Although Robinhood was among the companies that managed to escape the conspiracy claims brought by traders embroiled in the January trading short squeeze, the online trading company still faces a set of additional allegations, including ones about negligence and breach of duty of care. After the plaintiffs in a multi-district litigation against Robinhood filed their opposition to Robinhood’s motion to dismiss, the company has replied.
In a document submitted at the Florida Southern District Court on November 19, 2021, Robinhood says that the traders’ assertions are absurd and that their narrative of the relevant events is fundamentally misleading and inaccurate.
According to the traders, this case involves the failure of Robinhood to prepare for the risk associated with its own market disruption. Robinhood’s business model was to secure revenues from payment for order flow (PFOF) by entities to which it steered its customers trades for execution.
It therefore pursued a continual increase in customers and their trading to fuel to generate increased revenues from payment for order flow, while knowingly and recklessly continuing to facilitate a level of volatile trading on its platform that it failed to support with adequate capital resources. The plaintiffs claim that it was this failure that directly led to Robinhood’s sudden decision to pull itself back from the brink by intentionally devastating the market for in-demand securities concentrated on its platform.
Robinhood’s decision in late January 2021 to move 13 securities to position closing only (PCO) rendered the financial system inaccessible to millions of investors, who were forced to sell at depressed prices or hold and watch as the value of their holdings fell precipitously, while institutional investors saved billions in potential losses.
In the document filed with the Court on November 19, 2021, Robinhood disagrees with the traders’ allegations.
Robinhood states that:
“Stripped of the rhetoric and hyperbole, Plaintiffs’ arguments in opposition boil down to one absurd assertion: because Robinhood was founded on the ethos of empowering all retail investors to access the financial markets, it somehow has a legal duty to all investors in the United States—those who were Robinhood customers as well as those who had never even heard of Robinhood—to permit unrestricted trading on its platform in all securities at all times”.
Robinhood explains that it was monitoring the rise in volatility for GME and other relevant securities as early as Saturday, January 23, 2021, a day after the closing price for GME jumped from $43.93 on January 21 to $65.01 on January 22. Among other issues, Robinhood began analyzing Robinhood Securities’ overall exposure to the so-called meme stocks—particularly GME—and the extent to which customers were placing self-directed trades in volatile stocks on margin.
In their discussions, Robinhood employees sought to understand the impact of raising margin requirements (i.e., requiring customers to maintain sufficient collateral on hand with Robinhood Financial to cover the stock’s purchase price), and the number of Robinhood customers who would be impacted by margin requirements. Likewise, Robinhood staffers discussed how to explain an increase in margin requirements to customers in light of the risk of trading in volatile stocks.
When the markets opened on January 25, trading in the meme stocks rapidly spiked relative to the prior week, leading Robinhood to take further measures to mitigate risk and volatility across its platform in the face of rising customer trading activity. In addition to deploying additional resources to meet the technical demands imposed by the influx of customer trade orders, Robinhood Securities increased customer margin requirements for GME to manage risk levels.
These increased margin requirements helped mitigate risk by requiring that customers who held or wished to purchase GME (and later other meme stocks) to have sufficient assets (cash or other stock) in their accounts with Robinhood Financial to cover their positions. The increased margin requirements did not otherwise limit customers’ ability to purchase any of the meme stocks as long as they had sufficient cash or other stock in their account to pay for the purchase they wanted to complete. Concurrently, Robinhood Securities timely met each and every NSCC collateral deposit requirement, which grew from $125 million on the morning of January 25 to $690 million by the end of January 27.
But meme stock trading continued to push both share prices and volume upward, which culminated in an unprecedented one-day spike in the Suspended Stocks’ trading volume: from 1.86 billion shares on January 26 to 6.95 billion shares on January 27th, 2021.
At approximately 5:11 a.m. EST, Robinhood Securities received an email from NSCC stating that its deposit requirements had jumped massively from the prior day’s: Robinhood Securities’ deposit deficit was over $3 billion—more than quadruple the previous day’s deposit requirement.
The DTCC confirmed that, “risk at NSCC, as measured by NSCC’s aggregate clearing fund requirement, also increased substantially on January 28, to $33.5 billion, slightly higher than the peak that occurred in March 2020 and just under NSCC’s historical maximum.”
Robinhood claims that it was left with no choice but to set the Suspended Stocks to “position close only” (“PCO”), which enabled (but did not require) Robinhood customers to exit their positions in those symbols if they wished, but temporarily restricted new purchases of those volatile securities. The company says that, in light of the unprecedented market volatility, it had to exercise its discretion under the Customer Agreement to protect the firm and its customers.
The company says its statements were not inconsistent at all. For example, Plaintiffs allege that Mr Swartwout, President and COO of Robinhood Securities, engaged in self-serving trades at the expense of customers by selling “his AMC shares on January 26, 2021—a day before the restrictions took effect.” This is false, Robinhood says, for several reasons.
First, the full text of the message shows that Plaintiffs confuse Mr Swartwout’s sale of AMC shares on January 26 with Robinhood Securities’ plan to increase margin requirements for GME the following day—a completely different stock, and not the restriction at issue. Second, none of the purchase restrictions at issue were decided upon, or implemented until the morning of January 28 (after Robinhood Securities received the NSCC email raising its collateral deposit requirement), and therefore Mr. Swartwout did not know and could not have known that Robinhood later was going to impose purchase restrictions on AMC at the time he sold his AMC shares.
Third, the “PCO” restriction that Robinhood implemented on January 28 permitted Robinhood customers at all times to sell out of existing positions; thus, any Robinhood customer could sell his or her AMC shares, just as Mr. Swartwout did.
Further, Robinhood argues that there is no duty in negligence to avoid economic (non-physical) harm to any foreseeable plaintiff. Plaintiffs’ attempt to thrust upon Robinhood such a duty, to all investors in the United States who held a share in one of the meme stocks, is legally foreclosed. Also, Plaintiffs, who are all Robinhood customers, cannot evade the clear terms of the Customer Agreement they signed to open their Robinhood accounts.
In short, Robinhood restates its claims that the Robinhood Customer Agreement expressly permitted Robinhood to implement the challenged restrictions that are the basis for each of Plaintiffs’ claims. That same agreement limited the extent of any agency relationship between Robinhood and its customers, precluding the existence of any fiduciary duty.
The company concludes by stating that the relevant law precludes each of Plaintiffs’ claims, and the Amended Complaint should be dismissed with prejudice.