Robinhood revives efforts to nix short squeeze lawsuit

Shortly after Chief Judge Cecilia M. Altonaga of the Florida Southern District Court denied Robinhood’s motion to dismiss a complaint concerning the January short squeeze, the company has revived the motion.

On October 15, 2021, Robinhood Markets, Inc., Robinhood Financial LLC and Robinhood Securities, LLC submitted a memorandum of law in support of their Motion to Dismiss the Amended Consolidated Class Action Complaint for the Robinhood Tranche for failure to state a claim.

Let’s recall that the case stems from events that occurred in late January 2021, when thousands of traders were prevented from trading a number of stocks, such as AMC and GME. The traders (the plaintiffs in this lawsuit) allege that Robinhood Markets tortiously interfered with existing business relations, which are evidenced by the Customer Agreement and standards of care, amongst Plaintiffs, Robinhood Financial and Robinhood Securities.

The plaintiffs argue that broker-dealers are expected to take reasonable steps to ensure that they can provide access to the securities markets during periods of extreme market volatility.

Despite being on notice of the price volatility and trading volume concentrated on its platform, Robinhood allegedly failed to take any steps to ensure that its trading platform remained available during times of extreme market volatility. The traders accuse Robinhood of putting the entire market at risk by admittedly failing to meet its capital requirements to support the market activity that it was facilitating and then abruptly imposing a one-sided, self-declared circuit breaker in the form of a PCO (position closing only) policy designed to drive prices down and protect itself at the expense of its customers and investors, including Plaintiffs and the Class.

In the document filed in the Court on October 15, 2021, Robinhood reiterates that its obligations to its retail investor customers are defined by contract. The rights and obligations between Robinhood and its customers are delineated in the Robinhood Customer Agreement, which all Robinhood customers must review and accept when opening an account.

According to the company, the Customer Agreement expressly permitted Robinhood to implement the temporary restrictions it imposed on January 28, 2021 and in the days thereafter, which are the basis of the plaintiffs’ claims in this action.

Robinhood Securities claims that it made a difficult decision on January 28, 2021 to limit customer purchases of certain popular stocks, including GameStop, Inc. (GME) and AMC Entertainment Holdings, Inc. (AMC).

According to Robinhood, in the days leading up to this decision, retail investors, spurred by social media and online forums, poured into the stock markets in record numbers to trade in stocks for GME, AMC and certain other popular issuers known as the “meme stocks.” This activity pushed trading volatility in the meme stocks to record levels within a matter of days.

In late January 2021, this market volatility significantly affected the collateral deposit requirements that clearinghouses impose on clearing brokers to protect investors, brokers and the financial system as a whole. To ensure market stability in the event that a market participant is unable satisfy its obligations with respect to a trade, clearing brokers, like Robinhood Securities, are required to post collateral to clearinghouses, like the National Securities Clearing Corporation (“NSCC”), at least daily to cover the cost and risk associated with their customers’ trade orders.

Robinhood explains that, as the unprecedented volatility in late January 2021 grew, so too did brokers’ clearinghouse deposit requirements with the NSCC. This substantial increase in trading volume and volatility led the NSCC on the morning of January 28, 2021 to issue a $3 billion collateral deposit demand on Robinhood Securities – an approximately twenty-four fold increase from earlier in the week, and more than four times what was required the day before.

To remain in compliance with its deposit requirements, Robinhood Securities made the decision to place limited restrictions on customer purchases on the small number of securities driving its deposit requirements. Other brokers, which also saw dramatic increases in their deposit requirements, imposed restrictions on a number of the securities experiencing trading volatility as well.

Robinhood argues that its Customer Agreement expressly provides that Robinhood can impose trading restrictions, stating inter alia that “Robinhood may at any time, in its sole discretion, and without prior notice to [the customer], prohibit or restrict [the customer’s] ability to trade securities.” (Cust. Agmt. § 5.F.)

Robinhood reserves this right to restrict trading precisely because of situations like the one that unfolded in late January 2021: extreme market volatility can have unpredictable effects, and Robinhood, like all brokers, needs the flexibility to take measures to satisfy its legal obligations so that it can continue serving its customers trading in thousands of available securities.

In addition, Robinhood argues that the law does not permit the plaintiffs to take a losing breach of contract claim and dress it up as a tort claim or a claim for breach of an implied contractual obligation in order to avoid the governing provisions of the Customer Agreement.

All of Plaintiffs’ claims must therefore be dismissed, Robinhood says, arguing that Counts I (negligence) and II (gross negligence) fail because Plaintiffs do not identify any duty under tort law that arises independent of Robinhood’s contractual obligations to its customers.

Further, Robinhood says that Count III (breach of fiduciary duty) fails because, as a non- discretionary broker-dealer that does not provide investment advice, Robinhood owes no general fiduciary duty to its customers.

Also, Robinhood argues that Counts IV (implied duty of care) and V (implied covenant of good faith and fair dealing) fail because the implied obligations Plaintiffs allege Robinhood owed its customers are contradicted by the terms of the Customer Agreement, which expressly permit Robinhood to restrict trading.

The defendant also argues that Count VI (tortious interference with contract), which is asserted only against Robinhood Markets, fails because Plaintiffs do not allege facts to support a breach of contract by Robinhood Financial or Robinhood Securities, as the Customer Agreement expressly permitted them to restrict trading, and do not allege facts to support intentional interference by Robinhood Markets.

Finally, Robinhood says that Count VII (civil conspiracy) fails because there is no separate cause of action for civil conspiracy and because contractual parties, such as Robinhood Financial and Robinhood Securities, cannot be liable as a matter of law for conspiring to interfere with their own contract.

Robinhood notes that the traders had made a third attempt to plead a viable cause of action against Robinhood: each filed a complaint before centralization, and they have now filed two complaints since centralization. Plaintiffs have also had the benefit of more than 18,000 pages of discovery from Robinhood in drafting this complaint. Robinhood argues that the traders’ continued failure to identify a cognizable claim means that their Complaint should be dismissed with prejudice.