Case 1:21-md-02989-CMA Document 446 Entered on FLSD Docket 11/30/2021 Page 1 of 75
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`UNITED STATES DISTRICT COURT
`SOUTHERN DISTRICT OF FLORIDA
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`CASE NO. 21-2989-MDL-ALTONAGA/Torres
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`In re: JANUARY 2021 SHORT SQUEEZE
`TRADING LITIGATION
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`This Document Relates to: All Actions Involving the Federal Securities Laws
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`CONSOLIDATED CLASS ACTION COMPLAINT
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`Case 1:21-md-02989-CMA Document 446 Entered on FLSD Docket 11/30/2021 Page 2 of 75
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`Lead Plaintiff Blue Laine-Beveridge, named Plaintiffs Abraham Huacuja, Ava Bernard,
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`Brandon Martin, Brendan Clarke, Brian Harbison, Cecilia Rivas, Garland Ragland Jr., Joseph
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`Gurney, Santiago Gil Bohórquez, and Trevor Tarvis (collectively “Plaintiffs”), individually and
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`on behalf of all other persons similarly situated, by Plaintiffs’ undersigned attorneys, for Plaintiffs’
`Consolidated Class Action Complaint against defendants Robinhood Markets, Inc. and two of its
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`wholly owned subsidiaries, Robinhood Financial, LLC and Robinhood Securities, LLC (unless
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`otherwise noted, collectively “Robinhood” or the “Robinhood Defendants”) alleges the following
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`based upon personal knowledge as to Plaintiffs and Plaintiffs’ own acts, and information and belief
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`as to all other matters, based upon, inter alia, the investigation conducted by and through their
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`attorneys, which included, among other things, a review of the statements made by defendants and
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`their senior management, SEC filings, court records, Congressional testimony, administrative
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`proceedings, and information readily obtainable on the Internet. Plaintiffs believe that substantial
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`evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for
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`discovery.
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`SUMMARY OF THE ACTION
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`1.
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`This is a class action on behalf of persons or entities who held common stock in
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`AMC Entertainment Holdings, Inc. (“AMC”), Bed Bath & Beyond Inc. (“BBBY”), BlackBerry
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`Ltd. (“BB”), Express Inc. (“EXPR”), GameStop Corp. (“GME”), Koss Corp. (“KOSS”), Tootsie
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`Roll Industries Inc. (“TR”), or American Depositary Shares of foreign-issuers Nokia Corp.
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`(“NOK”) and trivago N.V. (“TRVG”) (collectively “the Affected Stocks”) as of the close of
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`trading on January 27, 2021, and sold such shares at a loss between January 28, 2021, and February
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`4, 2021 (the “Class”). Excluded from the class are the defendants, the officers and directors of
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`defendants, members of their immediate families and their legal representatives, heirs, successors
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`1
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`or assigns and any entity in which defendants or any excluded persons have or had a controlling
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`interest.
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`2.
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`The heroic outlaw depicted in the legend of Robin Hood stole from the rich to give
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`to the poor. Eager to invoke that “stick it to the Man” allusion, the story that Robinhood repeatedly
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`tells the public is that it is a revolutionary disruptor: By putting the power to trade into the hands
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`– and fingertips – of a new generation of investors via its mobile app, Robinhood claims to have
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`democratized access to financial markets by breaking Wall Street’s stranglehold on the means to
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`accumulate wealth. Alas, this too is a fairy tale.
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`3.
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`Far from being feisty outsiders enabling ordinary people to build stock portfolios,
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`Robinhood’s founders transitioned their business model from selling sophisticated software
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`platforms to hedge funds and other high-frequency traders (“HFTs”), which allowed these
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`automated traders to profit from front-running ahead of other traders, to the much more lucrative
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`business of selling to various HFT market makers the orders placed by a subset of those other
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`traders – the unsuspecting neophytes that represent the majority of Robinhood’s customers.
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`4.
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`The events of late January and early February 2021 do not tell the story of how
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`disruptive technology empowered investors but, rather, about how a selective denial of access to
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`that technology for more than a week wiped out tens of billions of dollars of investors’ equity. As
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`set forth in detail below, Robinhood’s actions were unique among retail brokers:
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`• Robinhood, and only Robinhood, halted trading and/or restricted purchases and/or
`holdings of multiple stocks for more than a single trading session – January 28th –
`extending some of its restrictions for six trading sessions, through February 4th
`• On January 29th, when other retail brokers had already removed any share
`purchasing restrictions in force on January 28th, Robinhood increased the number
`of issuers subject to restrictions – from 13 to 23 to 50 – and did not limit the issuers
`affected to so-called “meme stocks”, ultimately including Starbucks and General
`Motors
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`2
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`• On January 29th, Robinhood reduced the number of shares a customer could
`purchase and hold in various issuers multiple times over the course of a single
`trading session, causing price declines in the market prices of those stocks in the
`wake of those restrictions
`• Even after raising a $3.4 billion capital cushion against the risk of unsettled
`positions in its portfolio, Robinhood slowly released its restrictions over the course
`of the trading week to avoid a repeat of the price rebound on January 29th that
`Robinhood actively tamped down with its additional restrictions
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`Robinhood’s singular actions distorted the prices of the Affected Stocks for more
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`5.
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`than a week because of its domination of the online retail brokerage industry. Robinhood, which
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`claims to have opened nearly 50% of all retail brokerage accounts in the past five years,1 boasted
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`an industry-leading 12.5 million online accounts by the end of 2020 and added another 3 million
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`during the month of January 2021. By one estimate, approximately 4% of all shares traded in the
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`U.S. in January 2021 were traded on the Robinhood app.2
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`6.
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`With its brazen behavior – picking and choosing over six trading sessions not only
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`which stocks its customers could purchase but also the total amount of shares in a particular issuer
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`a customer could hold – Robinhood thumbed its nose at the bedrock principle of our free-market
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`economy: the price of a stock is set by the law of supply and demand, unfettered by external
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`controls.
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`7.
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`Only in rare instances of extreme price volatility, and in accordance with a SEC-
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`regulated plan, would all trading be halted in a particular issuer, and even then for only a few
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`minutes at a time. By completely shutting down, initially, and later restricting, the demand side of
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`the equation for the nine Affected Stocks in the accounts of more than 15 million very active
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` 1
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` Robinhood Markets, Inc. S-1, filed July 1, 2021, at 2.
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` 2
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` Caitlin McCabe, “It Isn’t Just AMC. Retail Traders Increase Pull in the Stock Market,” The
`Wall Street Journal (June 18, 2021).
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`traders,3 for days rather than just minutes, Robinhood unlawfully manipulated market prices for
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`the Affected Stocks.
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`8.
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`Although it was relatively unknown to a national audience before January 28, 2021,
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`Robinhood’s name was on everyone’s lips after it roiled the markets for the Affected Stocks
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`through the unique and extreme actions it took that day. Not only were there immediate calls for
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`government investigations, and questions raised about whether Robinhood colluded with hedge
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`funds and market makers to stop an alleged short squeeze by retail investors (Robinhood’s own
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`customer base), but the impact that this single online broker had on the markets suddenly
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`demonstrated Robinhood’s significant market power.
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`9.
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` Apparently, the adage “no publicity is bad publicity” is true. Despite being
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`pilloried by many in government and in the press, online, and over the airwaves, Robinhood
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`became a venture capital darling overnight. By February 1st, only four days after its severe
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`undercapitalization almost caused Robinhood to close its doors as a result of a major liquidity
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`crisis, Robinhood had raised $3.4 billion in 96 hours – significantly more that it had raised in the
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`eight years since its founding. One of those lining up to inject capital saw Robinhood’s new
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`customer metrics and concluded: “Robinhood is still the only game in town.” While the national
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`exposure delivered a critical funding boost that propelled Robinhood to its initial public offering
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`(“IPO”) in the summer of 2021, Class period investors, many of whom did not trade on the
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`Robinhood app, were left with staggering losses.
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` 3
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` 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 Schwab. See Nathaniel Popper, “Robinhood Has Lured Young Traders, Sometimes With
`Devastating Results,” The New York Times (July 8, 2020, last updated Sept. 25, 2021). The
`numbers are even more skewed with respect to risky options trading.
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`10.
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`Questions raised in the aftermath of the events described herein – who made money,
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`who lost money, was there collusion, who is to blame, how can we prevent a recurrence – have
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`been (and continue to be) the subject of Congressional hearings, several state investigations, at
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`least one Securities and Exchange Commission Staff investigation, and countless news reports and
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`articles. A spate of lawsuits pending before this Court arising from these events allege state law
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`claims and federal antitrust claims against Robinhood and others. One argument raised by the
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`defendants in the antitrust cases is that the actions complained of come under the purview of the
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`federal securities laws.4 Indeed they do.
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`11.
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`At the 2014 LAUNCH Festival in San Francisco, Robinhood Markets CEO
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`Vladimir Tenev challenged the supposition that “brokerages exist for the purpose of making
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`money,” claiming instead: “The purpose of Robinhood is to make buying and selling stocks as
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`frictionless as possible. So, if we make money as a side effect of that, you know, that’s great but
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`it will never be at the cost of introducing frictions between our customers and the markets.”
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`(Emphasis supplied.) From January 28th through February 4th substantial frictions between its
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`customers and the markets were the very cost Robinhood forced its customers, and consequently
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`other investors, to bear so that Robinhood’s founders and early investors could make a lot of money
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`in its upcoming IPO. These actions defrauded investors in violation of the Exchange Act of 1934.
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`12.
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`Throughout 2020 and in January 2021, Robinhood whipped up a frenzy of trading
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`and then shut it down, unevenly reopening the demand spigot over the course of a week, directly
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`affecting the markets’ bid-offer pricing mechanism for the Affected Stocks. As set forth in greater
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` 4
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` Defs.’ Motion to Dismiss the Antitrust Tranche Complaint and Incorporated Memorandum of
`Law at 33-38. (Dk. 408). Defendants’ “either/or” argument is puzzling; multiple laws may be
`violated by the same course of conduct.
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`detail below, with a lucrative IPO already being planned, Robinhood manipulated the share prices
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`of the Affected Stocks to avoid liquidation due to an inability to pay its core charges and excess
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`net capital charges to the NSCC:
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`(a)
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`On January 28th, only a combination of disabling the “buy” button for eight
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`(soon thereafter, 13) stocks and the NSCC waiving the excess capital premium charge –
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`more than $2.2 billion of the $3.7 billion deposit requested that day – temporarily solved
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`what Robinhood Markets’ COO described as a “major liquidity issue”. However, the
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`NSCC only used its discretion to waive excess capital premium charges until February 1st,
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`the two days it took transactions from January 27th and January 28th to clear.
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`(b)
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`On January 29th, when all other brokers lifted stock purchase restrictions
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`and Robinhood started to do the same, the prices of the Affected Securities rebounded so
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`strongly that Robinhood – which had only raised capital of $1 billion on January 28th –
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`realized that it would be unable to meet an excess capital premium charge on February 2nd
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`for the trading on its platform on January 29th and could once again face a major liquidity
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`issue. For this reason, at several points throughout the trading day Robinhood – the only
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`retail broker still restricting stock purchases – not only tightened the purchase restrictions
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`(with some issuers down to just one share) but increased the number of issuers to which
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`restrictions applied from 13 to 23 to 50.
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`(c)
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`Over the weekend, Robinhood raised an additional $2.4 billion of capital,
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`which could prevent the NSCC from assessing steep excess capital premium charges for
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`the January 29th transactions. At that point, Robinhood started the process of easing
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`purchase restrictions, a process it dragged out over several days so that Robinhood could
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`avoid a sharp increase in risk in its unsettled portfolio akin to what it had experienced on
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`January 29th when its partial lifting of restrictions caused an upward price spike in the share
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`prices of the Affected Stocks.
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`13.
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`Robinhood knew the prices of the Affected Stocks would plummet because of its
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`purchase restrictions:
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`(a)
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`As early as January 23rd, Robinhood executives were analyzing the impact
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`of making margin calls on its customers with respect to their GameStop positions. They
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`knew that their customers – most of who were just starting on their investment journey –
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`would not have the funds to meet the margin calls, which could force Robinhood to close
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`out their positions potentially exposing Robinhood to financial risk.
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`(b)
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`On January 26th, when the President and COO of Robinhood Securities, a
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`30-year industry veteran, alerted others that Robinhood Securities was moving GameStop
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`to 100% margin the next day, he started his communication with the statement “I sold my
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`AMC today.” This seasoned securities industry executive was well aware (and informed
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`the others with his statement) that the result of the Robinhood’s introduction of frictions
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`between its customers and the markets – be it a margin call or a total inability to purchase
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`shares – would be a sharp decline in the price of the stocks subjected to the restrictions.
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`14.
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`Throughout the week it was artificially distorting the price of the Affected Stocks
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`Robinhood went to great lengths to convince investors that was not what was occurring. On
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`multiple occasions, Robinhood falsely assured investors that the national exchanges were free of
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`manipulation, to wit, that Robinhood’s actions were the same as its peers and simply part of any
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`retail broker’s “normal operations.” Robinhood even went as far as to blame our national markets’
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`failure to implement a real-time settlement system – something the CEO of the Depositary Trust
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`& Clearing Corporation testified would be unworkable and deprive financial markets of liquidity
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`– rather than its massive undercapitalization for the actions it took to distort the markets. These
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`representations were patently untrue – and Robinhood knew it.
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`15.
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`The frictions between its customers and the markets introduced and maintained by
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`Robinhood during the Class period, to ensure that its upcoming IPO was not derailed by a liquidity
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`crisis, are against the law. Tenev later rationalized Robinhood’s actions by claiming, during a
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`discussion with Dave Portnoy of Barstool Sports, that “[i]f Robinhood ceases to exist,” that would
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`have caused more harm. Thus, Tenev reasoned, “protecting the firm and protecting the system,
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`ultimately, that was the best thing for customers.” Even if Tenev were correct, unlawful actions
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`undertaken to ensure the survival of a company do not get a free pass under our nation’s federal
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`securities laws.
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`16. While our sympathies may lie with a lawbreaker such as the legendary Robin Hood,
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`who acted with a noble purpose, Robinhood’s greed must be met with justice for the investors it
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`harmed.
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`JURISDICTION AND VENUE
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`17.
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`The claims asserted herein arise under and pursuant to Sections 9(a) and 10(b) of
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`the Exchange Act and Rule 10b-5 promulgated thereunder.
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`18.
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`This Court has jurisdiction over the subject matter of this action pursuant to 28
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`U.S.C. § 1331, and Section 27 of the Exchange Act (15 U.S.C. §78aa).
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`19.
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`Venue is proper in this judicial district pursuant to 28 U.S.C. § 1391(b) and Section
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`27 of the Exchange Act (15 U.S.C. § 78aa(c)) because defendants conduct business in this District
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`and caused damages within this District. In addition, venue is proper in this District because the
`Judicial Panel for Multidistrict Litigation determined that the actions that are before this Court
`should be centralized in this District pursuant to 28 U.S.C. § 1407.
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`20.
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`In connection with the acts, conduct and other wrongs alleged in this complaint,
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`defendants, directly or indirectly, used the means and instrumentalities of interstate commerce,
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`including but not limited to, the United States mails, interstate telephone communications and the
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`facilities of national securities exchanges.
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`PARTIES
`Blue Laine-Beveridge, appointed by the Court as Lead Plaintiff (Dk. 420), owned
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`21.
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`shares of AMC and NOK at the close of the markets on January 27, 2021, and sold AMC shares
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`on Robinhood’s trading platform on February 3, 2021, and was economically damaged thereby.
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`22.
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`As set forth in detail in their certifications attached as Exhibit A hereto, plaintiffs
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`Abraham Huacuja, Ava Bernard, Brandon Martin, Brendan Clarke, Brian Harbison, Cecilia
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`Rivas, Garland Ragland Jr., Joseph Gurney, Santiago Gil Bohórquez, and Trevor Tarvis each
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`owned shares of one or more of the Affected Stocks at the close of the markets on January 27,
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`2021, and sold those shares at a loss on one or more days during the period from January 28, 2021,
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`to and including February 4, 2021, and were economically damaged thereby. Many, but not all,
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`of the Named Plaintiffs traded on the Robinhood platform.
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`23.
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`Defendant Robinhood Financial, LLC (Robinhood Financial) is a brokerage
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`company providing online and mobile application-based discount stock brokerage services that
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`allow users to invest in publicly traded companies and exchange-traded funds. Robinhood
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`Financial, LLC’s business address is 85 Willow Road, Menlo Park, CA 94025.
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`24.
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`Defendant Robinhood Securities, LLC (Robinhood Securities) is registered as a
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`broker-dealer with the SEC. Robinhood Securities, LLC acts as a clearing broker and clears trades
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`introduced by its affiliate Defendant Robinhood Financial. Robinhood Securities, LLC’s business
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`address is 500 Colonial Center Parkway, Suite 100, Lake Mary, FL 32746.
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`25.
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`Defendant Robinhood Markets, Inc. is the corporate parent of defendants
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`Robinhood Financial LLC and Robinhood Securities, LLC, both of which are wholly owned
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`subsidiaries of Robinhood Markets. Robinhood Markets, Inc.’s business address is 85 Willow
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`Road, Menlo Park, CA 94025.
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`26.
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`Robinhood Markets and its wholly owned subsidiaries operate as one entity, and
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`they are treated as one entity in Robinhood Markets’ IPO Registration Statement. See S-1,
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`Robinhood Markets, at F-7 (“Robinhood Markets, Inc. (‘RHM’, together with its subsidiaries,
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`‘Robinhood,’ the ‘Company,’ ‘we,’ or ‘us,’)”. The S-1 explains that “[t]he consolidated financial
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`statements include the accounts of RHM and its wholly-owned subsidiaries. All intercompany
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`balances and transactions have been eliminated.”). Id. at F-8. The S-1 also describes Robinhood
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`Markets and its subsidiaries as a “Vertically Integrated Platform.” Id. at 6.
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`27.
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`Robinhood Financial and Robinhood Securities are single member, limited
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`liability companies, with all tax effects of income or loss included in the tax returns of their parent,
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`Robinhood Markets.
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`28.
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`Robinhood Markets, Robinhood Financial and Robinhood Securities acted jointly
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`in the market manipulation that is alleged herein. See id. at 41 (explaining that “we temporarily
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`prevented our customers from purchasing certain specified securities”) (emphasis added).
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`29.
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`Unless specified, the named defendants are collectively referred to herein as the
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`“Robinhood”.
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`Background
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`SUBSTANTIVE ALLEGATIONS
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`30.
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`In 2011, Robinhood founders Vlad Tenev and Baiju Bhatt owned and operated
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`Chronos Research, a company that developed backend trading technology which increased the
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`speed of trade execution. That summer, the company introduced Zardoz, software platforms that
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`lowered tick-to-trade5 latencies to either five microseconds or fifteen microseconds. Chronos
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`Research’s products were created to enable hedge funds and other HFTs to use speed to obtain a
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`trading advantage over those without such high-end technology. In fact, HFTs are known to front-
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`run other traders and to exploit differences in the bid-ask spreads across multiple exchanges.
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`31.
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`Several months later, purportedly inspired by the Occupy Wall Street protests,
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`Bhatt and Tenev conceived the idea for Robinhood – a company whose stated mission is to
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`democratize investing by providing access to financial markets at no cost to its customers. In
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`1973, sculptor and videographer Richard Serra coined the phrase “if something is free, you’re the
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`product.” Although most of Robinhood’s revenues came from selling customer orders to HFT
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`market makers – the same firms for whom Chronos Research’s products were designed – for
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`much of its short life, Robinhood had gone to great lengths to hide that fact.
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`32.
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`Although it is now widely known that Robinhood’s revenues come from routing
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`its customers’ orders to a handful of market makers for execution – a practice known as “payment
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`for order flow” (“PFOF”) – a December 17, 2020, SEC Cease-and-Desist Order imposing a $65
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`million civil penalty exposed how Robinhood Financial had methodically altered its public
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`disclosures about PFOF for a number of years, with each adjustment moving farther away from
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`the truth:
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`(a)
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`Before the app launched, Robinhood had disclosed PFOF as a source of
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` 5
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` For HFTs, whose trades are automated, “tick-to-trade” is the response time between receiving a
`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.
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`revenue in its FAQ answer to the question “How does Robinhood make money?”;6
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`(b)
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`Apparently concerned about negative publicity surrounding PFOF and
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`HFTs, by late 2014, PFOF was taken out of the answer to “How does Robinhood make
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`money?”, a prominent topic on the Robinhood Help Center webpage, and placed
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`elsewhere. There, Robinhood described PFOF revenue as “indirect” and “negligible” and
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`stated that PFOF would be moved to the “How does Robinhood make money?” page if
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`PFOF became a direct or significant source of revenue.7
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`(c)
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`Although PFOF made up 80% of Robinhood’s income through mid-2016,
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`PFOF was never disclosed as a revenue source, as had been promised, in the answer on the
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`“How does Robinhood make money?” FAQ page. To the contrary, at some point during
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`2016, Robinhood removed all reference to PFOF from its website and even trained those
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`responding to inquiries that PFOF as a source of revenues was an “incorrect” answer to a
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`question about how Robinhood makes money. This deception continued through late 2018,
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`despite PFOF being Robinhood’s largest revenue source.8
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` 6
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` 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.
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` 7
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` 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”
`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
`had some language saying that we intended to generate revenue through PFOF. The reason we
`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
`indirectly generate from it is negligible. If we were ever to receive it directly, or if it becomes a
`significant source of
`revenue, we will
`reintroduce
`that
`language
`into
`the FAQ.”
`(https://web.archive.org/web/20160412113038/https://support.robinhood.com/hc/en-
`us/articles/204336175-Order-Routing-and-Exchanges, last accessed November 29, 2021).
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` SEC C&D Order, Finding of Fact Nos. 18, 27, 31-36.
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`33.
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`The SEC also found that Robinhood Financial knowingly violated its duty of “best
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`execution” for customer orders by routing trades only to executing brokers that would split the
`
`PFOF 80% to Robinhood and only 20% to price reduction for customers, a reverse of the split
`
`paid to large retail broker-dealers.9 Not surprisingly, an extensive internal analysis conducted by
`
`Robinhood in March 2019 bluntly concluded: “ ‘[n]o matter how we cut the data, our % orders
`
`receiving price improvement lags behind that of other retail brokerages by a wide margin.’ ” The
`
`SEC continued: “Robinhood further found that the amount of price improvement obtained for
`
`Robinhood customers was far lower than at competing broker-dealers, measured on a per order,
`
`per share, and per dollar traded basis. Senior Robinhood personnel were aware of this analysis.”
`
`Although Robinhood had a Best Execution Committee, from 2016 to 2019 it did nothing to either
`
`assess or address whether Robinhood was breaching its duty of best execution.10
`
`34.
`
`Even though PFOF is banned in other countries because of the inherent conflicts
`
`it poses – including, in addition to a brokerage firm pocketing most of the payment, market maker
`
`front-running and broker inducements to increase customers’ trading frequency11 – since 1994,
`
`
`
`
`
` 9
`
` Id. at Finding of Fact Nos. 21-23, 27. A September 2018 article on Seeking Alpha first noted key
`differences in PFOF payment reporting in SEC Rule 606 filings. Author Logan Kane queried:
`“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
`other brokerages. This raises questions about the quality of execution that Robinhood provides if
`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
`November 29, 2021).
`
`10 SEC C&D Order, Finding of Fact Nos. 29, 30 & 39.
`
`11 Robinhood’s “gamification” of its app to induce frequent trading is under scrutiny by the SEC.
`See https://www.sec.gov/rules/other/2021/34-92766.pdf.
`
`
`13
`
`
`

`

`Case 1:21-md-02989-CMA Document 446 Entered on FLSD Docket 11/30/2021 Page 15 of 75
`
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`the SEC has instead opted for full disclosure of PFOF and adherence to a broker’s duty of best
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`execution for its customers. As laid out in detail by the SEC, even before the events of late January
`
`and early February 2021 unfolded, Robinhood had already failed its customers spectacularly on
`
`both measures. But the worst was yet to come.
`
`35.
`
`During the pandemic lockdown, with stimulus checks in one hand and time on
`
`both hands, large numbers of Americans started to follow the markets and trade for the first time.
`
`The popularity of mobile app-based brokers such as Robinhood exploded among younger, first-
`
`time traders.12 Social media sites such as the WallStreetBets sub-Reddit and Stocktwit provided
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`millions of new investors with a platform to discuss investment strategy and the merits of trading
`
`in particular stocks. Not surprisingly, retail trading surged tremendously. On several occasions in
`
`2020, Robinhood’s platform crashed due to the steep increase in trading volume, causing millions
`
`of dollars in investor losses.13
`
`36.
`
`The extent to which novice, retail traders entered the market during the pandemic
`
`was detailed in a recent SEC Staff Report. Notable statistics include:
`
`(a)
`
` During 2020, the 60-day moving average of off-exchange market volume,
`
`i.e., trades routed through wholesalers instead of being executed on an established
`
`
`
`
`12 Robinhood, whose investors’ median age is 31, seeks to drive that figure even lower. In
`“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
`students $15 to sign up, with five lucky customers to receive $20,000 for tuition.
`
`13 Failure to supervise the technology relied upon to provide core broker-dealer services caused
`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 “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-financial-penalties-against-robinhood-financial last accessed November 29, 2021).
`
`
`14
`
`
`

`

`Case 1:21-md-02989-CMA Document 446 Entered on FLSD Docket 11/30/2021 Page 16 of 75
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`
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`exchange (deemed to be a proxy for retail trading), increased from 38.4% on March 23 to
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`46.5% at the end of the 2020, with the single-day percentage exceeding 50% for the first
`
`time on December 23, 2020, at 50.4%.14
`
`(b)
`
`Trading in single option contracts in the 50 most-traded stocks rose from
`
`10% to 14% in a matter of months, with number of contracts trading per day increasing
`
`from 19.6 million in December 2019 to 34.3 million in December 2020.15
`
`(c)
`
`In December 2020, over the counter, non-exchange listed equity volume
`
`(including “penny” stocks) surged, with a daily average of nearly 50 billion shares,
`
`compared to roughly 14.7 billion shares per day in November 2020, which had been the
`
`most active month over the prior two years.16
`
`37.
`
`This enormous growth in online retail trading corresponded to the destruction of
`
`many of the guardrails established by government entities and by self-regulatory organizations to
`
`protect investors. As explained on its website, FINRA is “authorized by Congress to protect
`
`America’s investors by making sure the broker-dealer industry operates fairly and honestly.” One
`
`rule enacted to protect investors, Rule 2111, sets standards for investment recommendations to
`
`customers, providing, in relevant part:
`
` A member or an associated person must have a reasonable basis to believe
`(a)
`that a recommended transaction or investment strategy involving a security or
`securities is suitable for the customer, based on the information obtained through the
`reasonable diligence of the member or associated person to ascertain the customer’s
`
`
`
`14 SEC “Staff Report on Equity and Options Market Structure Conditions in Early 2021,” at 16 n.
`51 (Oct. 14, 2021) (“SEC Staff Report”) (https://www.sec.gov/files/staff-report-equity-options-
`market-struction-conditio