “Every other discount broker reports their payments from HFT ‘per share,’ but Robinhood reports
‘per dollar’, and when you do the math, they appear to be receiving far more from HFT firms than
26 other brokerages. This raises questions about the quality of execution that Robinhood provides if
27 their true customers are HFT firms.” (https://seekingalpha.com/article/4205379-robinhood-is-
making-millions-selling-out-millennial-customers-to-high-frequency-traders, last accessed
28 November 29, 2021).
12
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1 a per order, per share, and per dollar traded basis. Senior Robinhood personnel were
2 aware of this analysis.” Although Robinhood had a Best Execution Committee, from
3 2016 to 2019 it did nothing to either assess or address whether Robinhood was
4 breaching its duty of best execution.9
5 31. Even though PFOF is banned in other countries because of the inherent
6 conflicts it poses – including, in addition to a brokerage firm pocketing most of the
7 payment, market maker front-running and broker inducements to increase customers’
8 trading frequency 10 – since 1994, the SEC has instead opted for full disclosure of PFOF
9 and adherence to a broker’s duty of best execution for its customers. As laid out in detail
10 by the SEC, even before the events of late January and early February 2021 unfolded,
11 Robinhood had already failed its customers spectacularly on both measures. But the
12 worst was yet to come.
13 32. During the pandemic lockdown, with stimulus checks in one hand and
14 time on both hands, large numbers of Americans started to follow the markets and trade
15 for the first time. The popularity of mobile app-based brokers such as Robinhood
16 exploded among younger, first- time traders. 11 Social media sites such as the
17 WallStreetBets sub-Reddit and Stocktwit provided millions of new investors with a
18 platform to discuss investment strategy and the merits of trading in particular stocks.
19 Not surprisingly, retail trading surged tremendously. On several occasions in 2020,
20 Robinhood’s platform crashed due to the steep increase in trading volume, causing
21
22
23 9
SEC C&D Order, Finding of Fact Nos. 29, 30 & 39.
24 10
Robinhood’s “gamification” of its app to induce frequent trading is under scrutiny by the SEC.
25 See https://www.sec.gov/rules/other/2021/34-92766.pdf.
26 11
Robinhood, whose investors’ median age is 31, seeks to drive that figure even lower. In
27 “Robinhood Is Going on a College Tour to Recruit New Customers,” the Wall Street Journal
reported on September 15, 2021, that Robinhood planned to give community college and HBCU
28 students $15 to sign up, with five lucky customers to receive $20,000 for tuition.
13
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1 millions of dollars in investor losses.12
2 33. The extent to which novice, retail traders entered the market during the
3 pandemic was detailed in a recent SEC Staff Report. Notable statistics include:
4 (a) During 2020, the 60-day moving average of off-exchange market
5 volume,
6 i.e., trades routed through wholesalers instead of being executed on an
7 established exchange (deemed to be a proxy for retail trading), increased from 38.4%
8 on March 23 to 46.5% at the end of the 2020, with the single-day percentage
9 exceeding 50% for the first time on December 23, 2020, at 50.4%. 13
10 (b) Trading in single option contracts in the 50 most-traded stocks rose
11 from 10% to 14% in a matter of months, with number of contracts trading per
12 day increasing from 19.6 million in December 2019 to 34.3 million in December
13 2020. 14
14 (c) In December 2020, over the counter, non-exchange listed equity
15 volume (including “penny” stocks) surged, with a daily average of nearly 50
16 billion shares, compared to roughly 14.7 billion shares per day in November
17 2020, which had been the most active month over the prior two years. 15
18 34. This enormous growth in online retail trading corresponded to the
19
20 12
Failure to supervise the technology relied upon to provide core broker-dealer services caused
21 multiple outages, including one for 26 hours on March 2-3, 2020. This is one reason Robinhood was
fined $70 million by the Financial Industry Regulatory Authority (“FINRA”) in June 2021. See
22 “FINRA Orders Record Financial Penalties Against Robinhood Financial, LLC,” June 30, 2021.
(“FINRA Order”) (https://www.finra.org/media-center/newsreleases/2021/finra-orders- record-
23
financial-penalties-against-robinhood-financial last accessed November 29, 2021).
24
13
SEC “Staff Report on Equity and Options Market Structure Conditions in Early 2021,” at 16 n. 51
25 (Oct. 14, 2021) (“SEC Staff Report”) (https://www.sec.gov/files/staff-report-equity-options-
market-struction-conditions-early-2021.pdf)
26
27
14
Id. at n.52.
28 15
Id. at n.51.
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1 destruction of many of the guardrails established by government entities and by self-
2 regulatory organizations to protect investors. As explained on its website, FINRA is
3 “authorized by Congress to protect America’s investors by making sure the broker-
4 dealer industry operates fairly and honestly.” One rule enacted to protect investors, Rule
5 2111, sets standards for investment recommendations to customers, providing, in
6 relevant part:
7 (a) A member or an associated person must have a reasonable basis to
8 believe that a recommended transaction or investment strategy involving a
security or securities is suitable for the customer, based on the information
9 obtained through the reasonable diligence of the member or associated person to
10 ascertain the customer’s investment profile. A customer’s investment profile
includes, but is not limited to, the customer’s age, other investments, financial
11
situation and needs, tax status, investment objectives, investment experience,
12 investment time horizon, liquidity needs, risk tolerance, and any other
13 information the customer may disclose to the member or associated person in
connection with such recommendation.
14
15 35. Because customers trading on the Robinhood platform are self-directed,
16 i.e., not receiving portfolio management or investment advice from a licensed advisor,
17 Robinhood insufficiently concerned itself with whether investments were suitable for
18 the customers making them, only providing some basic financial literacy articles free-
19 of-charge on its customer website. This paved the way for many of Robinhood’s
20 customers to trade not only in equities, but also in options, 16 for which Robinhood
21 received a higher PFOF rate17. For the month of December 2020, Robinhood’s Rule
22
23 16
FINRA fined Robinhood for relying on “option account approval bots,” without oversight by the
firm principals, to approve thousands of customers whose inconsistent or illogical responses to the
24
firm’s questions should have disqualified them from trading options. See FINRA Order.
25
17
S. Kolhatkar, “Robinhood’s Big Gamble: In eliminating barriers to investing in the stock market,
26 is the app democratizing finance or encouraging risky behavior?”, The New Yorker (May 10, 2021)
(“At the end of 2017, Robinhood announced options trading on the platform, making it available to
27
all but its most inexperienced users. The company received even higher payment-for- order-flow rates
28 on options than on stocks, and options trading soon became the company’s largest source of revenue.
In options trading, it is easy to quickly rack up enormous losses, and it has been associated with
15
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1 606 report showed PFOF of $1.7 million for trades of S&P 500 stocks and $52.7
2 million in PFOF for its customers’ options trading.18
3 36. By late 2020, Robinhood was adding new traders at an accelerating pace,
4 increasing its customer base to 12.5 million funded accounts. In early December, news
5 reports surfaced that Robinhood had selected Goldman Sachs to lead its initial public
6 offering in 2021.19
7 Chronology of Relevant Events
8 The Lead-Up to January 28, 2021
9 37. Although purchases by prominent market players sparked retail investor
10 interest in some of the Affected Stocks before January 2021, e.g., by November 2020,
11 the former CEO of online pet-supply giant Chewy.com, Ryan Cohen, had purchased a
12 9.98% interest in GameStop and Michael Burry’s Scion Asset Management held a 5.3%
13 interest, the rise in meme stock prices occurred in mid- to late- January 2021 because
14 posters on social media investment sites had noted that some hedge funds had taken
15 large short interests in certain of the Affected Stocks.
16 38. The most-famous exchange between short sellers and retail investors was
17 an online battle over GameStop. On January 19, 2021, Citron Research tweeted that it
18 would livestream an event the next day explaining why GameStop share values would
19 retreat, calling those currently purchasing GameStop – then hovering around $40 per
20 share – “suckers at this poker game.” Citing alleged hacks to its Twitter feed on January
21 20th, Citron’s Andrew Left indicated that he would tape and post the message on
22 January 21, 2021. Live on the afternoon of January 21, 2021 on Benzinga’s
23 ZingerNation Power Hour, Left stated that GameStop’s business was in “terminal
24
25 compulsive behavior.”)
26 18
Felix Salmon, “Why people love to hate Robinhood,” Axios (Feb. 4, 2021)
27 (https://www.axios.com/robinhood-lawsuit-gamestop-stocks-90e13174-e459-4212-
8f62- 15540b1baf54.html last accessed November 29, 2021).
28
19
See, e.g., reports by Reuters and Yahoo! Finance on December 8, 2020.
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1 decline.” Retail investors and savvy hedge funds responded by driving up the price of
2 the stock: after closing at $43.03 that day, GameStop’s price soared to $65.01 at the
3 close of the markets on January 22, 2021. By January 27, 2021, Citron was forced to
4 cover its position with purchases in the $90-dollar range, according to a Tweet it posted
5 at 6:47 a.m. that day.
6 39. As GameStop’s share price began to soar as a result of this public feud,
7 on January23, 2021, internal Robinhood communications between Tenev, Robinhood
8 Securities President and COO James Swartwout and others centered around the risk to
9 Robinhood of customers trading GameStop on margin. Specifically, Swartwout asks:
10 (1) How many customers are holding GME on margin, (2) If we move to 100%
11 [margin] -- what are the number of calls generated, and (3) What is our risk exposure? 20
12 At some point in the planning and analysis for such an event, a Robinhood employee
13 chimed in, recognizing the potential harm to Robinhood’s customers should Robinhood
14 require 100% margin for GameStop:
15 “It seems that the process outlined above covers
16 firm risk well, but from a public perception POV, we
may want to consider the risks our customers face. Is
17 there a comms need or other action we should consider
18 that would provide protection to our customers? I defer
to … and … on that point, but something to consider.
19
Although we don’t have a straightforward obligation here
20 because our customers are self directed, the perception is
21 that they are relatively inexperienced and our action may
well be compared to the actions of other firms (with other
22 obligations to customers).”21
23
Robinhood was thus acutely aware of the potential exposure its customers would face
24
if forced to liquidate their positions because of a margin call.
25
26
27 20
Robinhood Tranche Amended Consolidated Class Action Complaint (Dk. 409) (“Robinhood State
28 Law Complaint”) at ¶194 (reproducing internal chat).
21
Id. at ¶195.
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1 40. Prior to January 25, 2021, hedge fund Melvin Capital had amassed an
2 enormous short position in GameStop shares. As GameStop’s share price rapidly
3 increased, Melvin Capital was facing billions of dollars of losses. On January 25, 2021,
4 Melvin Capital announced an infusion of $2.75 billion – hedge funds Point72 and
5 Citadel LLC (“Citadel”) lent $750 million and $2 billion, respectively – to stay afloat
6 after its value had declined more than 30% in a matter of weeks, due mainly to its short
7 position in GameStop. Earlier, in November 2020, a post on WallStreetBets alerted
8 the sub-reddit’s millions of followers of Melvin Capital’s short interest in GameStop
9 and subsequent posters vowed to take the fund down. Melvin Capital closed out its
10 GameStop position on January 27, 2021.
11 41. On the morning of January 27, 2021, Vlad Tenev had published an
12 opinion piece for CNBC.com entitled “Becoming an investor is the new American
13 dream, just like home ownership was before.” Making the case that Robinhood enables
14 “everyday” Americans to trade, Tenev welcomed customers to the platform to take part
15 in the current market rally:
16 “In these turbulent times, it gives us tremendous
17 satisfaction that Robinhood has expanded access for many
to begin their investment journey during the market rally.
18 Although most of those gains are unrealized, and 2021 is
19 sure to bring its own twists and turns, we are proud to have
enabled our customers to begin participating in the
20
markets and allow them to progress towards their own
21 financial independence.
22 ***
23 I’d argue that those who question the capability of retail
investors do not have the interests of everyday Americans
24 at heart. It’s wrong to view the arrival of increasing
25 numbers of retail investors in the market with dismay. It’s
short-sighted to proclaim that financial instruments
26
integral to investment strategies of the wealthiest
27
28
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1 Americans should be left exclusively in the hands of the
2 old guard. 22
3 42. When asked during a companion interview on CNBC’s “Squawk Box”
4 that same morning how the company planned to handle the massive volume of trading
5 in stocks such as GameStop, Tenev stated:
6 “Like many others in the industry, we have processes that
7 respond to increases in volatility in certain names by
doing things like raising the margin requirements.
8
We’ve done that in lots of cases. We, we always remain
9
focused on making sure the system is reliable, that we’re
10 investing in stability, making sure we’re up for
11
customers when they need us the most … There’s things
happening, different things happening every week. I
12 think we have to avoid running our business as if we’re
13 responding to what’s in the news on a weekly basis …”
14 43. When specifically asked whether Robinhood was raising the margin
15 requirements for GameStop, Tenev refused to directly answer the question, but instead
16 again compared Robinhood’s actions to those of its competitors: “Like other
17 brokerages do, we monitor volatility and take steps as appropriate, like raising the
18 margin requirements.” Tenev’s answer, which painted Robinhood as a responsible actor
19 in the industry, one that need not specifically react to the meme stock trading
20 phenomenon, was less than candid.
21
22
22
See https://www.cnbc.com/2021/01/27/robinhood-ceo-becoming-an-investor-is-the-new-
23 american-dream-just-like-home-ownership-was-before.html (last accessed November 29, 2021).
Even as Robinhood was worried, internally, about being able to handle the trading volume and
24
margin risk, in addition to this opinion piece, Tenev appeared on Yahoo Finance Live on January
25 27th and made a similar pitch to customers new to investing: “Retail investors and individuals have
felt like they’ve been talked down to. Lots of them felt like they haven’t been taken seriously,”
26 he said. “There’s this term ‘sophisticated investor’ that’s been thrown around, so there’s an idea
27 that they’re unsophisticated.” https://www.yahoo.com/now/robinhood-ceo-retail- investors-have-
felt-like-they-have-been-talked-down-to-are-now-empowered-214947293.html (last accessed
28 November 29, 2021).
19
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1 44. Internally, the answer to host Andrew Ross Sorkin’s question was a
2 resounding “Yes!” According to the SEC Staff Report, Robinhood had already begun to
3 ratchet up purchasing restrictions, raising both initial and maintenance margin
4 requirements, with GameStop at 80% on January 26, 2021, and 100% January 27,
5 2021. 23 Of course, Tenev’s bid for new customers, posting both an op-ed and appearing
6 on CNBC’s “Squawk Box” (and on Yahoo Finance Live), would not have fared as well
7 had he publicly announced specific restrictions on margin trading of GameStop, which
8 could have opened up the door to questions about customers’ ability to readily purchase
9 the other Affected Stocks. By side-stepping host Sorkin’s question, Tenev enabled the
10 Robinhood app to be downloaded 120,000 times that day and Robinhood to set its own
11 record for active daily users on mobile, at 2.6 million, ultimately catapulting
12 Robinhood to the No. 1 app on the App Store for the first time.
13 45. Despite Tenev’s attempt to place Robinhood in the company of other
14 retail online brokerages, such as TD Ameritrade and Charles Schwab, what Robinhood
15 did over the next eight days did not remotely resemble the risk management processes
16 employed by any other brokerage firm. Nor were any two entities in the events that
17 unfolded as tied together in public opinion as Robinhood and Citadel Securities LLC
18 (“Citadel Securities”).
19 46. On the evening of January 27, 2021, Robinhood senior staff had an
20 important discussion with employees of Citadel Securities, the market maker
21 responsible for the largest portion of Robinhood’s revenues. According to Robinhood’s
22 IPO Registration Statement, in 2019, PFOF revenue from Citadel Securities represented
23 29% of Robinhood’s total revenues; in 2020, the figure rose to 34%.24 In actual dollars,
24
25
23
SEC Staff Report at 33-34. Although Robinhood is not named, the unique actions described were
26 those taken by Robinhood. See also Robinhood State Law Complaint at ¶12 (on January 26th,
27 Robinhood Securities President and COO James Swartwout stated in an internal chat: “I sold my
AMC today. FYI – tomorrow morning we are moving GME to 100% – so you are aware.”).
28 24
Robinhood Markets, Inc. Form S-1, filed July 1, 2021, at F-10.
20
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1 Citadel Securities paid Robinhood nearly $80.5 million for its customers’ order flow in
2 2019 and a whopping $326 million for its customers’ order flow in 2020. 25 Most
3 important, the filing revealed that Robinhood’s “PFOF … arrangements with market
4 makers are not documented under binding contracts.” 26 In short, the arrangement was
5 terminable by either party at any time. Consequently, the continued growth of
6 Robinhood’s business, and most certainly its ability to move forward with an IPO, was
7 very much in the hands of Citadel Securities on the evening of January 27, 2021.
8 47. As internal communications at Robinhood and email chains between
9 Robinhood and Citadel Securities indicate, 27 although the initial reason for the
10 discussion appears to have been anticipated “across-the-board” adjustments by Citadel
11 Securities of PFOF payments to Robinhood (according to Robinhood Markets Chief
12 Operating Officer Gretchen Howard), it was apparent that the discussion also included
13 references to the negative impact on Citadel/Citadel Securities and other HFTs of the
14 intense purchasing activity that caused the price of most of the Affected Stocks to
15 skyrocket in a single trading session earlier that day.28
16 48. Following the phone call, at least one Robinhood executive was unhappy
17 with the way Citadel Securities apparently dictated the new terms of the parties’
18 arrangement. Robinhood Securities President and COO James Swartwout wrote to a
19 counterpart at Citadel Securities: “I have to say I am beyond disappointed in how this
20 went down. It’s difficult to have a partnership when these kind of things go down this
21
22
23 25
Id. at F-4.
24
26
Id. at 35.
25
27
Partially redacted reproductions of the communications appear in the Corrected Consolidated
26 Class Action Complaint at ¶¶ 304-313 in the Antitrust Tranche (Dk. 416) (“Antitrust Complaint”).
27 28
Id. at ¶308 (One Robinhood employee noted: “Anecdotal evidence that several ‘very large’ firms
28 are having really bad nights too”. Robinhood Securities President and COO Swartwout replied:
“everyone is. you wouldn’t believe the convo we had with Citadel. total mess”).
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1 way.” 29 Although Citadel Securities was Robinhood’s largest source of revenue,
2 pursuant to an arrangement that is not documented in a binding contract, Robinhood
3 appears to have only found out on the night of January 27, 2021, who had the upper
4 hand in the parties’ relationship. 30
5 January 28, 2021
6 49. In the very early hours of the morning – after the unsatisfactory phone
7 call with Citadel Securities and before receiving the January 28, 2021 deposit
8 requirement from the NSCC that Robinhood blames for its six days of trading
9 restrictions – Robinhood decided that customers holding options for GME and AMC
10 set to expire on Friday, January 29, 2021, should not be permitted to exercise those
11 options. Robinhood unilaterally acted in the middle of the night to foreclose this
12 possibility by placing all options expiring on January 29, 2021 into “position closing
13 only” (“PCO”), sending the following email to customers (posted at 1:03 a.m. on
14 Twitter):
15
16
17
18
19
20
21
22
23
24
25
29
Antitrust Complaint at ¶313.
26
30
Underscoring this point, Tenev’s request to speak to Citadel CEO Ken Griffin that evening appears
27
to have been rebuffed. In another email chain, Tenev asked his team to propose a one-on- one; in
28 response, Citadel Securities offered to have Tenev speak with someone else, indicating arrangements
could be made to speak with Griffin in the future. Id. at ¶¶307, 311 and 312.
22
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1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
50. Specifically, customers were told: “If we determine that your option
24
contract is at risk of being in the money and you don’t maintain the necessary collateral
25
to support assignment/exercise, we may take proactive measures to help reduce your
26
account risk, including closing at-risk positions prior to expiration date.” (Emphasis
27
supplied.) Thus, before customers could decide whether to close out the position or
28
deposit funds to exercise their in-the-money options, i.e., to purchase GME and AMC
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1 shares at less than their then-current market value, Robinhood unilaterally decided it
2 could proactively close out their positions early should it choose to do so.
3 51. By closing out the positions early, Robinhood relieved the sellers on the
4 other side of the option contracts (the “counterparties”) of the obligation to sell shares
5 to Robinhood’s customers at below market value. Should the counterparties not have
6 had shares of GME and AMC in their accounts, Robinhood’s action would further
7 relieve them of having to purchase shares at exorbitant prices to enable them to deliver
8 those shares upon exercise of the option. As the pressure to perform under these
9 contracts was removed from counterparties, Robinhood knew that such a “proactive”
10 measure, indeed one step beyond requiring 100% margin for a share purchase, would
11 cause the price of GME and AMC shares to decline rather than to continue to climb
12 even higher.
13 52. Robinhood’s use of the phrase “at risk of being in the money” is rather
14 telling. This is a very an odd way to refer to a successful bet on a stock’s price movement
15 – unless Robinhood knew for a fact that its customers were new investors who both
16 routinely traded options without the financial means to exercise them and were more
17 likely than experienced options traders to exercise their options. 31
18 53. Preemptively taking away decision-making authority from its customers
19 by closing out options early is an action that runs directly contrary to Robinhood’s
20 repeated refrain that it is democratizing finance for new investors. Less than 24 hours
21 earlier, Tenev’s published opinion on CNBC.com accusatorily proclaimed: “I’d argue
22
23
24
31
25 In fact, Robinhood Securities President and COO James Swartwout explained that Robinhood
customers were so uninformed about options trading that Robinhood took affirmative steps to try to
26 prevent customers from losing money by requiring they speak to a live broker before exercising out-
27 of-the-money options, i.e., to purchase shares at a price higher than available on the open market,
they should opt to allow to expire. Decl. of James Swartwout, filed Feb. 8, 2021, in Cobos v.
28 Robinhood Fin. LLC, 21-cv-00835, (C.D. Cal.) (Dk. 27-3) (“Swartwout Decl.”) at ¶¶ 22-23.
24
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1 that those who question the capability of retail investors do not have the interests of
2 everyday Americans at heart.”
3 54. The decision to move all of the Affected Options expiring on January 29,
4 2021 to PCO during the early hours of January 28, 2021, potentially closing out early
5 options “at risk of being in the money,” also contradicts Robinhood Securities President
6 and COO Jim Swartwout’s sworn statement on February 8th: “At no time on or since
7 January 27, 2021, did Robinhood restrict a customer’s ability to exercise ITM [in-the-
8 money] options.”32
9 55. Hours later, at 5:11 a.m. EST on January 28, 2021, Robinhood received
10 a file from the National Securities Clearing Corporation (“NSCC”), of which
11 Robinhood Securities is a member, indicating that Robinhood was required to pay $3
12 billion dollars (in addition to the nearly $700 million already on deposit) to secure
13 completion of unsettled trades in its customers’ accounts. The $3.7 billion charge had
14 two components: the core clearing fund charge, the primary component of which is the
15 value at risk charge (“VaR”) which is calculated based upon the estimated risk in the
16 member’s unsettled portfolio, and an excess capital premium charge which compares
17 the member’s excess net capital to its core charges. The more the core charges exceed
18 the member’s capital cushion, the larger the capital premium charge. To avoid incurring
19 the latter charge the member must either reduce the level of risk or raise additional
20 capital.33
21 56. Citing a “major liquidity issue” Robinhood Markets COO Gretchen
22 Howard wrote in an internal chat that eight stocks – AMC, GME, and six other “meme”
23 stocks – had been moved to position closing only (“PCO”) on the Robinhood Financial
24
25
32
Swartwout Decl. at ¶24.
26
33
See Written Testimony of Michael C. Bodson, CEO of the Depository Trust & Clearing
27
Corporation, before the Committee on Financial Services of the U.S. House of Representatives, May
28 6, 2021 (“Bodson Testimony”) at 3-4. (https://www.dtcc.com/-/media/Files/PDFs/ Testimony-of-
Michael-Bodson-050621.pdf)
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1 platform, with all purchases prohibited. 34 According to Shiv Verma, Head of Treasury
2 at Robinhood Markets, because the VaR charge exceeded Robinhood’s net capital, a
3 special excess capital premium (“ECP”) charge had been assessed in addition to the core
4 VaR charge, and Robinhood was looking for a way to eliminate or significantly reduce
5 the more than $2.2 billion ECP charge. 35
6 57. Following a discussion between Robinhood and the NSCC in which
7 Robinhood “proposed to the NSCC that, as a temporary measure, it would limit customer
8 purchases for certain volatile stocks that had driven the increased deposit
9 requirements,”36 before the markets opened on January 28, 2021, the NSCC waived
10 Robinhood’s capital premium charge for the day – in fact, the NSCC waived net capital
11 charges through February 1, 2021, to allow the trades from both January 27, 2021 and
12 January 28, 2021 to work through the system. 37 Only because of its decision to halt
13 stock purchases in eight issuers and the NSCC’s waiver of a $2.2 billion charge was
14 Robinhood was able to temporarily solve its “major liquidity issue” and meet the
15 NSCC’s greatly-reduced deposit requirement for January 28, 2021 with an additional
16 $700 million payment. Had both extraordinary measures not been taken, Robinhood
17
18
34
Internal Robinhood chats are reproduced at ¶¶ 232 and 233 of the Antitrust Complaint.
19
35
Declaration of Shiv Verna, filed Feb. 8, 2021, in Cobos v. Robinhood Fin. LLC, 21-cv-00835,
20 (C.D. Cal.) (Dk. 27-2) at ¶13. (“Verna Decl.”). For an undercapitalized broker, the ECP could
21 potentially be much greater than the VaR. Tenev testified that Robinhood’s was more than $2.2
billion on the morning of January 28th. See Written Testimony of Vladimir Tenev, CEO Robinhood
22 Markets, Inc., before the Committee on Financial Services of the U.S. House of Representatives
Feb. 18, 2021, at 9-10 (after ECP was waived, $3.7 billion charge was reduced to the core charge
23 amount of approximately $1.4 billion) Thus, the bulk of the $3 billion requested deposit (in addition
24 to the $700 million already on deposit) was an ECP charge not a core charge.
25 36
Verna Decl., supra, id. Although Tenev later claimed that Robinhood had been “forced” to prohibit
purchases, this was a voluntary proposal made by Robinhood. Bodson testified: “NSCC’s role in the
26 market is a neutral one. It does not impose trading restrictions upon its clearing members or their
27 customers, and it did not instruct any clearing member to impose restrictions during the market
volatility events of late January.”
28
37
Bodson Testimony at 5 & n.4.
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1 would have faced liquidation of its customers’ positions and left the other members of
2 the NSCC to cover the losses.38
3 58. Apparently, the internal assessment of Robinhood Financial’s President
4 and COO, David Dusseault, that Robinhood would “navigate through this nscc issue”
5 because the company was “to [sic] big for them to actually shut us down,” proved to be
6 correct. With the liquidity crisis temporarily solved, by 5:30 p.m. on January 28, 2021
7 Reuters reported that Robinhood raised $1 billion from existing investors to provide a
8 desperately needed capital cushion. Alas, Robinhood’s customers were not too big to
9 fail, these “everyday Americans” were abandoned by Robinhood without even being
10 told why.
11 59. After Robinhood took the extraordinary measures of prematurely
12 moving GME and AME options to position closing only, disabling the “buy” button
13 for shares of GME, AMC and six other issuers, and telling customers that trades they
14 already scheduled had been cancelled (either without their consent or, falsely, at their
15 request),39 on the morning of January 28, 2021, Robinhood first sent a terse, patronizing
16 note to its customers, one that did not inform investors of the purchase prohibitions or
17 why they were instituted:
18 We wanted to reach out to you in the midst of the current
19 volatile market conditions. It’s as important as ever to be
an informed investor.
20
21
22 38
On the evening of January 28th, Thomas Peterffy, the Chairman of Interactive Brokers, viewed
Robinhood’s announced decision to enable the “buy” button when trading opened on
23 January 29th, even for limited purchases only, a risk to the entire system. The potential liquidation of
Robinhood, should it not be able to meet its deposit requirements, would impact “the integrity of the
24
marketplace and the clearing system.” He continued: “I’m not comfortable with the current situation
25 because if the brokers go the clearinghouse has to collect from other members…and it’s a domino
effect.” See M DeCambre “Peterffy calls Robinhood decision to allow ‘limited buys’ of GameStop
26 troubling: ‘I’m not comfortable’”, Marketwatch.com, Jan. 28, 2021
27 (https://www.marketwatch.com/story/peterffy-calls-robinhood-decision-to-allow-limited-buys- of-
gamestop-troubling-im-not-comfortable-11611876619, last accessed Nov. 29, 2021)
28
39
See Robinhood State Law Complaint at ¶¶243-244; Antitrust Complaint at ¶237.
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1 Whether you’re brand new to Robinhood or have been
2 investing with us for years, we have lots of resources to
help you navigate the markets, including Investing 101
3 and our entire Help Center.
4
Here are some specific articles from Robinhood Learn to
5
help make sense of market volatility:
6 -- The stock market has been super volatile – How can I
7 make sense of it?
-- Volatility explained
8
9 As always, thank you for being a Robinhood customer.
10
Sincerely,
11
12
The Robinhood Team40
13 60. At or near the market open, Robinhood decided to increase the number
14 of stocks for which purchases were barred to 13, adding AAL among others to the list.
15 In a blog post on its site, stunned customers were provided no information – beyond a
16 reference to “recent volatility” – about why the “buy” button had been disabled for
17 these stocks:
18 Keeping Customers Informed Through Market Volatility
19
Our mission at Robinhood is to democratize finance for
20 all. We’re proud to have created a platform that has
21 helped everyday people, from all backgrounds, shape
their financial futures and invest for the long term.
22
23 We continuously monitor the markets and make changes
where necessary. In light of recent volatility, we are
24
restricting transactions for certain securities to position
25
26 40
This initial message was made public shortly before trading began. See, e.g., “Robinhood sends
27 market volatility warning to brokerage app users,” ClickonDetroit.com (online site of WDIV
Channel 4 news, Jan. 28, 2021) (https://www.clickondetroit.com/news/2021/01/28/robinhood-
28 sends-market-volatility-warning-to-brokerage-app-users/, last accessed November 29, 2021)
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1 closing only, including $AAL, $AMC, $BB, $BBY,
2 $CTRM, $EXPR, $GME,
$KOSS, $NAKD, $NOK, $SNDL, $TR, and $TRVG.
3 We also raised margin requirements for certain securities.
4
Amid significant market volatility, it’s important as ever
5
that we help customers stay informed. That’s why we’re
6 committed to providing people with educational
7 resources. We recently revamped and expanded
Robinhood Learn to help people take advantage of the
8 hundreds of financial resources we offer and educate
9 themselves, including how to make sense of a volatile
market. In 2020, more than 3.2 million people read our
10
articles through Robinhood Learn.41
11
12 61. The two public statements issued on the morning of January 28, 2021
13 were hardly a model of the transparency in which Robinhood purports to take pride. As
14 Tenev admitted two weeks later, on the February 12, 2021 podcast of All-In with
15 Chamath, Jason, Sacks & Friedberg: “no doubt we could have communicated this a
16 little bit better to customers.” However, when Tenev was specifically asked why
17 Robinhood did not just come right out and explain the real reason to its customers, that
18 the NSCC’s initial $3 billion deposit requirement forced its hand, his explanation of
19 what happened is even more disingenuous.
20 62. Tenev deceptively tried to palm off the uninformative communications
21 as ill- conceived automated messages. Specifically, because Robinhood has an
22 “operationalized process” to switch off the “buy” button for a short period of time for a
23 legitimate reason, e.g., the occurrence of a corporate action such as a reverse stock split,
24 Tenev suggested that when that action is taken, “there’s a button in a dashboard you can
25 click and automated emails get sent out. It’s an operational process that I think in
26
27
28
41
Id. (updated heading added to the article, “Robinhood now ‘restricting transactions for certain
securities’ ” republishes the blog post in full).
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1 hindsight we probably should have ‘exceptionalized’ to make it clear why we were
2 doing this.” Because the three stated reasons (in the Help Center FAQ “Why don’t I
3 see a buy button?”) were not applicable to the popular stocks Robinhood customers
4 were attempting to purchase, the appearance of these automated messages raised more
5 questions for Robinhood’s customers than they answered.
6 63. Although Tenev only referenced inapposite automated messages when
7 he retrospectively indicated that Robinhood should have “ma[de] it clear why we were
8 doing this,” the vague communications concerning “market volatility” quoted in ¶¶59
9 and 60, were carefully crafted before being sent to customers to specifically address
10 the situation at hand. Internal Robinhood communications reveal that at 8:13 a.m. EST
11 on January 28, 2021, Robinhood was fashioning just the right message to not lose
12 credibility with its current and future customer base: “Is there a level to which we are
13 aiming for? . . . Not sure where the line is as a brand . . . not sure yet – I know there is
14 a team working on our response here and we’ll know more shortly.” (Emphasis
15 supplied.) 42
16 64. As the crisis was unfolding, the image that Robinhood was trying to
17 project in advance of its IPO was not one of a company saved from liquidation by both
18 the grace of an NSCC deposit waiver and Robinhood taking the extreme action – taken
19 by no other retail brokers – to entirely shut down purchases of 13 different stocks. On
20 the February 12, 2021 podcast, however, after Robinhood raised $3.4 billion and shored
21 up its balance sheet, Tenev concluded, in retrospect, that communications to customers
22 should have been more forthright about the actions Robinhood took to respond to the
23 NSCC’s deposit demand. 43
24
25
42
Robinhood State Law Complaint at ¶205.
26
43
During a podcast on February 23rd with Dave Portnoy of Barstool Sports, Tenev again admitted
27
that the vague communications about “market volatility” were insufficient: “[W]e we sent some
28 emails that were like, hey, there’s some market volatility going on, and we basically sent a link that
said: What is market volatility? I think in that one, in hindsight, we should have said, hey, some
30
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1 65. Whether or not that explanation is entirely truthful, the deliberate
2 decision not to provide it to the public in real time caused retail investors to reach their
3 own conclusions, exacerbating the market volatility. Robinhood’s precisely worded
4 messages, that intentionally kept investors in the dark to save face, further drove down
5 the share prices of the Affected Stocks and Affected Options. Specifically, Tenev
6 explained that because Robinhood withheld information about the NSCC’s deposit
7 requirement, investors immediately jumped to the conclusion that Robinhood was on
8 the side of the hedge funds the WallStreetBets investors were trying to take down.
9 66. As the share prices of the Affected Stocks and Affected Options
10 plummeted because of Robinhood’s unexplained decision to prohibit all share
11 purchases,44 Robinhood’s actions were immediately and universally decried as market
12 manipulation – and not just by the followers of the WallStreetBets sub-Reddit.
13 Robinhood was sharply criticized by members of Congress from both sides of the aisle,
14 with Representatives Rashida Tlaib and Alexandria Ocasio-Cortez and Senators Ted
15 Cruz and Marsha Blackburn all weighing in against its restrictions. (The next morning,
16 as noted in a tweet by U.S. Rep. Jamaal Bowman, Robinhood added a job posting for
17 a new position based in Washington, D.C. for a “Federal Affairs Manager”, i.e., a
18 lobbyist).
19 67. Many were disillusioned that the alleged disruptor, Robinhood, suddenly
20 made it impossible for its customers to freely purchase the Affected Stocks while
21 institutional investors and those on more-established online platforms could still do so.
22 Some accused Robinhood of acting to benefit hedge funds, including Citadel LLC, and
23 Citadel Securities, the market maker which provided Robinhood 36% of its 2020
24 revenues and had flexed its power the night before. Specifically, many theorized that
25
26
things can happen that restrict certain aspects of your trading …”
27 44
Price graphs of the five Affected Stocks, GME, NOK, AMC, BBBY, and BB appear, respectively,
28 at ¶¶ 258-266 of the Antitrust Complaint. Each shows a sharp price decline as between January 27th
and January 28th.
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1 Robinhood knowingly acted to slash the price of the Affected Stocks so that the hedge
2 funds and market makers could cover their short positions in various meme stocks, as
3 Melvin Capital and Citron Capital had been forced to do. 45
4 68. Robinhood prohibited purchases, but not sales, of the Affected Stocks
5 and Affected Options to decrease the amount of the core charge it was required to
6 deposit with the NSCC, which would enable the company to withstand the financial
7 impact of the volume of its customers’ trades – business it actively recruited and
8 recklessly stoked during the market rally – so that it could survive until its IPO.
9 Additionally, cutting off demand from 15 million active traders, a large percentage of
10 which traded in one or more of the Affected Stocks, could also assist Citadel, Citadel
11 Securities, other market makers who generate PFOF revenue, and/or hedge funds –
12 many of which Robinhood executives believed were negatively impacted by the
13 explosion in the price of the Affected Stocks on January 27, 2021 – by causing a price
14 decline that would permit these powerful market players to cover, and/or profit from,
15 short positions they held.
16 69. Regardless of its motive(s) on January 28, 2021, when it closed out AMC
17 and GME options early, disabled multiple “buy” buttons, and cancelled purchase orders
18 for the Affected Stocks and the Affected Options, Robinhood was certain of one thing:
19 its actions would harm its customers who held the Affected Stocks and the Affected
20 Options by driving down their share prices. Not only were customers who would be
21 harmed not protected or warned, as suggested should occur in a Robinhood January 23,
22 2021 internal communication (¶39, above), but a senior Robinhood official did sell his
23 shares of one of the Affected Stocks and warned his own colleagues before the
24 restrictions were imposed.
25
26
45
A chart in the SEC Staff Report showed that purchases to cover short sales were more prevalent
27
during the period January 22 -27, 2021, than they were on January 28, 2021. However, the data
28 presented appeared to expressly exclude trading by market makers and other HFTs. SEC Staff
Report at 28, Fig. 6 and n.78.
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1 70. Robinhood Securities President and COO James Swartwout attested to
2 being the person at Robinhood who made the PCO decisions. 46 According to his
3 candidate statement in a 2020 FINRA Regional Committee Election:
4 James Swartwout is a 30 year veteran of the securities
5 industry who has held leadership roles at many of the top
discount brokerage firms in the nation. His career
6 encompasses roles in customer support, back office
7 operations, trading and order management, clearing
operations as well as branch operations. Currently the
8
President and COO of Robinhood Securities LLC based
9 in Lake Mary, Florida, he has also held Senior Leadership
10 positions at AmSouth Investment Services, E*TRADE
Securities and E*TRADE Clearing, Scottrade and was
11 the President of tradeMONSTER until its merger with
12 Optionshouse.
13
71. Thus, when Swartwout stated in an internal communication on January
14
26, 2021: “I sold my AMC today. FYI – tomorrow morning we are moving GME to
15
100% [margin] - so you are aware,” both Swartwout and all of the Robinhood personnel
16
who were on the internal chat (or were told of its contents) knew that the prices of the
17
Affected Stocks and Affected Options would be driven down should Robinhood make
18
it more difficult to purchase and hold shares in the Affected Stocks by imposing a 100%
19
purchase and maintenance margin requirement on its 15 million customers. These
20
same Robinhood executives understood very well that making the Affected Stocks and
21
the Affected Options impossible for their customers to purchase would have an even
22
greater impact on Robinhood’s customers and on the prices of the stocks subject to the
23
purchase prohibition. After all, it was the very propensity of Robinhood’s customers to
24
purchase these very stocks, and options on such stocks, in such high concentration that
25
was the basis for the initial $3 billion deposit demand.
26
27
28 Swartwout Decl. at ¶34 (“This was a decision I made on behalf of RHS and in consultation with my
46
operations team at RHS and others at Robinhood.”)
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1 72. Indeed, before the markets opened that morning, one Robinhood
2 employee looking at the big picture questioned how detrimental Robinhood’s actions
3 could be – and how that would affect Robinhood (a company planning an IPO) in the
4 long term: “I think the blowback from this is going to be exponentially worse as time
5 goes on . . . Just worried about the long term affects [sic] of this.” 47 As Tenev later
6 admitted: “We knew this was a bad outcome for customers.”
7 73. Not only Robinhood’s customers were negatively affected by the tsunami
8 of selling unleashed by Robinhood’s disabling of “buy” buttons for the very stocks that
9 were the most popular with its customer base. By the close of the markets on January
10 28, 2021, each of the Affected Stocks and Affected Options saw significant declines
11 from the previous close:
12 Closing price Closing price
13 January 27, January 28,
2021 2021
14
AMC (AMC $19.90 $8.63
15 Entertainme
16 nt Holdings
17 Inc.)
GME $347.51 $193.60
18
(GameSt
19 op Corp.)
20 BB $25.10 $14.65
(Blackberry
21
Ltd.)
22
BBBY (Bed $52.89 $33.64
23 Bath &
24
Beyond Inc.)
NOK (Nokia $6.55 $4.69
25
OYJ)
26
27
28
47
Robinhood State Law Complaint at ¶205 (the remainder of the quoted message appears in ¶63).
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1 74. That evening, Tenev hit the airwaves to do damage control. Again
2 appearing with Andrew Ross Sorkin on CNBC Tenev stated that Robinhood had to
3 make a “very difficult decision” to halt customer purchases of the stock of multiple
4 issuers “as part of normal operations.” Rejecting the suggestion that Robinhood shut
5 off its customers’ ability to purchase these stocks to aid hedge funds and market makers
6 by depressing share prices for those needing to cover short positions, Tenev stated:
7 “We absolutely did not do this at the direction of any market maker or hedge fund or
8 anyone we route to or any other market participants.” (Emphasis supplied.)48
9 75. Instead, Tenev explained the various regulatory capital requirements at
10 play that morning and how they had sharply increased due to volatility concentrated in
11 the Affected Stocks, ultimately leading to the determination that “to protect the firm
12 and protect our customers we had to limit buying in these stocks.” Customers unable to
13 freely trade disagreed with Tenev’s paternalistic attitude; they felt betrayed, not
14 protected, by Robinhood’s self-serving actions.
15 76. Host Sorkin followed up by asking whether Tenev’s explanation
16 suggested Robinhood had a liquidity problem, raising “all sorts of new questions” about
17 whether there is a systemic issue underneath the company itself. Seeking to squelch
18 questions about Robinhood’s financial stability, and directly contradicting Robinhood
19 Markets COO Gretchen Howard’s internal comment that morning that a “major
20 liquidity issue” led to the decision to PCO eight stocks before the market opened, Tenev
21 flatly denied it, claiming:
22 “There was no liquidity problem. And to be clear this
23 was done pre-emptively, so we did this proactively …
And we’re doing what we can to allow buying and to
24 remove these restrictions in the morning.” (Emphasis
25 supplied.)
26
27 48
The denial is very precise: Tenev did not state that the decision was not made to benefit market
28 makers or hedge funds or that it was made regardless of its impact on market makers and hedge
funds, just not “at the direction” of these powerful players.
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1 77. Tenev’s false statement – that Robinhood did not have a liquidity
2 problem on the morning of January 2, 2021 – was made with scienter because:
3 (a) Tenev knew that Robinhood’s COO internally attributed its decision
4 to PCO eight stocks to Robinhood’s having a “major liquidity issue,” to wit, an
5 inability to otherwise meet the additional $3 billion deposit demanded by the
6 NSCC in the ordinary course of business;
7 (b) Were Tenev to admit to the liquidity crisis Robinhood faced that
8 morning, it would reveal that Robinhood was ill-prepared to handle the volume
9 of trading generated by the extraordinary popularity of its app, potentially
10 endangering the planned IPO;
11 (c) When given a do-over on this very question during the February
12 12, 2021 podcast, Tenev doubled down on his misstatement, underscoring his
13 motivation for making it on January 28, 2021 – to make it appear Robinhood’s
14 actions were akin to those taken by other brokers and that it was never on the
15 brink of liquidation. Specifically, Tenev was told that people thought he was
16 “obfuscating or lying” to host Sorkin when he denied there had been a liquidity
17 problem. When Tenev was asked whether he would now respond “Yes, we had a
18 liquidity issue, and here’s why,” Tenev stuck by his earlier denial:
19 “I stand by what I said and I’ll explain it . . . Restricting
20 the buying of securities is something that every, pretty
much every broker did to some degree during this week.
21 When you say the “L” word in financial services it
22 reminds you of Lehman Brothers where you literally are
not able to operate your business. We met all our deposit
23
requirements.”
24
25 Of course, what Tenev left out was that the NSCC exercised its discretion to
26 waive the more than $2.2 billion excess capital payment which had dwarfed the
27 core charge that morning, and that the deposit amount that was required had
28 only been reduced because of Robinhood’s suggestion that it would temporarily
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1 limit purchases of certain volatile stocks. Without these actions, Robinhood most
2 certainly had a “major liquidity issue.” Tenev, who wanted potential investors in
3 Robinhood’s IPO to hear that Robinhood’s actions were “part of normal
4 operations” and that it had acted as “pretty much every other broker did,” would
5 not admit to Robinhood’s liquidity problem for fear of endangering the planned
6 IPO.
7 (d) On February 23, 2021, Tenev appeared on a podcast
8 hosted by one of Rot critics, Dave Portnoy of Barstool Sports.
9 Asking the liquidity question in different ways, Portnoy obtained
10 several admissions from Tenev:
11 (i) Portnoy: If you don’t get a call at three in the morning,
12 do you regulate trading?
13 Tenev: Well, no, we did this because we had to comply
14 with our capital requirements . . .
15
Portnoy: But you found that out at like three in the
16 morning . . .
17
Tenev: If we had a bunch more headroom, yes, we
18 probably would have let things continue . . .
19
Portnoy: Well if you didn’t get a call that says, hey, we
20
need this money from you, you wouldn’t have shut off
21 buying?
22
Tenev: Correct. The last thing we would want to do is
23 shut off buying
24
(ii) Portnoy: That is a capital issue, he specifically said, a
25 liquidity issue, you need this much money, you didn’t
26 have it, so you acted. Isn’t that the essence of liquidity?
Like, are you afraid to say liquidity, because of a domino
27
effect with the banks?
28
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1 Tenev: I think that liquidity issue, and I probably should
2 be careful and call it the “L word,” right, the “L word” is a
big thing in financial services. Basically, if you say
3 liquidity issue means you can’t meet your capital
4 requirements, or your deposit requirements, then you’re
essentially dead, and that was not the case with
5
Robinhood. We met our capital requirements; we met our
6 deposit requirements …
7
Portnoy: But, that theoretically could be a technicality,
8 right, if you didn’t change the trading of that day, you
9 may have had a liquidity issue tomorrow?
10
Tenev: Exactly. I think that’s accurate. (Emphasis
11 supplied.)49
12
Even though Tenev finally admitted that had Robinhood been better capitalized on
13
the morning of January 28, 2021 it would have not disabled any “buy” buttons, he
14
clung to the “proactive"/”pre-emptive” measures argument by explaining that the
15
liquidity problem was not at hand, but a day away. To make that hair-splitting
16
distinction, Tenev conveniently omitted that Robinhood only got to live to see another
17
day because, in addition to its decision to PCO various stocks, the NSCC waived a $2.2
18
billion ECP charge.
19
78. Avoiding host Sorkin’s question of what he would tell investors who lost
20
money because they were unable to buy the Affected Stocks or had to sell them at a
21
loss, Tenev inaptly analogized Robinhood to Clorox and Lysol running out of inventory
22
early in the pandemic: “We just have not seen this level of concentrated interest market-
23
wide in a small number of names before … We’re doing what we can to re-enable
24
buying in these names and we stand with our customers.”
25
26
27
28 The podcast can be found at https://www.youtube.com/watch?v=LqoJApzkaPU, last accessed
49
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1 79. Later that evening, in an interview on CNN with Chris Cuomo, Tenev
2 was again asked whether the need to restrict purchasing to meet regulatory capital
3 requirements evidenced a liquidity problem at Robinhood. Repeating the same talking
4 points used on CNBC, Tenev stressed that Robinhood did not have a liquidity problem.
5 Stating “we feel pretty good about the situation,” Tenev instead claimed that Robinhood
6 imposed the restrictions “pre-emptively” and “proactively.” He added: “We feel good
7 about being able to re-enable these things.”
8 January 29, 2021
9 80. Believing Tenev’s statements that the prohibition on purchases of 13
10 stocks was not evidence of a liquidity problem and that Robinhood was working hard
11 to “re-enable” purchases, premarket trading activity on January 29, 2021 was very high
12 as investors looked forward to purchasing these stocks when Robinhood lifted its
13 restrictions. This belief was bolstered when CNBC reported that Robinhood was able
14 to increase its net capital by securing financing of $1 billion, adding to the $500 million
15 credit line it already tapped.
16 81. Early in the trading day, SlashGear.com reported that Robinhood had
17 lifted its complete prohibition but had imposed restrictions on the number of shares and
18 option contracts a customer could purchase in the companies whose shares it had
19 PCOed the day before:
20
21
22
23
24
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28
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1 82. Several hours into the trading day, as the price of the 13 stocks PCOed the
2 previous day had quickly rebounded from their steep declines, Robinhood significantly
3 ratcheted up the share purchase restrictions it had put in place at the start of trading (as
4 reported by SlashGear.com):
5
6
7
8
9
10
11
12
13
14
15
16 83. Several hours later, ShashGear.com reported that even greater
17 restrictions were imposed on the purchase of shares and/or options of the original 13
18 PCOed stocks, and new restrictions were imposed on 10 additional issuers, for the first
19 time:
20
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28
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1 84. As the day wore on, the number of stocks subject to purchase restrictions
2 more than doubled – from 23 mid-afternoon to 50 during the last half hour of trading
3 for the week. No longer limited to volatile meme stocks, the list now included issuers
4 such as Starbucks and GM. As CNBC reported that afternoon:
5 Restrictions on Robinhood traders got tighter throughout
6 the day on Friday, only allowing clients to buy a single
share of GameStop.
7
8 The stock trading app also expanded its list of restricted
stocks from 13 earlier in the day to 50.
9
“The table below shows the maximum number of shares
10 and options contracts to which you can increase your
11
positions,” Robinhood wrote. [Although CNBC
recreated the table, below is a copy of the original
12
posting on Robinhood’s website]50
13
14 Symbol Shares Options contracts
15 AAL 1 10
16
ACB 1 Standard limits apply
17
AG 1 Standard limits apply
18
19
AMC 1 10
20 AMD 1 Standard limits apply
21 BB 1 10
22
BBBY 1 10
23
BYDDY 1 N/A
24
25
50https://web.archive.org/web/20210129203511/https://robinhood.com/us/en/support/articles/chang
26
es-due-to-recent-market-volatility/ (This archived page from the Robinhood site on January 29th
27
was last accessed on November 29, 2021.)
28
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BYND 1 Standard limits apply
2
CCIV 1 Standard limits apply
3
CLOV 1 Standard limits apply
4
5 CRIS 1 Standard limits apply
6 CTRM 5 N/A
7 EXPR 5 10
8
EZGO 5 N/A
9
GM 1 Standard limits apply
10
11 GME 1 5
12 GTE 5 Standard limits apply
13 HIMS 1 Standard limits apply
14 INO 1 Standard limits apply
15
IPOE 1 Standard limits apply
16
IPOF 1 Standard limits apply
17
18
JAGX 5 Standard limits apply
19
KOSS 1 N/A
20 LLIT 5 N/A
21 MRNA 1 Standard limits apply
22
MUX 5 Standard limits apply
23
NAKD 5 N/A
24
NCTY 1 Standard limits apply
25
26 NOK 5 10
27 NVAX 1 Standard limits apply
28 OPEN 1 Standard limits apply
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1 RKT 1 Standard limits apply
2
RLX 1 Standard limits apply
3
RYCEY 5 Standard limits apply
4
5
SBUX 1 Standard limits apply
6 SHLS 1 N/A
7 SIEB 1 Standard limits apply
8 SLV 1 Standard limits apply
9 SNDL 5 10
10
SOXL 1 Standard limits apply
11
SRNE 1 Standard limits apply
12
13 STPK 1 Standard limits apply
14 TGC 5 N/A
15 TIRX 1 N/A
16 TR 1 10
17
TRVG 5 10
18
WKHS 1 Standard limits apply
19
XM 1 Standard limits apply
20
21 ZOM 5 N/A
22
23 The restricted list tells clients how many shares and
24 options contracts they can buy pertaining to a particular
security. Robinhood customers can only buy one share
25
and up to five options contracts of GameStop; however,
26 if a customer already owns one or more share of
27 GameStop, they are not able to buy any more shares.
28 Robinhood’s restrictions could take the wind out of
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1 point-and-click traders trying to jack up the price of
2 GameStop. Robinhood, however, will not sell any
client’s shares of GameStop that are already over the one-
3 share limit from a previous position.
4
The stock, which closed up 67%, was off its highs of the
5
session as the new more severe limits were
6 implemented. Earlier in the day, clients could buy five
7 shares of GameStop.
8 The most shares clients could buy of any of the 50 stocks
9 was five. Clients without existing shares can only buy
one share and 10 options contracts in AMC
10
Entertainment, which is down from an earlier 115
11 shares. Shares of AMC Entertainment closed up 53%
12
but also well off their highs of the day. Clients can only
buy one share of American Airlines, Bed Bath & Beyond
13 and Koss.
14
The stock trading app has also expanded its list of
15 restricted stocks. Some of the new names include
16 Advanced Micro Devices, Starbucks, Novavax, General
Motors and Beyond Meat.
17
18 On Thursday, Robinhood told clients it was only allowed
19 to sell shares, not buy new ones, in certain securities that
were garnering social media attention from Reddit
20 crowds. The firm also raised margin requirements, or the
21 amount of money in a client’s account when they will be
using leverage to buy a security. Robinhood’s decision
22
was met with outrage, with many users taking their
23 grievance to Twitter.
24
Robinhood said the trading restrictions were risk
25 management decisions to protect Robinhood and its
26 clearinghouses, but touted that the restrictions would be
eased on Friday.
27
28 The free trading pioneer raised $1 billion in investor
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1 money and tapped more credit lines overnight for its
2 clients to be able to trade names like GameStop and AMC
Entertainment on Friday.
3 However, the restrictions got tighter throughout the
4 trading day, as the list of limited securities grew and the
number of shares clients could buy shrunk for certain
5
stocks. (Emphasis supplied.)
6
7 85. Rather than working to ease restrictions on January 29, 2021 as repeatedly
8 suggested by Tenev the night before, as the trading day progressed Robinhood once
9 again panicked about not having sufficient excess capital to satisfy a deposit
10 requirement for the January 29, 2021 trades. For this reason, Robinhood, on several
11 occasions during the trading day, placed greater restrictions on free trading. And each
12 time new restrictions were imposed, the prices of the Affected Stocks and the Affected
13 Options declined.
14 86. As noted in italicized portions of the CNBC report reproduced above, as
15 they did on January 28, 2021, Robinhood’s new restrictions had an oversized,
16 detrimental impact on the market price of the Affected Stocks and Affected Options. On
17 several occasions when Robinhood increased restrictions on share purchases during the
18 day – just after 12:30 p.m. and before 2:30 p.m. – there was an immediate decline in
19 the market price of the Affected Stocks and Affected Options: 51
20
21
22
23
24
25
26
27 51
A chart in the Antitrust Complaint appears to correlate GameStop price and trading volume
28 declines to Robinhood’s two-share and one-share limits on the afternoon of January 29th. Id. at ¶325
and chart (text inadvertently refers to the date as January 30th, a Saturday).
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1
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3
4
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7
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10
11
12 87. Most significantly, this distortion of the stock and option prices that
13 occurred at various points during the trading day is directly attributed to Robinhood’s
14 manipulative actions because Robinhood was the only retail broker that not only
15 continued the stock and option purchase restrictions imposed on January 28, 2021
16 but actually increased purchasing restrictions over the course of the January 29,
17 2021 trading day.52
18 88. Although the NSCC had exercised its discretion to waive the excess
19 capital charges for Robinhood through the close of business on February 1, 2021, to
20 allow the trades from January 27, 2021 and January 28, 2021 to work their way through
21 the system, having only raised $1 billion as a capital cushion at that point, Robinhood
22 could have faced another liquidity crisis on February 2, 2021 if the trading volume on
23 January 29, 2021 – as share prices began to rebound sharply – was so great that the
24
25
52
On January 29th, Apex Clearing Corporation (“Apex”) informed Robinhood of a post on
26 WallStreetBets instructing how to evade purchase restrictions on the Affected Stocks. See Antitrust
Complaint at ¶¶328-330 (reproduced internal chats between Robinhood’s Miles Wellesley, David
27
Dusseault and/or Jim Swartwout) (“FYI Apex pinged me on this to make sure we are aware of it.”).
28 Robinhood’s chats about Apex’s warning appear to have occurred between the first and second
intraday imposition of more-severe purchase limits for the Affected Stocks.
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1 amount of the unsettled trades again resulted in a core charge that greatly exceeded
2 Robinhood’s net capital. (This is precisely the scenario that Thomas Peterffy, the
3 Chairman of Interactive Brokers had feared when interviewed the prior evening.) The
4 $1 billion raised in the past 24 hours might not be enough to meet an ECP of several
5 billion, as Robinhood had initially faced on the morning of January 28, 2021.
6 89. To whitewash its unique, drastic, and seemingly random restrictions, i.e.,
7 on issuers that were not heavily-shorted, WallStreetBets meme stocks, Tenev appeared
8 on Yahoo Finance Live on January 29, 2021 – as Robinhood was imposing new
9 restrictions and manipulating market pricing – to spread the false message that
10 Robinhood’s actions were, in fact, commonplace:
11 Brokerages and other financial institutions do this all the
12 time. They’ve been doing this throughout the week and
it’s just part of day-to-day, normal operations. Now, sure,
13 Robinhood gets a lot of attention for it, but this is just a
14 standard part of practices in the brokerage industry and
the broader financial industry.
15
16 ***
17 Well, again, what we’ve done is something that other
18 brokerages have done. It’s not unique to Robinhood to
place restrictions on purchasing certain things at certain
19 times. Other brokers have done it.53
20
90. Tenev’s claim was patently untrue. No other online retail broker took as
21
extreme measures to restrict customers’ ability to freely trade as Robinhood did on
22
January 28-29, 2021. For example:
23
(a) Charles Schwab, Fidelity, and TD Ameritrade did not prohibit
24
equity purchases on January 28, 2021;
25
(b) Apex is alleged to have required eight introducing brokers
26
27
28
53
https://www.yahoo.com/lifestyle/robinhood-ceo-made-decision-response-204254105.html, last
accessed on November 29, 2021.
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1 (including the very popular Webull) to turn off the “buy” button for only three
2 of the Affected Stocks, AMC, GME and KOSS, for 3 ½ hours, until just before
3 3:00 p.m. on January 28, 2021; 54
4 (c) Interactive Brokers raised margins on equity trades and placed
5 options on AMC, BB, EXPR, GME and KOSS into liquidation only on January
6 28, 2021, removing the options restrictions after the close of trading on January
7 29, 2021; and
8 (d) E*Trade limited purchases of GME and AMC for part of the day on
9 January 28, 2021, but allowed trading to resume on January 29, 2021. 55
10 91. As Robinhood’s increasingly severe restrictions on January 29, 2021
11 distorted the prices of the Affected Stocks and the Affected Options, the public began
12 to recognize Robinhood’s power to move the markets. As reported by The New York
13 Times on January 30, 2021, Robinhood is far and away the app of choice for active retail
14 traders:
15 The app was downloaded more than 177,000 times on
16 Thursday [January 28th], twice the daily download rate
over the previous week, according to Apptopia, a data
17 provider, and it had 2.7 million daily active users on its
18 mobile app that day, its highest ever. That’s more than its
rivals — Schwab, TD Ameritrade, E*Trade, Fidelity and
19
Webull — combined.56
20
92. A review of trading data from January 2021 not only confirms the New
21
York Times’s assessment that Robinhood was the 800-pound gorilla in the industry of
22
23 54
Amended Consolidated Class Action Complaint (Other Broker Tranche) at ¶ 2 (Dkt. 410).
24 55
E*Trade’s purchase halt was explained: “Amid the extraordinary volumes in GME and AMC, we
25 chose to limit client activity in these names late in the trading day in order to ensure that we could
continue to serve our broader client base. We take actions like this seriously, and only initiate them in
26 rare circumstances. We expect to resume normal trading operations tomorrow.”
27
56
N. Popper, M. Phillips, K. Kelly and T. Siegel Bernard, “The Silicon Valley Start-Up That Caused
Wall Street Chaos,” The New York Times, Jan. 30, 2021 (last accessed on November 29, 2021, at
28 https://www.nytimes.com/2021/01/30/business/robinhood-wall-street-gamestop.html).
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1
online retail brokers but also reveals that it was a dominant force, overall, in U.S. equity
2
markets. In June 2021, the Wall Street Journal reported that Larry Tabb, the head of
3
market-structure research at Bloomberg Intelligence, estimated: “Activity from
4
individual investors trading on Robinhood Markets Inc. accounted for roughly 4% of
5
total U.S. share volume in January …”57 Given the fact that one of every 25 shares
6
traded on all U.S. markets in January 2021 traded on the Robinhood platform, when
7
Robinhood halted, partially-restored, and then severely restricted purchases of the
8
Affected Stocks, Robinhood manipulated the market prices of the Affected Stocks.
9
93. What is most appalling about Robinhood’s improper actions on January
10
29, 2021 – restricting 50 issuers by late in the trading day with no apparent rhyme or
11
reason – is that Robinhood doubled down on its manipulations from the prior day
12
because Robinhood appeared to not only have survived the firestorm but thrived,
13
raising $1 billion from investors in a single day. During the February 12, 2021 podcast,
14
Tenev revealingly admitted: “When an early investor called me throughout this and
15
said, hey, chin up, you know, navigating a crisis successfully unlocks the next level of
16
value creation for the company, [ ] I’ve had that in mind the entire time.”
17
94. Temporary restrictions due to volatility are imposed across entire
18
exchanges for minutes at a time, not indefinitely, and most certainly not on the demand
19
side only across a wide swath of issuers by a single firm desperate to manage, on the
20
fly, its deposit requirements with the NSCC for the next few days. With the benefit
21
of having raised another $2.4 billion over the weekend quelling the fear Robinhood
22
must have experienced on January 29, 2021, during the February 12, 2021 podcast,
23
Robinhood’s CEO tried to normalize its outrageous price manipulations during trading
24
on January 29, 2021:
25
26
27 57
Caitlin McCabe, “It Isn’t Just AMC. Retail Traders Increase Pull in the Stock
28 Market,” The Wall Street Journal (June 18, 2021).
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1 “I’m very proud of the transition that we made between
2 Thursday and Friday, so Thursday we had the blunt
hammer of PCO’ing these stocks, which obviously was
3 not ideal. By Friday, we had moved to a much more
4 sophisticated system where intraday we adjust the
position limits in, it was up to 50 stocks, and we
5
published that on our website, so that gave us a lot more
6 granular control over it, and is a better system, and we’re
7 going to only improve that, and take the learnings to other
parts of the business.”
8
9 January 30 and 31, 2021
10 95. Over the weekend, to combat public perception that Robinhood imposed
11 purchase restrictions because it was beholden to Citadel Securities, the source of 36%
12 ($326 million) of Robinhood’s 2020 revenues, the companies discussed how they could
13 “generally coordinate messaging, in particular some of the narrative around Ken
14 [Griffin, Citadel Securities’ CEO] owning Robinhood.” Citadel Securities informed
15 Robinhood’s Vice President for Corporate Communications, Josh Drobnyk, who at
16 Citadel Securities was “running point on this narrative for us,” noting that members of
17 its General Counsel office were also copied, in part, “for privilege.”58
18 96. The next day, Vlad Tenev penned an op-ed in USA Today to repeat
19 Robinhood’s nothing-to-see-here-folks message, to wit, we were forced to restrict
20
21 58
Antitrust Complaint at ¶335 (reproducing partially redacted email chain). The companies’
22 messaging on the subject has been in sync: Both Tenev and Griffin denied coordinated action in
their testimony before Congress on February 18, 2021. (https://www.c-span.org/video/?508545-
23 1/gamestop-hearing-part-1&event=508545&playEvent). On September 28, 2021, after complaints in
the other tranches in this MDL revealed communications between Robinhood and Citadel during the
24 last week of January 2021, in response to the trending hashtag, #KenGriffinLied, Griffin surprisingly
25 tweeted: “It must frustrate the conspiracy theorists to no end that Vlad and I have never texted,
called, or met each other.” (Perhaps Tenev’s request to speak with Griffin on January 27th was turned
26 down to allow Griffin to later make this very denial.) For its part, Robinhood issued a statement
claiming: “At no point did Citadel or any other market maker pressure the business to on the evening
27
of January 27th was a discussion of an across-the-board reduction of Robinhood’s largest source of
28 revenue, PFOF payments from Citadel, is any pressure necessary? While the claims asserted in this
case require no proof of coordination, it does appear that Griffin and Tenev doth protest too much.
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1 buying due to unprecedented regulatory requirements, not to help Citadel, Citadel
2 Securities, or other HTFs. Under the caption “Robinhood CEO: We’re helping those
3 left behind by Wall Street, not hedge funds,” Tenev sought to reassure ordinary investors
4 on Main Streets across the country that Robinhood had their backs, stating, in relevant
5 part:
6 We built Robinhood for our customers. For millions of
7 people who have felt left behind by America’s financial
system. For people who felt turned away by the big Wall
8 Street financial institutions. For those who are making
9 their voices heard through the markets and showing the
world that investing is for everyone.
10
11 Last week, we witnessed something the stock market has
12 never quite experienced before. Short squeezes on a small
number of stocks triggered wild gyrations in prices,
13 massive volatility that prompted clearinghouses to take
14 swift action to protect the plumbing that handles stock
trading every day.
15
16 In a matter of days, our clearinghouse-mandated deposit
17
requirements related to stocks increased ten-fold. These
deposits are the collateral we post to ensure our access to
18 clearinghouse services on behalf of our customers. They
19 are what led us to put temporary buying restrictions in
place on a small number of securities that the
20 clearinghouses had raised their deposit requirements on.
21 As we noted in a blog on Friday, it was not because we
wanted to stop people from buying these or any stocks
22
— we built Robinhood to provide access to investing for
23 all. And it certainly wasn’t because we were trying to help
24 hedge funds.
25 97. Also on January 31, 2021, Elon Musk interviewed Vlad Tenev on the
26 audio-based social-network site Clubhouse. As he did during his discussions on CNBC
27 on January 27, 2021 and Yahoo Finance Live on January 29, 2021, Tenev
28 disingenuously compared Robinhood’s actions to those of other retail brokers.
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1 Specifically, Tenev claimed that while Robinhood’s name was all over the press,
2 “other brokers basically restricted the same exact activity.” This was not true. As set
3 forth in ¶90(a)-(d), above, other brokers did not completely shut down purchasing, either
4 at all, as long, and/or in as many issuers as did Robinhood. Tenev’s misrepresentation
5 was made with scienter because the specific restrictions imposed by different
6 brokerages on January 28, 2021 and January 29, 2021 were widely reported in the
7 financial press and Tenev knew (or should have known on a matter of such critical
8 importance), that Robinhood’s actions were out of step with all other brokerages,
9 especially on January 29, 2021 when Robinhood, alone, restricted stock purchases on
10 up to 50 issuers.
11 98. After walking Musk through Robinhood’s interactions with the NSCC
12 on the morning of January 28, 2021, to reduce and ultimately be able to meet deposit
13 requirements by prohibiting new purchases of volatile stocks, Tenev candidly admitted:
14 “We knew this was a bad outcome for customers.” But, trying to limit the damage,
15 Tenev stated that the reason that both buying and selling were not restricted was that
16 Robinhood concluded that it would be “categorically worse” to restrict both purchases
17 and sales at the same time, explaining: “People get really pissed off if they’re holding
18 stock and they want to sell it and they can’t.”
19 99. Tenev’s explanation for the one-sided trading halt does not appear in the
20 internal chats on the subject. While several expressly discussed the dire fallout of
21 moving numerous issuers to PCO, 59 and correctly anticipated the fury of frustrated
22 purchasers, nowhere was it suggested that continuing to permit sales of the Affected
23 Stocks would at least avoid an even greater level of ire from customers desperate to
24
25
26 59
See, e.g., Robinhood State Law Complaint at ¶7 (“we’re going to get crucified … for pco’ing”),
27 ¶205 (“I think the blowback from this is going to be exponentially worse as time goes on. Not sure
where the line is as a brand …), ¶219 (“Need to inform FINRA of expectations around plan for pco
28 symbols & expected increase in complaint impact”).
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1 sell.
2 100. Three weeks later, when speaking to Dave Portnoy, Tenev admitted that
3 the demand-side only trading halt was not implemented to avoid “piss[ing] off”
4 customers eager to sell, as he had misrepresented to Elon Musk on January 31, 2021.
5 Instead, Tenev rather bluntly admitted that a complete freeze of trading – which would
6 have been fair to all market participants – would not have helped Robinhood meet its
7 NSCC deposit requirements:
8 Portnoy: When you force people to sell . . . you only
9 allow them to sell but they can’t buy, you cratered the
stock, like that was the decision that cratered the stock,
10 and I saw your quote, “People get pissed off if they are
11 holding stock, and they can’t sell it.” Which I guess is
true, but I guarantee you, if you polled your customer
12
base, and said, listen, we’re just gonna freeze it. Like
13 when the market is tumultuous, they freeze stock, so you
14 can’t buy or sell, it’s just frozen at that value. And you
have your client base, all buying it; they would have
15 rather said, freeze it, just figure out what you’re
16 [Robinhood’s] issues are, liquidity, whatever they may
be; figure it out, and then turn it back on and let me buy
17
and sell, but you – and when I say you, Robinhood –
18 manipulated that stock price. You cratered it . . . So how
19
do you rationalize not freezing it? . . . You cratered the
market.
20
21 Tenev: Well, first of all, let me say that we’re speculating
now . . .
22
23 Portnoy: There’s no speculation that when you only allow
somebody to sell a stock and not buy it, you crater it.
24
That’s not speculation.
25
26
27
28
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1 Tenev: Let me explain the reason why that’s kind of
2
standard procedure. Portnoy: Have you done that before?
3
4 Standard procedure?
5
Tenev: Well, PCO’ing, marking a stock position closing
6 only, is a standard procedure, and it’s what the other
7 brokers did in this case as well . . . It actually comes from
the capital requirements. The VaR formula was in this
8 case driven by the one-sided long position, so it actually
9 wouldn’t help us; wouldn’t help the deposit requirements
to restrict selling in this case …. Restricting selling
10
wouldn’t help the exponential growth in the deposit
11 requirements …
12
Portnoy: I still don’t feel like I got a straight answer why
13 you didn’t do both [restrict buying and selling], except
14 you’re saying it’s standard procedure?
15 Tenev: Because the VaR charge, which drives our deposit
16 requirements, was driven by the size of the long position.
101. When discussing a “freeze” on all stock transactions during a
17
“tumultuous” period, Portnoy was referencing an industry-wide protocol. Since 2012,
18
when it was initially approved as a pilot program, there has been in place a National
19
Market System Plan, known as the Limit Up/Limit Down Plan (“LULD Plan”), to
20
address extreme market volatility. The LULD Plan, which became a permanent rule in
21
2019, is administered by the LULD Operating Committee, an entity that includes
22
numerous exchanges and FINRA. The Plan and all amendments are filed with and
23
approved by the SEC in accordance with the Securities Exchange Act of 1934. Periodic
24
monitoring and performance reports are filed with the SEC and made available to the
25
public.
26
102. The LULD Plan sets forth specific rules to be followed to rein in extreme
27
intraday price movements while ensuring that trading remains fair for all. As explained
28
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1 on investor.gov, a SEC site, depending upon the issuer, time of day, and market price
2 (for some stocks), if shares trade for too long at the upper or lower limit of a trading
3 band, a five-minute pause will ensue:
4 Limit Up-Limit Down Circuit Breaker (Single Stock
5 Circuit Breaker) – The Limit Up-Limit Down circuit
breaker (“LULD”) is a market volatility moderator
6 designed to prevent large, sudden price moves in a stock.
7 In particular, it prevents trades in individual securities
from occurring outside of a specified price band. This
8
price band is set at a percentage level above and below the
9 average price of the stock over the immediately preceding
10 five-minute trading period. If the stock’s price moves to
the price band and does not move back within the price
11 bands within 15 seconds, trading in the stock will pause
12 for five minutes. These price bands are 5%, 10%, 20%,
or the lesser of $.15 or 75%, depending on the price of
13
the stock and whether the stock is designated as a Tier 1
14 or Tier 2 NMS stock. Tier 1 NMS stocks include all
15
securities in the S&P 500, the Russell 1000 and select
Exchange Traded Products. Tier 2 NMS stocks include
16 all other NMS securities, except for rights and warrants,
17 which are specifically excluded from coverage. The
LULD applies during regular trading hours from 9:30 am
18 ET – 4:00 pm ET. The LULD’s price bands double
19 during the last 25 minutes of the regular trading day for
(i) all Tier 1 NMS stocks and (ii) Tier 2 NMS stocks at
20
or below $3.00.
21
22 103. According to the SEC Staff’s investigation, there were 19 LULD trading
23 pauses for GameStop on January 28, 2021 – 13 at the lower bound and 6 at the upper
24 bound of the price band.60 As the LULD Plan demonstrates, our national exchanges
25 have acted together for almost a decade to both limit and fine-tune restrictions on the
26 freedom to trade. Robinhood’s unilateral manipulation of demand – not, as initially
27
28
60
SEC Staff Report at 39 & n. 113.
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1 claimed, because those of its customers wanting to sell would be “pissed off,” but
2 because only purchase risk affects the VaR charge Robinhood sought desperately to
3 reduce – disrupted and distorted free-market pricing for the Affected Stocks that would
4 otherwise only be limited (when necessary) by orderly operation of this circuit-breaker
5 mechanism to briefly halt all trading.
6 February 1, 2021
7 104. On Monday, February 1, 2021, having raised $2.4 billion over the
8 weekend, Robinhood loosened the restrictions it imposed on Friday, January 29, 2021.
9 Shrinking the list back down from 50, Robinhood still enforced restrictions on trading
10 for seven of the 13 issuers it PCOed on January 28, 2021. Brazenly, having gotten away
11 with it for two trading sessions, Robinhood added one issuer to the list for the first time,
12 Genius Brands (GNUS), a children’s media company. As reported by CNBC, the
13 issuers and the newly imposed limits were as follows:
14
15
16
17
18
19
20
21
22
23
105. The disproportionate impact Robinhood’s actions had on the markets for
24
the Affected Stocks and Affected Options while its restrictions were in place was
25
acknowledged in the financial press. In an article published by the Wall Street Journal
26
at 6:05 a.m. on February 1, 2021, entitled “Robinhood Stocks Rise Premarket,” author
27
Caitlin Ostroff noted that after Robinhood relaxed restrictions in the overnight hours,
28
by 6:00 a.m., “[t]welve of the 13 stocks that Robinhood Markets had restricting trading
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1 in last week jumped premarket.” More broadly, at 5:51 a.m. that day, a popular online
2 investment site, The Motley Fool, published an article entitled “The Top 50 Robinhood
3 Stocks of February.” This is a recurring article, published at the beginning of each
4 month, listing the 50 most-held stocks of Robinhood investors in the prior month. No
5 similar articles are published about the stocks held by customers of any other online
6 retail broker.
7 106. Also on Monday, February 1, 2021, Robinhood posted a blog on its site
8 informing customers that a group of investors – led by Ribbit Capital and including
9 ICONIQ Capital, Sequoia Capital, Index Ventures and New Enterprise Associates –
10 had infused Robinhood with an additional $2.4 billion in capital. Robinhood stated:
11 “With this funding, we’ll build and enhance our products that give more people access
12 to the financial system.”
13 107.
14 108. As for increasing its current customers’ access to purchase all stocks free
15 of restrictions, having survived the maelstrom of January 28, 2021 and January 29, 2021,
16 Robinhood appeared unwilling to risk another upward spike in meme stock prices that
17 would require it to deposit much of the capital it had just raised with the NSCC.
18 Restrictions on eight issuers remained in place.
19 109. Before trading closed on February 1, 2021, Politico reported that Tenev
20 was going to deliver Robinhood’s message to its biggest audience yet: On February 18,
21 2021, he would likely be called to testify before the U.S. House of Representatives
22 Financial Services Committee.
23 February 2, 2021
24 110. On February 2, 2021, Robinhood again eased but did not lift all
25 restrictions it had put in place five days earlier. CNBC again reproduced Robinhood’s
26 restricted securities chart:
27
28
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1
2
3
4
5
6
7
8 111. CNBC specifically noted that an immediate difference in GameStop’s
9 stock price appeared to be triggered by a five-fold increase in the upper limit of
10 GameStop shares Robinhood customers could purchase and hold, i.e., customers could
11 purchase 100 shares or increase their total holdings to 100 shares: “Robinhood on
12 Tuesday rolled back more of its trading limitations, now allowing clients to buy up to
13 100 shares of GameStop. GameStop climbed off the lows as the Robinhood changes
14 were announced.”
15 112. On February 2, 2021, to get out of the hot seat, Robinhood decided to go
16 on the offensive against the existing trade settlement rules. As reported by Reuters,
17 Tenev posted a blog on Robinhood’s website blaming the initial $3 billion demand by
18 the NSCC on January 28, 2021 on the uncertainties injected into the market by the fact
19 that it takes two days to settle a trade, i.e., exchange money for shares, during which
20 time deposits are required by clearinghouses to ensure the trade settles regardless of
21 whether either side of the transaction defaults (referred to as “T+2”). Tenev wrote:
22 “There is no reason why the greatest financial system the world has ever seen cannot
23 settle trades in real time. Doing so would greatly mitigate the risk that such processing
24 poses.”
25 113. Tenev’s comments were designed to redirect customers’ and the public’s
26 anger from Robinhood to the “system,” attacking Wall Street’s manner of doing
27 business to reclaim Robinhood’s disrupter status. Tenev would repeat this strategy in
28 his testimony before the House Committee on Financial Services, with a section of his
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1 prepared remarks entitled: “Real-Time Settlement: Big Changes Could Protect Small
2 Investors.” While such a move might relieve the strain on Robinhood’s liquidity, it
3 would greatly damage the overall liquidity of the financial markets.
4 114. DTCC CEO Bodson’s testimony before Congress provided many reasons
5 why moving to T+0 or Real Time Gross Settlement (“RTGS”) was not within the
6 capability or the desire of various stakeholders in the financial markets:
7 Substantial procedural hurdles remain for a move to T+0.
8 Beyond T+0, a move to RTGS would eliminate the
substantial efficiencies of netting, which currently
9 compresses the amount of cash required to fund daily
10 transactions at NSCC by over 98%. RTGS could require
that transactions be funded on a trade-by-trade basis.
11
While this could eliminate most margin component
12 charges for clearing members if customers fully
13 prefunded all trading activity, that prefunding would be
difficult to forecast as settlement obligations change in
14 real-time. The heightened costs of the substantial
15 liquidity buffers required to support this approach could
erode market liquidity. Additionally, the real-time
16
reconciliation and real-time stock records required for
17 either T+0 or RTGS would be difficult for the industry to
18
implement. There would be negative impacts to
processing for short sales, the use of securities lending as
19 a financing tool, and institutional trade processing
20 operations. For these reasons, while NSCC is fully
supportive of a shorter settlement cycle, NSCC does not
21 believe the industry is ready to support shortening the
22 settlement cycle beyond T+1 at this time.
23 February 3, 2021
24 115. On February 3, 2021, Robinhood finally lifted restrictions on Nokia and
25 lifted the prohibition on purchases of fractions of a share of GameStop and AMC.
26 However, customers were still limited to purchases (and total holdings) of 500 shares
27 of GameStop and 5,500 shares of AMC.
28 116. Before the markets opened, CNBC.com reported “Robinhood moves
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1 forward with first Super Bowl ad as brand crisis mounts.” With its balance sheet flush,
2 Robinhood stated that the Super Bowl spot “will kick off what the company says is its
3 largest ever brand campaign.” For yet another day, Robinhood would not remove all
4 trading restrictions – which could require it to deposit with the NSCC a portion of the
5 billions of dollars it just raised should prices for those issuers’ shares quickly rise.
6 Instead, Robinhood spent its new funding on an ad campaign – including a Super Bowl
7 spot, one of the most expensive ad buys of the year. Barely avoiding liquidation by the
8
grace of the NSCC waiving the ECP charge through February 1st, which gave
9 Robinhood time to regroup and raise capital over the weekend, Robinhood dared to risk
10 roiling the markets yet again with an appeal for new customers during one of the
11 country’s most-watched broadcasts of the year.
12 117. That day, CNBC.com published a story entitled “Why investors were
13 willing to write Robinhood a $3 billion check during the GameStop chaos.” This story
14 explained Robinhood’s cocky behavior over the past three days. Author Kate Rooney
15 interviewed three of Robinhood’s investors, one of whom explained: “In spite of the
16 trouble last week, the metrics suggest retail trading is exploding and Robinhood is still
17 the only game in town.” Even with the loss of customers who were injured or dismayed
18 by Robinhood’s actions, shoring up Robinhood’s balance sheet in the short term would
19 reap big results down the road:
20 Robinhood’s ability to add hundreds of thousands of new
21 customers during a week of chaos, along with its IPO
prospects, convinced Silicon Valley backers that a multi-
22 billion-dollar cash infusion was worth it.
23 ***
24 One venture capital investor who saw the internal growth
metrics last week said the flood of new investors “far
25
outweighed” any attrition. Robinhood was the top app in
26 the iOS app store for multiple days. It also led the
27 industry in app downloads by a wide margin with
600,000 people downloading the free-trading app,
28 according to JMP Securities analysis.
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1 The explosive customer growth during the pandemic that culminated in adding 600,000
2 customers in a matter of days might have gone unnoticed had Robinhood not used its
3 market power to manipulate and depress stock prices. Robinhood’s national PR disaster
4 showed investors that Robinhood stood alone as the app used by an overwhelming
5 majority of retail traders.
6 118. Because hedge funds and venture capitalists saw Robinhood as “the only
7 game in town,” when asked whether the backlash against Robinhood would delay its
8 IPO plans, one unnamed banker said: “The [Robinhood] IPO is full steam ahead.”61
9 February 4, 2021
10 119. As the markets opened on February 4, 2021, Robinhood continued to
11 impose the same restrictions on purchases and total holdings of GameStop and AMC,
12 500 and 5,500 shares, respectively. By the end of the day, GameStop shares fell to
13 $53.50, the lowest close since January 21, 2021, a whopping $294 less than the January
14 27, 2021 closing price of $347.51 Similarly, AMC shares closed at $7.09, the lowest
15 closing price since the January 26, 2021 close of $4.96, and a greater than 64% drop
16 from the closing price of $19.90 on January 27, 20217th. Late in the day on February 4,
17 2021, after six days of limiting stock purchases, Robinhood posted a message on its
18 website announcing: “There are currently no temporary limits to increasing your
19 positions.”
20 120. When Robinhood Securities told the NSCC that it would impose
21 “temporary” purchasing restrictions on the morning of January 28, 2021, to avoid
22 payment of an excess capital premium charge so large that Robinhood would be forced
23 to liquidate (a charge that was instead completely waived through February 1st), no one
24 could have ever imagined that such restrictions would have lasted, in one form or
25 another, for six entire trading sessions. After all, on the occasions when they are
26
27
28
61
Luisa Beltran, “Robinhood to Push Forward With IPO Despite Backlash Over GameStop
Trading,” Barron’s (Feb. 2, 2021).
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1 triggered, legitimate LULD trading halts last only for a matter of minutes.
2 121. Apparently, Robinhood has a very fluid perception of time: Its founders
3 developed trading technology that reduced tick-to-trade latency time for hedge funds
4 and market makers down to as low as five microseconds – the more infinitesimal the
5 better, or else you will lose the opportunity to an even faster trader. Yet, somehow,
6 Robinhood told its customers with a straight face that restrictions that lasted from the
7 morning of January 28, 2021 through the close of trade on February 4, 2021 were only
8 “temporary”.
9 122. After Robinhood prohibited purchases (January 28th), then loosened and
10 retightened restrictions (January 29th), only to gradually lift the restrictions on its trading
11 platform over the course of the next week, the prices of the Affected Stocks and the
12 Affected Options were depressed by Robinhood artificially restricting demand and
13 remained depressed through the Class period.
14 123. Throughout the period until February 19, 2021, the next expiration date
15 for the Affected Options, the price of the Affected Stocks remained depressed as did
16 the prices of the Affected Options due to Robinhood’s manipulation of the market
17 prices through February 4, 2021. Those who sold or were forced to sell, or whose
18 Affected Options expired due to either an inability to exercise them or because of the
19 manipulated negative discrepancy between their exercise price and the price of the
20 Affected Stocks 62 suffered serious economic damages as a result of Robinhood’s
21 blatant market manipulation.
22 Post-Class Period Events
23 124. On July 29, 2021, Robinhood Markets, Inc. conducted its initial public
24 offering of shares on the NASDAQ exchange and raised $2 billion. Following the IPO
25 debut at $38 per share, Robinhood’s balance sheet was significantly strengthened; its
26
27
28
62
By increasing the margin requirement on the Affected Stocks, some who had purchased the
securities on a margin loan were forced to sell or face a margin call.
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1 market value was $32 billion. Speaking that day on CNBC, Tenev initially avoided
2 answering questions about any lessons Robinhood learned following the events of late
3 January and early February. When he finally did, his comments showed a callous lack
4 of concern about the market chaos and financial damages Robinhood’s actions caused
5 its customers and others who sold the Affected Stocks at a loss:
6
7 MORGAN BRENNAN: Vlad, it’s Morgan.
8 Congratulations today. TENEV: Thank you.
9
BRENNAN: I asked this question, though hindsight is 20/20,
10
but if you could, could go back to January, would you have
11 done things differently?
12
TENEV: I would say it’s, you know, there’s always things we
13 could have done better and I’m the, I’m the first to say that but
14 it’s, it’s been an amazing six months and it really 18 months
and much, much more than that …
15
16 ***
17 DAVID FABER: Vlad, it’s David Faber. Final question from
18
us here at the NYSE. You know, Morgan had asked you about
that January period I mean, what did you take away from that?
19 You know, you’re a technology company but you’re a financial
20 technology company and when those peak margin calls were
coming in with big volume, you know, what did you learn about
21
being the financial part of a technology company and all the
22 regulations and all the things that come along with that and how
are you going to apply it now?
23
24 TENEV: I think in those, in those short few weeks around end
25 of January, early February, we certainly learned a lot. We got a
whole lot of work done strengthening everything across the
26 board not just the balance sheet but customer support. We made
27 it a lot easier for customers that want to come back to the
service …
28
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1 125. Closer to the events, appearing before the House of Representatives
2 Committee on Financial Services on February 18, 2021, Tenev more contritely
3 testified: “[A]t the end of the day, what happened is unacceptable to us. For our
4 customers, I’m sorry and I apologize. Please know that we are doing everything we can
5 to make sure this won’t happen again.” A company valued at tens of billions of dollars
6 is required to do more in response to the financial damages it caused than promise to
7 do better next time. Instead, Robinhood needs to emulate its namesake and give to the
8 poor, to wit, provide redress to injured investors made poorer by Robinhood’s actions.
9 PLAINTIFFS’ CLASS ACTION ALLEGATIONS
10 126. The members of the Class, as defined in ¶ 1, are so numerous that joinder
11 of all members is impracticable. The Affected Options were actively traded on the
12 Robinhood trading platform via the NASDAQ and NYSE. While the exact number of
13 Class members is unknown to Plaintiffs at this time and can be ascertained only through
14 appropriate discovery, Plaintiffs believe that there are hundreds, if not thousands of
15 members in the proposed Class.
16 127. Plaintiffs’ claims are typical of the claims of the members of the Class as
17 all members of the Class are similarly affected by Defendants’ wrongful and
18 manipulative conduct in violation of federal law that is complained of herein.
19 128. Plaintiffs will fairly and adequately protect the interests of the members
20 of the Class and have retained counsel competent and experienced in class and
21 securities litigation. Plaintiffs have no interests antagonistic to or in conflict with those
22 of the Class.
23 129. Common questions of law and fact exist as to all members of the Class
24 and predominate over any questions solely affecting individual members of the Class.
25 Among the questions of law and fact common to the Class are:
26 • whether Defendants engaged in manipulative acts as alleged herein;
27 • whether Defendants’ acts distorted the price of the Affected Options;
28 • whether the members of the Class have sustained damages
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1 and, if so, what is the proper measure of damages.
2 130. A class action is superior to all other available methods for the fair and
3 efficient adjudication of this controversy since joinder of all members is impracticable.
4 Furthermore, as the damages suffered by individual Class members may be relatively
5 small, the expense and burden of individual litigation make it impossible for members
6 of the Class to individually redress the wrongs done to them. There will be no difficulty
7 in the management of this action as a class action.
8 131. Plaintiffs and Class members will rely, in part, upon the presumption of
9 reliance established by the fraud-on-the-market doctrine in that:
10 • Defendants made public misrepresentations or failed to
11 disclose facts during the Class period;
12 • the omissions and misrepresentations were material;
13 • the Affected Options were traded in efficient markets;
14 • the Affected Options were liquid and traded with moderate to
15 heavy volume during the Class Period;
16 • the Affected Options were traded on national exchanges such
17 as the NASDAQ and NYSE, and were covered by analysts;
18 • Plaintiffs and members of the Class w h o sold the
19 Affected Options, or whose Affected Options expired ,
20 during the Class period were without knowledge of the
21 omitted or misrepresented facts; and
22 • unexpected material news about the Affected Options was
23 rapidly reflected in and incorporated into each company’s
24 option price during the Class period.
25 132. Based upon the foregoing, Plaintiffs and members of the Class are
26 entitled to a presumption of reliance upon the integrity of the market for the Affected
27 Options.
28
67
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CLASS ACTION COMPLAINT
Case
Case
1:21-md-02989-CMA
2:23-cv-02622-FLA-PD
Document
Document
565-61 Filed
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1 COUNT I
2 Violations of Section 9(a)(2) of the Exchange Act Against All Defendants
3
133. Plaintiffs repeat and reallege each and every allegation contained in the
4
foregoing paragraphs as if fully set forth herein.
5
134. The Robinhood Defendants affected and distorted the normal market
6
dynamics for the Affected Stocks and Affected Options by: (a) canceling purchase
7
orders for the Affected Stocks and the Affected Options placed before the markets
8
opened for trading on January 28, 2021; (b) prohibiting and later restricting purchases
9
of the Affected Stocks and the Affected Options on the Robinhood trading platform
10
and (c) abruptly raising margin requirements for Robinhood’s customers, forcing those
11
who could not meet the margin calls for the Affected Stocks or the Affected Options to
12
sell some or all of their holdings.
13
135. By preventing Robinhood customers from purchasing the Affected
14
Stocks and purchasing or exercising the Affected Options, Robinhood sought to ensure
15
that it could meet its deposit requirements with the NSCC. Robinhood knew that
16
distorting the demand side of the market for the Affected Stocks and the Affected
17
Options in this manner would depress the prices of those shares and options.
18
136. Plaintiffs and the Class would not have either sold their Affected Options
19
at a loss or because of the manipulated negative discrepancy between their exercise
20
price and the price of the Affected Stocks, they would not have expired, if not for
21
Defendants’ manipulation of the prices of the Affected Stocks and the Affected
22
Options.
23
137. As a direct and proximate result of Defendants’ unlawful conduct,
24
Plaintiffs and members of the Class suffered damages in connection with their sales of
25
the Affected Options or expiration of Affected Options due to an inability to exercise
26
them or because of the manipulated negative discrepancy between their exercise price
27
and the price of the Affected Stocks.
28
68
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CLASS ACTION COMPLAINT
Case
Case
1:21-md-02989-CMA
2:23-cv-02622-FLA-PD
Document
Document
565-61 Filed
Entered on
04/06/23
FLSDPage
Docket
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1 COUNT II_
2 Violations of Section 10(b) of the Exchange Act And Rule 10b-5 Promulgated
3 Thereunder Against All Defendants
4 138. Plaintiffs repeat and reallege each and every allegation contained in the
5 foregoing paragraphs as if fully set forth herein.
6 139. Defendants (a) employed devices, schemes, and artifices to defraud; (b)
7 made untrue statements of material fact and/or omitted to state material facts necessary
8 to make the statements not misleading; and/or (c) engaged in acts, practices, and a
9 course of conduct which operated as a fraud and deceit upon the owners of the Affected
10 Options in violation of §10(b) of the Exchange Act and Rule 10b-5. Defendants are
11 sued as primary participants in the wrongful and unlawful conduct charged herein.
12 140. Defendants’ actions with respect to all restrictions placed on the ability
13 to purchase and exercise the Affected Options on the Robinhood platform during the
14 Class period constitutes a scheme to defraud and/or a course of conduct that operates
15 as a fraud.
16 141. Defendants’ malfeasance included the dissemination of information
17 which they knew or recklessly disregarded was materially false and/or misleading to
18 induce the Plaintiffs and members of the Class to believe that the market for the
19 Affected Options was free of manipulation.
20 142. Defendants knew and/or recklessly disregarded that their actions to
21 manipulate the price of the Affected Options would cause damages to Plaintiffs and
22 members of the Class.
23 143. As a direct and proximate result of Defendants’ wrongful conduct,
24 Plaintiffs and members of the Class suffered damages in connection with their sales of
25 the Affected Options or the expiration of Affected Options due to an inability to
26 exercise them or because of the manipulated negative discrepancy between their
27 exercise price and the price of the Affected Stocks.
28 144. Defendants, individually and in concert, furthered their scheme directly
69
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CLASS ACTION COMPLAINT
Case
Case
1:21-md-02989-CMA
2:23-cv-02622-FLA-PD
Document
Document
565-61 Filed
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1 and indirectly, by the use, means or instrumentalities of interstate commerce, the mails,
2 and/or the facilities of a national securities exchange.
3 145. By virtue of the foregoing, Defendants have violated §10(b) of the
4 Exchange Act, and Rule 10b-5 promulgated thereunder.
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CLASS ACTION COMPLAINT
Case
Case
1:21-md-02989-CMA
2:23-cv-02622-FLA-PD
Document
Document
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1 PRAYER FOR RELIEF
2 WHEREFORE, Plaintiffs, on behalf of themselves and the Class, pray for
3 judgment and relief as follows:
4 (a) declaring this action to be a proper class action under Rule 23 of the
5 Federal Rules of Civil Procedure;
6 (b) awarding damages in favor of Plaintiffs and the other Class members
7 against all Defendants, jointly and severally, together with interest thereon;
8 (c) awarding Plaintiffs and the Class reasonable costs and expenses incurred
9 in this action, including counsel fees and expert fees; and
10 (d) awarding Plaintiffs and other members of the Class such other and further
11 relief as the Court may deem just and proper.
12
13 Dated: April 6, 2023 PESSAH LAW GROUP, PC
14 By: /s/ Maurice D. Pessah
MAURICE D. PESSAH, ESQ. (SBN: 275955)
15 9100 Wilshire Blvd., Suite 850E
16 Beverly Hills, CA 90212
Tel.: (310) 772-2261
17 Email: maurice@pessahgroup.com
18 CHELIN LAW FIRM
19
By: Stuart N. Chelin
20 STUART N. CHELIN, ESQ.
16133 Ventura Boulevard, Suite 700
21
Encino, CA 91436
22 Tel. (310) 556-9664
Email: stuart@chelinlaw.com
23
KLAFTER LESSER LLP
24
JEFFREY A. KLAFTER, ESQ.
25 (pro hac vice to be requested)
Two International Drive, Suite 850E
26 Tel.: (914) 934-9200
Email: jak@klafterlesser.com
27
28 Attorneys for Plaintiffs and the Proposed Class
71
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CLASS ACTION COMPLAINT
Case
Case
1:21-md-02989-CMA
2:23-cv-02622-FLA-PD
Document
Document
565-61 Filed
Entered on
04/06/23
FLSDPage
Docket
72 of 72
05/26/2023
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1 DEMAND FOR JURY TRIAL
2 Plaintiffs hereby demand a trial by jury.
3
4 Dated: April 6, 2023 PESSAH LAW GROUP, PC
5 By: /s/ Maurice D. Pessah
MAURICE D. PESSAH, ESQ. (SBN: 275955)
6 9100 Wilshire Blvd., Suite 850E
7 Beverly Hills, CA 90212
Tel.: (310) 772-2261
8 Email: maurice@pessahgroup.com
9 CHELIN LAW FIRM
10
By: /s/ Stuart N. Chelin
11 STUART N. CHELIN, ESQ. (SBN: 320357)
16133 Ventura Boulevard, Suite 700
12
Encino, CA 91436
13 Tel. (310) 556-9664
Email: stuart@chelinlaw.com
14
KLAFTER LESSER LLP
15
JEFFREY A. KLAFTER, ESQ.
16 (pro hac vice to be requested)
Two International Drive, Suite 850E
17 Tel.: (914) 934-9200
Email: jak@klafterlesser.com
18
19 Attorneys for Plaintiffs and the Proposed Class
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