Case 3:20-cv-01626-JD Document 120 Filed 06/30/21 Page 1 of 48
`
`KAPLAN FOX & KILSHEIMER LLP
`Matthew B. George (SBN 239322)
`Maia C. Kats (pro hac vice)
`Laurence D. King (SBN 206423)
`Mario M. Choi (SBN 243409)
`1999 Harrison Street, Suite 1560
`Oakland, CA 94612
`Telephone: 415-772-4700
`Facsimile: 415-772-4707
`mgeorge@kaplanfox.com
`mkats@kaplanfox.com
`lking@kaplanfox.com
`mchoi@kaplanfox.com
`
`COTCHETT, PITRE & MCCARTHY, LLP
`Anne Marie Murphy (SBN 202540)
`Mark C. Molumphy (SBN 168009)
`Noorjahan Rahman (SBN 330572)
`Tyson C. Redenbarger (SBN 294424)
`Julia Q. Peng (SBN 318396)
`San Francisco Airport Office Center
`840 Malcolm Road, Suite 200
`Burlingame, CA 94010
`Telephone: (650) 697-6000
`Facsimile: (650) 697-0577
`amurphy@cpmlegal.com
`mmolumphy@cpmlegal.com
`nrahman@cpmlegal.com
`tredenbarger@cpmlegal.com
`jpeng@cpmlegal.com
`
`[Additional Counsel Appear on Signature Page]
`
`UNITED STATES DISTRICT COURT
`
`NORTHERN DISTRICT OF CALIFORNIA
`
`In re: Robinhood Outage Litigation
`
`Case No. 3:20-cv-01626-JD
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`SECOND AMENDED CONSOLIDATED
`CLASS ACTION COMPLAINT
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`DEMAND FOR JURY TRIAL
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`
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`Case No. 3:20-cv-01626-JD
`SECOND AMENDED CONSOLIDATED CLASS ACTION COMPLAINT
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`Case 3:20-cv-01626-JD Document 120 Filed 06/30/21 Page 2 of 48
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` INTRODUCTION
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`1.
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`Plaintiffs bring this putative class action against Defendants Robinhood Financial,
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`LLC (“Robinhood Financial”), Robinhood Securities, LLC (“Robinhood Securities”), and
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`Robinhood Markets, Inc. (“Robinhood Markets”) (collectively, “Robinhood”), demanding a trial
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`by jury. Plaintiffs make the following allegations pursuant to the investigation of counsel and based
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`upon information and belief, except as to the allegations specifically pertaining to each individual
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`Plaintiff, which are based on personal knowledge.
`
`2.
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`Robinhood is an online brokerage firm founded in 2013 that states it is “a pioneer
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`in commission-free investing.” Robinhood’s customers can place securities trades through the
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`firm’s website and by using a web-based application (or “app”). Robinhood permits customers,
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`when its trading platform is operational, to purchase and sell certain securities, including option
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`contracts, and engage in trading on margin. The company has no storefront offices and operates
`entirely online. Robinhood is a FINRA1 regulated broker-dealer
`
`3.
`
`Unfortunately for Robinhood’s customers, including Plaintiffs and the putative class
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`(the “Class”), Robinhood’s trading systems have repeatedly crashed—preventing Plaintiffs and the
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`Class from accessing their accounts and making any trades through the firm’s website or app. The
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`most significant crash occurred on Monday, March 2, 2020, and extended through mid-day
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`Tuesday, March 3, 2020. The March 2-3 outage crashed all of Robinhood’s operating systems for
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`more than a full trading day.
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`4.
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`Several days later, on March 9, 2020, Robinhood again experienced another
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`complete system outage. Plaintiffs and Class members again experienced significant outages on
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`March 13, 16, and June 18, 2020. In total, the Robinhood website and app have gone down 47
`times since March.2 The service outages are individually referred to as an “Outage” and
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`1 Financial Industry Regulatory Authority, Inc. (FINRA) is a private corporation that acts as a a
`non-governmental, self-regulatory organization that regulates member brokerage firms and
`exchange markets.
`2 Nathaniel Popper, Robinhood Has Lured Young Traders, Sometimes With Devastating Results,
`The New York Times (July 8, 2020)
`https://www.nytimes.com/2020/07/08/technology/robinhood-risky-
`trading.html?searchResultPosition=2 (last visited Aug.19, 2020).
`
`- 1 -
`Case No. 3:20-cv-01626-JD
`SECOND AMENDED CONSOLIDATED CLASS ACTION COMPLAINT
`HIGHLY CONFIDENTIAL – ATTORNEYS’ EYES ONLY
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`Case 3:20-cv-01626-JD Document 120 Filed 06/30/21 Page 3 of 48
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`collectively as the “Outages”.3
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`
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`5.
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`During the Outages, Robinhood’s customers were completely unable to use the
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`services, including to buy or sell securities or to exercise option contracts through Robinhood’s
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`website and app. Robinhood’s help center, which should provide email and phone support, was
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`also unavailable during the Outages and customers were unable to obtain any information or
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`meaningful assistance from Robinhood. During the Outages, Class members repeatedly attempted
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`to contact the help center, by phone and email, to no avail. Robinhood has admitted that during the
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`Outages the help center was unavailable and that Robinhood’s phone support was non-existent.
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`Customers were thus left with no recourse during the Outages, unable to access their funds or
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`exercise time-sensitive trades. They were forced to sit helplessly until services were re-established.
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`The Outages on March 2 and 3, 2020, were particularly devastating for Plaintiffs
`6.
`and the Class as the Dow Jones Industrial Average rose 5.1% during that time.4 Meanwhile,
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`Robinhood users were locked out of their accounts and unable to access their funds or make
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`trades—while the markets gained a record $1.1 trillion. The Outage on March 9, 2020, was
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`similarly harmful, as the Dow Jones Industrial Average had its largest point plunge in history up to
`that date.5 Again, Plaintiffs and the Class were unable to access their funds or make trades and
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`suffered significant losses as a result. Trades that were placed before the Outages, for which
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`Plaintiffs and the Class received trade confirmations, also failed, or were processed at incorrect
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`times or incorrect prices during the Outages. Additionally, Plaintiffs and the Class members were,
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`at times during the Outages, able to seemingly place trades, and again the Plaintiffs and class
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`received trade confirmations; however, it was later learned that those trades also failed, or were
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`
`3 Plaintiffs and the Class seek damages related to the Outages on March 2, 3, and 9, 2020.
`4 Fred Imbert and Eustance Huang, Dow roars back from coronavirus sell-off with biggest gain
`since 2009, surges 5.1%, CNBC (March 2, 2020) https://www.cnbc.com/2020/03/01/awaiting-
`us-stock-futures-open-at-6-pm-after-wall-streets-worst-week-since-2008.htm (last visited Aug.
`19, 2020).
`5 Kimberly Amadeo, How Does the 2020 Stock Market Crash Compare With Others? The
`Balance (April 27, 2020) https://www.thebalance.com/fundamentals-of-the-2020-market-crash-
`4799950#:~:text=The%20stock%20market%20crash%20of,point%20drops%20in%20U.S.%20hi
`story (last visited Aug. 19, 2020).
`
`
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`- 2 -
`Case No. 3:20-cv-01626-JD
`SECOND AMENDED CONSOLIDATED CLASS ACTION COMPLAINT
`HIGHLY CONFIDENTIAL – ATTORNEYS’ EYES ONLY
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`Case 3:20-cv-01626-JD Document 120 Filed 06/30/21 Page 4 of 48
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`
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`processed at incorrect times or incorrect prices during or after the Outages.
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`7.
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`Such failures constitute negligence, breaches of contract and fiduciary duties, and
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`are violations of FINRA regulations. Per FINRA regulations, Robinhood has a duty to process
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`trades timely and at the best prices for its users. Robinhood is also required to have a business
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`continuity plan identifying a procedure relating to an emergency or significant business disruption.
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`During the Outages, Robinhood failed to process trades in a timely manner or at all, and it was
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`discovered that Robinhood’s continuity plan was nonexistent. Robinhood simply abandoned its
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`customers.
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`8.
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`The loss of access to Robinhood’s trading platform and absence of contingency
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`plans and customer service support caused concrete, particularized, and actual damages for
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`Robinhood customers. Plaintiffs and members of the class were unable to monitor their accounts,
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`make trades, or exercise their option contracts to capitalize on gains or to mitigate losses. Many
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`Plaintiffs and Class members held options contracts that expired, worthless, during the Outages.
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`And some of those contracts, such as the contracts held by certain Plaintiffs herein, were exercised
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`by Robinhood during the Outages, without express authorization or approval of its customers, at a
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`loss. Other Plaintiffs and Class members were subjected to forced margin calls as a result of the
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`Outages, which they otherwise would have been able to avoid if they had access to their accounts.
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`9.
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`Robinhood accepts fault for the Outages, which it attributes to stress on its systems.
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`According to Robinhood employees, the March 2020 “outage was rooted in issues with the
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`company’s phone app and servers. They said the start-up had underinvested in technology and
`moved too quickly rather than carefully.”6 These flaws were known and insufficiently addressed:
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`“[s]oftware mishaps have rocked Robinhood before,” including in 2018, for example, when
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`its “options trading service had an outage that locked consumers out of their accounts and stopped
`
`
`6 Nathaniel Popper, Robinhood Has Lured Young Traders, Sometimes With Devastating Results,
`The New York Times (July 8, 2020)
`https://www.nytimes.com/2020/07/08/technology/robinhood-risky-
`trading.html?searchResultPosition=2 (last visited Aug.19, 2020).
`- 3 -
`Case No. 3:20-cv-01626-JD
`SECOND AMENDED CONSOLIDATED CLASS ACTION COMPLAINT
`HIGHLY CONFIDENTIAL – ATTORNEYS’ EYES ONLY
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`Case 3:20-cv-01626-JD Document 120 Filed 06/30/21 Page 5 of 48
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`them from closing positions[.]”7
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`
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`10.
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`In offering trading services, Robinhood assumed a duty to ensure that its systems
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`were sufficiently equipped to reliably deliver such services under reasonably foreseeable customer
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`demands and market conditions, such as those at issue in this case. Robinhood acted negligently
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`by failing to adequately or properly equip itself technologically and systemically to maintain
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`Plaintiff and Class members’ access to trading services. Due solely to its own negligence and failure
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`to maintain adequate infrastructure, Robinhood breached obligations owed to Plaintiff and Class
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`members and caused them substantial losses. Its failures are all the more serious due to
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`Robinhood’s history of such failures, the magnitude of the Outages, the absence of alternative
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`means for customers to protect their positions and investments, and lack of communication and
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`customer support.
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`11.
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`Plaintiffs bring this class action on behalf of Robinhood customers who were denied
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`access to their Robinhood trading accounts during the Outages and for the many, including
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`themselves, who suffered losses as a result of the Outages. Plaintiffs assert putative class action
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`claims generally including negligence, breach of contract, breach of fiduciary duty, and violations
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`of California’s Unfair Competition Law, on behalf of themselves and all other Robinhood
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`customers who are similarly situated. Plaintiffs seek damages, restitution, disgorgement and
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`declaratory relief.
`
`PARTIES
`
`12.
`
`Plaintiff Daniel Beckman (“Plaintiff Beckman”) is a citizen of Florida and is over
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`the age of 18.
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`13.
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`Plaintiff Joseph Gwaltney (“Plaintiff Gwaltney”) is a citizen of Florida and is over
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`the age of 18.
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`14.
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`Plaintiff Emma Jones (“Plaintiff Jones”) is a citizen of Texas and is over the age
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`
`7 John Gittlelsohn, Annie Massa, and Jennifer Surane, Robinhood Maxed Out a Credit Line Last
`Month as Markets Fell, Bloomberg (March 10, 2020)
`https://www.bloomberg.com/news/articles/2020-03-10/robinhood-maxed-out-credit-line-last-
`month-amid-market-tumult (last visited Aug. 19, 2020).
`
`
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`- 4 -
`Case No. 3:20-cv-01626-JD
`SECOND AMENDED CONSOLIDATED CLASS ACTION COMPLAINT
`HIGHLY CONFIDENTIAL – ATTORNEYS’ EYES ONLY
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`Case 3:20-cv-01626-JD Document 120 Filed 06/30/21 Page 6 of 48
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`
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`of 18.
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`15.
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`Plaintiff Leila Kuri (“Plaintiff Kuri”) is a citizen of North Carolina and is over the
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`age of 18.
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`16.
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`Plaintiff Jared Leith (“Plaintiff Leith”) is a citizen of Minnesota and is over the age
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`of 18.
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`17.
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`Plaintiff Omeed Mahrouyan (“Plaintiff Mahrouyan”) is a citizen of California and
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`is over the age of 18.
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`18.
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`Plaintiff Mahdi Heidari Moghadam (“Plaintiff Moghadam”) is a citizen of Texas
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`and is over the age of 18.
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`19.
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`Plaintiff Howard Morey (“Plaintiff Morey”) is a citizen of Oklahoma and is over the
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`age of 18.
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`20.
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`Plaintiff Colin Prendergast (“Plaintiff Prendergast”) is a citizen of California and is
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`over the age of 18.
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`21.
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`Plaintiff Raghu Rao (“Plaintiff Rao”) is a citizen of New Jersey and is over the age
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`of 18.
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`22.
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`Plaintiff Michael Riggs (“Plaintiff Riggs”) is a citizen of Pennsylvania and is over
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`the age of 18.
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`23.
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`Plaintiff Kevin Russell (“Plaintiff Russell”) is a citizen of Illinois and is over the
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`age of 18.
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`24.
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`Plaintiff Jason Steinberg (“Plaintiff Steinberg”) is a citizen of California and is over
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`the age of 18.
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`25.
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`Plaintiff Jared Ward (“Plaintiff Ward”) is a citizen of California and is over the age
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`of 18.
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`of 18.
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`26.
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`Plaintiff Mengni Xia (“Plaintiff Xia”) is a citizen of New York and is over the age
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`27.
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`Defendant Robinhood Financial is a Delaware corporation with its principal place
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`of business at 85 Willow Road, Menlo Park, California 94025. It is a wholly-owned subsidiary of
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`
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`Robinhood Markets. Robinhood Financial is registered as a broker-dealer with the U.S. Securities
`- 5 -
`Case No. 3:20-cv-01626-JD
`SECOND AMENDED CONSOLIDATED CLASS ACTION COMPLAINT
`HIGHLY CONFIDENTIAL – ATTORNEYS’ EYES ONLY
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`Case 3:20-cv-01626-JD Document 120 Filed 06/30/21 Page 7 of 48
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`& Exchange Commission (“SEC”). Defendant Robinhood Financial acts as an introducing broker
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`and has a clearing arrangement with its affiliate Defendant Robinhood Securities.
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`28.
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`Defendant Robinhood Securities is a Delaware corporation with its principal place
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`of business at 500 Colonial Center Parkway, Suite 100, Lake Mary, Florida 32746. It is a wholly-
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`owned subsidiary of Defendant Robinhood Markets.
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`29.
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`Defendant Robinhood Markets is a Delaware corporation with its principal place of
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`business at 85 Willow Road, Menlo Park, California 94025. Defendant Robinhood Markets is the
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`corporate parent of Defendants Robinhood Financial and Robinhood Securities. Robinhood
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`Markets is also the entity that actually owns, develops and/or maintains the technology
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`infrascturcture that was at the root cause of and that was impacted by the Outages. Robinhood
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`Markets is the developer and provider of the mobile application that Plaintiffs downloaded and
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`used as customers of Robinhood. Robinhood Markets is the employer of most, if not all, of the key
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`engineering personnel who developed, designed and maintained the technology infrastructure that
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`failed during the Outages. Most, if not all, of Robinhood Markets’ engineering employees who
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`were responsible for developing and/or maintaining Robinhood’s electronic securities trading
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`application perform their work at facilities and/or on equipment owned or leased by Robinhood
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`Markets, which also acts as a technology vendor for its own subsidiaries Robinhood Financial and
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`Robinhood Securities. Robinhood Markets also pays for and provides staffing and services
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`pertaining to customer service for Robinhood Financial and Robinhoood Securities, including at
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`times pertinent to the Outages. Certain personnel maintain multiple roles at the various entities,
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`such as Robinhood Markets’ current director of engineering who also serves as Robinhood
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`Financial’s Chief Technology Officer, creating intertwined management and supervision of the
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`technology infrastructure that failed during the Outages and gives rise to Plaintiffs’ claims.
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`Plaintiffs bring their claims against Robinhood Markets in its capacity as a parent corporation of
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`the co-defendants, but also in its own capacity as an alleged tortfeasor on the claims identified
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`below.
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`JURISDICTION AND VENUE
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`30.
`
`This Court has jurisdiction over the subject matter of this action pursuant to 28
`- 6 -
`Case No. 3:20-cv-01626-JD
`SECOND AMENDED CONSOLIDATED CLASS ACTION COMPLAINT
`HIGHLY CONFIDENTIAL – ATTORNEYS’ EYES ONLY
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`Case 3:20-cv-01626-JD Document 120 Filed 06/30/21 Page 8 of 48
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`
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`U.S.C §1332(d), because the amount in controversy for the Classes exceeds $5,000,000 exclusive
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`of interest and costs, there are more than 100 putative Class members defined below and minimal
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`diversity exists because the majority of putative Class members are citizens of a state different than
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`Defendants.
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`31.
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`Pursuant to 28 U.S.C. § 1391, this Court is the proper venue for this action because
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`a substantial part of the events, omissions, and acts giving rise to the claims herein occurred in this
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`District where Robinhood is headquartered and where it developed and sold the financial services
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`which are the subject of the present complaint. Finally, venue is appropriate in this District pursuant
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`to 28 USC § 1391(b)(2) because Robinhood is headquartered in Menlo Park and a substantial part
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`of the acts and omissions that gave rise to this Complaint occurred or emanated from this District.
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`32.
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`This Court has personal jurisdiction over Robinhood because it is headquartered in
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`and authorized to do business and does conduct business in California, and because it has sufficient
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`minimum contacts with this state and/or sufficiently avails itself of the markets of this state through
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`its business within this state to render the exercise of jurisdiction by this Court permissible.
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`INTRADISTRICT ASSIGNMENT
`
`33.
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`Pursuant to Civil Local Rule 3-2(c), an intradistrict assignment to the San Francisco
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`Division is appropriate because a substantial part of the events or omissions which give rise to the
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`claims asserted herein occurred in this Division, and because the District Court transferred this
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`matter to the San Francisco Division after it was originally filed in the San Jose Division, and then
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`consolidated about a dozen related matters filed in, transferred to, or removed to this District.
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`FACTUAL ALLEGATIONS
`
`Robinhood’s Business Model
`
`34.
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`Robinhood was founded by Vlad Tenev and Baiju Bhatt, who met each other at
`
`Stanford University in 2005. After teaming up on several ventures, including a high-speed trading
`firm, they created Robinhood in 2013.8
`
`8 Nathaniel Popper, Robinhood Has Lured Young Traders, Sometimes With Devastating Results,
`The New York Times (July 8, 2020)
`https://www.nytimes.com/2020/07/08/technology/robinhood-risky-
`trading.html?searchResultPosition=2 (last visited Aug.19, 2020).
`- 7 -
`Case No. 3:20-cv-01626-JD
`SECOND AMENDED CONSOLIDATED CLASS ACTION COMPLAINT
`HIGHLY CONFIDENTIAL – ATTORNEYS’ EYES ONLY
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`Case 3:20-cv-01626-JD Document 120 Filed 06/30/21 Page 9 of 48
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`35.
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`Robinhood offers people the ability to invest in stocks, ETFs, and options through
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`an electronic trading platform, both online and through an app.
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`36.
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`Robinhood competes with other online and traditional brokerages by not charging
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`trading fees. At the time of its founding, most brokerage firms charged about $10 or more to make
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`a trade. Robinhood also competes with traditional financial institutions by offering more user-
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`friendly digital services, which has made Robinhood very popular, especially with younger traders.
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`In July of 2020, Robinhood said it had over 13 million users on its platform. In August 2020, after
`raising $200 million in Series G funding, Robinhood was valued at $11.2 billion.9
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`37.
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`Robinhood’s original product was commission-free trades of stocks and
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`exchange-traded funds. As Robinhood grew, it added more risky and complex products—like
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`options and margin trading. Those products, combined with Robinhood's game-like interface, have
`been a hit with millenials, and its typical customer is 31 years old on average.10
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`38.
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`Robinhood’s trading app, when functional, is designed to be easy to use. For
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`example, on the Robinhood home screen, there is a list of popular stocks that users can “trade” with
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`just the touch of the screen, which skips many of the steps that other firms require.
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`9 Kate Rooney, Robinhood snags third mega-investment of the year, boosting valuation to $11.2
`billion, CNBC (August 17, 2020) https://www.cnbc.com/2020/08/17/robinhood-announces-
`another-mega-round-valuation-soars-to-11point2b.html (last visited Aug. 19, 2020).
`10 Graham Rapier, Robinhood had to install protective glass after frustrated traders kept showing
`up at its office, Business Insider (July 10, 2020) https://www.businessinsider.com/robinhood-
`office-installed-bulletproof-glass-after-frustrated-traders-visited-report-2020-7 (last visited Aug.
`19, 2020).
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`- 8 -
`Case No. 3:20-cv-01626-JD
`SECOND AMENDED CONSOLIDATED CLASS ACTION COMPLAINT
`HIGHLY CONFIDENTIAL – ATTORNEYS’ EYES ONLY
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`39.
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`Robinhood also includes many features that make investing appear more like a
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`game. New members are given a free share of stock when they join Robinhood—to reveal the
`stock users scratch-off images that look like a lottery ticket.11 Once the stock is revealed, confetti
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`appears to fall from the top of the screen.
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`40.
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`One of Robinhood’s popular features is the ability for users to engage in options
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`trading. Robinhood describes its options trading as “quick, straightforward & free.” To start
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`trading options, users respond to multiple-choice questions. “Beginners are legally barred from
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`trading options, but those who click that they have no investing experience are coached by the app
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`on how to change the answer to ‘not much’ experience. Then people can immediately begin option
`trading.”12
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`According to the New York Times, Robinhood’s “success appears to have been built
`41.
`on a Silicon Valley playbook of behavioral nudges and push notifications,13 which has drawn
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`inexperienced investors into the riskiest trading. . . And the more that customers engaged in such
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`11 Nathaniel Popper, Robinhood Has Lured Young Traders, Sometimes With Devastating Results,
`The New York Times (July 8, 2020)
`https://www.nytimes.com/2020/07/08/technology/robinhood-risky-
`trading.html?searchResultPosition=2 (last visited Aug.19, 2020).
`12 Id.
`13 Nudges and push notifications are reminders or prompts sent directly to users. Nudges and push
`notifications may appear on a users home screen similar to a text message or email alerts.
`- 9 -
`Case No. 3:20-cv-01626-JD
`SECOND AMENDED CONSOLIDATED CLASS ACTION COMPLAINT
`HIGHLY CONFIDENTIAL – ATTORNEYS’ EYES ONLY
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`Case 3:20-cv-01626-JD Document 120 Filed 06/30/21 Page 11 of 48
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`behavior, the better it was for the company.”14 “At the core of Robinhood’s business is an incentive
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`to encourage more trading. It does not charge fees for trading, but it is still paid more if its
`customers trade more.”15
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`42.
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`A research analyst at Chicago-based Sumner Capital group pointed out that
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`Robinhood’s app has “slick interfaces. Confetti popping everywhere…They try to gamify trading
`and couch it as an investment.”16 Unfortunately for many Americans, losing investment and
`retirement funds or accruing colossal debt is not a game, and the consequences have been tragic.17
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`43.
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`Robinhood’s digital platform app has been beset by its technology glitches, which
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`have been significant and ongoing. “In 2018, Robinhood released software that accidentally
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`reversed the direction of options trades giving customers the opposite outcome from what they
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`expected. Last year, it mistakenly allowed people to borrow infinite money to multiply their bets,
`leading to some enormous gains and losses.”18
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`Robinhood claims that its more recent Outages resulted from “stress on [their]
`44.
`infrastructure” due to “unprecedented load,” and “record volume.” 19 But these circumstances,
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`even if true, were encouraged and driven by Robinhood’s own business model—encourage its users
`to trade as much as possible.20
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`14 Nathaniel Popper, Robinhood Has Lured Young Traders, Sometimes With Devastating Results,
`The New York Times (July 8, 2020)
`https://www.nytimes.com/2020/07/08/technology/robinhood-risky-
`trading.html?searchResultPosition=2 (last visited Aug.19, 2020)..
`15 Id.
`16 Antoine Gara, Sergei Klebnikov, 20-Year-Old Robinhood Customer Dies by Suicide After
`Seeing a $730,000 Negative Balance, Forbes (June 17, 2020)
`https://www.forbes.com/sites/sergeiklebnikov/2020/06/17/20-year-old-robinhood-customer-dies-
`by-suicide-after-seeing-a-730000-negative-balance/#11d468081638 (last visited Aug. 19, 2020).
`17 Id.
`18 Robinhood options errors, Elite Trader, https://www.elitetrader.com/et/threads/robinhood-
`options-errors.327998/ (last visited Aug. 19, 2020).
`19 Baiju Bhatt and Vladimir Tenev, An Update from Robinhood’s Founders, Robinhood (March
`3, 2020) https://blog.robinhood.com/news/2020/3/3/an-update-from-robinhoods-founders ((last
`visited Aug. 19, 2020).
`20 Nathaniel Popper, Robinhood Has Lured Young Traders, Sometimes With Devastating Results,
`The New York Times (July 8, 2020)
`https://www.nytimes.com/2020/07/08/technology/robinhood-risky-
`trading.html?searchResultPosition=2 (last visited Aug. 19, 2020).
`- 10 -
`Case No. 3:20-cv-01626-JD
`SECOND AMENDED CONSOLIDATED CLASS ACTION COMPLAINT
`HIGHLY CONFIDENTIAL – ATTORNEYS’ EYES ONLY
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`Case 3:20-cv-01626-JD Document 120 Filed 06/30/21 Page 12 of 48
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`45.
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`Robinhood’s users trade more often than average, faster, and with more risk than
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`traders who use other platforms. According to an analysis of new filings from nine brokerage firms
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`by the research firm Alphacution for The New York Times, in the first quarter of 2020, Robinhood
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`users traded nine times as many shares as E-Trade customers and 40 times as many shares as
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`Charles Schwab customers. They also bought and sold 88 times as many risky options contracts as
`Schwab customers, relative to the average account size, according to the analysis. 21
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`46.
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`According to Tim Welsh, founder and CEO of wealth management consulting firm
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`Nexus Strategy, “they should put a cigarette warning label on Robinhood, because it could be
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`hazardous to your financial health the more you trade. Every study on planet Earth has shown day
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`traders that are not sophisticated do not make money. They game-ify it, they throw confetti after
`each trade, the make it ‘free’ but ultimately it’s a losers game.”22
`Robinhood’s Services and How it Makes Money
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`47. When a user opens an account with Robinhood, they enter into a Customer
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`Agreement with “Robinhood Financial LLC, Robinhood Securities, LLC, and their agents and
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`assigns.” Prior to the Outages in March 2020, the Customer Agreement had most recently been
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`revised on February 5, 2020. After the March Outages, Robinhood revised its Customer Agreement
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`21 Id.
`22 Id.
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`- 11 -
`Case No. 3:20-cv-01626-JD
`SECOND AMENDED CONSOLIDATED CLASS ACTION COMPLAINT
`HIGHLY CONFIDENTIAL – ATTORNEYS’ EYES ONLY
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`Case 3:20-cv-01626-JD Document 120 Filed 06/30/21 Page 13 of 48
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`on April 28, 2020, and again on June 22, 2020.
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`48.
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`Robinhood provides its users educational information with the tagline “Investing
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`can be complicated — that’s why we’re here. From beginners’ guides to timely features, explore
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`articles that make finance a little more understandable.” The information provided varies from
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`investment strategy for investors in their 20’s, to basic information about the market and common
`terms used in investing.23 Robinhood’s interface also highlights particular stocks and “makes
`suggestions to users on what to trade next.”24
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`49.
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`Robinhood offers a paid subscription product called “Gold.” Users who purchase
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`Gold memberships pay $5 a month to have faster deposit processing, access to professional
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`research, the ability to see additional information about stock prices, and the ability to invest on
`margin.25
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`50.
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`Robinhood also makes money from “payment for order flow” fees. In fact, payment
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`for order flow fees are reportedly Robinhood’s primary revenue stream—greatly exceeding what it
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`earns from Robinhood Gold, or from the interest it makes on cash balances in customer accounts,
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`which is another source of Robinhood’s revenue.
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`51.
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`Payment for order flow fees are paid to Robinhood from electronic market makers
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`for passing on customer orders. For example, if a Robinhood users purchase a share of Apple on
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`through their account, Robinhood sends that order to a large market maker like Citadel Securities
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`and receives a few pennies in return—i.e., the “payment for order flow” fees. Citadel, meanwhile,
`completes the trade and makes a few pennies itself.26
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`52.
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`For Robinhood, those fees add up. According to a recent SEC filing, Citadel
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`23 See https://learn.robinhood.com/ (last visited Aug. 19, 2020).
`24 Alicia Adamcyk, Trading Apps Like Robinhood Are Having A Moment. But Users Should Be
`Careful, CNBC (Aug. 21, 2020), https://www.cnbc.com/2020/08/21/robinhood-is-having-a-
`moment-users-should-be-careful.html (last visited Aug. 21, 2020).
`25 A margin account is a brokerage account in which the broker lends the investor money to buy
`more securities than what they could otherwise buy with the balance in their account.
`26Jeff John Roberts, David Z. Morris, Robinhood makes millions selling your stock trades … is
`that so wrong?, Fortune (July 8, 2020), https://fortune.com/2020/07/08/robinhood-makes-
`millions-selling-your-stock-trades-is-that-so-wrong/ (last visited Aug. 19, 2020).
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`Case No. 3:20-cv-01626-JD
`SECOND AMENDED CONSOLIDATED CLASS ACTION COMPLAINT
`HIGHLY CONFIDENTIAL – ATTORNEYS’ EYES ONLY
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`Case 3:20-cv-01626-JD Document 120 Filed 06/30/21 Page 14 of 48
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`Securities and several other firms paid Robinhood nearly $100 million in the first quarter of 2020.27
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`And in the second quarter of 2020 — Robinhood made $180 million off trades, roughly double
`from the prior quarter.28
`The Outages
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`At 9:33 am29 the morning of March 2, 2020, a Monday and the first day of the month
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`53.
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`for trading traditional securities, Robinhood’s trading platform completely stopped functioning. As
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`a result, at that moment, the platform stopped processing orders entered by customers prior to the
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`Outage and customers were unable to enter new orders. The majority of users were also prevented
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`from accessing their account and funds altogether.