`
`UNITED STATES DISTRICT COURT
`SOUTHERN DISTRICT OF FLORIDA
`
`CASE NO. 21-02989-MDL-ALTONAGA/Torres
`
`
`In re:
`
`JANUARY 2021 SHORT SQUEEZE
`TRADING LITIGATION
`_________________________________/
`
`This Document Relates to the Robinhood Tranche
`
`
`ORDER
`
`THIS CAUSE came before the Court on the Motion to Dismiss the Robinhood Tranche
`
`Complaint [ECF No. 421] filed by Defendants Robinhood Markets, Inc.; Robinhood Financial
`
`LLC; and Robinhood Securities, LLC (collectively, “Defendants” or “Robinhood”) on October
`
`15, 2021. Plaintiffs filed a Response in Opposition [ECF No. 436], and Defendants filed a Reply
`
`[ECF No. 439]. The Court has carefully considered the Amended Consolidated Class Action
`
`Complaint [ECF No. 409], the parties’ written submissions, the record, and applicable law.
`
`INTRODUCTION
`
`
`
`This case is about meme stocks.1 In January 2021, scores of retail investors rushed to
`
`purchase stocks that hedge funds and institutional investors had bet would decline in value, causing
`
`a dramatic increase in those stocks’ share prices. The mass rush to purchase these “meme stocks”
`
`led to a highly volatile securities trading market, with the prices of certain stocks varying wildly
`
`by the hour.
`
`
`1 The Securities and Exchange Commission (“SEC”) recently defined “meme stocks” as stocks that
`“experienced a dramatic increase in their share price in January 2021 as bullish sentiments of individual
`investors filled social media.” SEC, Staff Report on Equity and Options Market Structure Conditions in
`Early 2021, at 2 (Oct. 28, 2021), https://www.sec.gov/files/staff-report-equity-options-market-struction-
`conditions-early-2021.pdf.
`
`
`
`Case 1:21-md-02989-CMA Document 453 Entered on FLSD Docket 01/27/2022 Page 2 of 66
`
`CASE NO. 21-02989-MDL-ALTONAGA/Torres
`
`For securities brokers who execute investor trades, the regulatory environment became
`
`correspondingly unpredictable. In the securities trading industry, registered clearing brokers must
`
`meet daily deposit requirements set by self-regulatory organizations. The amount clearing brokers
`
`must deposit each day depends on the level of volatility in the securities they trade. The purpose
`
`of deposit requirements is to stabilize the marketplace and reduce the risk that market participants
`
`will prove unable to meet financial obligations related to securities trades.
`
`When meme stock share prices took off in January 2021, regulators reacted. In a span of
`
`three days, Robinhood Securities, a clearing broker, incurred both a deposit surplus of $11 million
`
`and a deposit deficit of over $3 billion. These oscillating collateral requirements were driven
`
`primarily by Robinhood customers’ concentrated positions in meme stocks. Robinhood Securities
`
`proved able to meet its daily deposit requirements each day up to January 28, 2021.
`
`Still, it and its affiliates — parent company Robinhood Markets and introducing broker
`
`Robinhood Financial — grew concerned about the rapidly changing circumstances. It then made
`
`the fateful decision to restrict purchases of the meme stocks on the Robinhood platform for a week.
`
`That decision helped fix Robinhood’s compliance quandary. But, Robinhood customers say, it
`
`also forced share prices of the meme stocks into a steep decline.
`
`Several of those customers sued Robinhood, and their suits were consolidated into this
`
`Multi-District Litigation.2 Robinhood now moves to dismiss. The Motion to Dismiss challenges
`
`whether any of Plaintiffs’ seven claims is viable.
`
`
`
`
`
`
`2 The Plaintiffs are Andrea Juncadella, Edward Goodan, William Makeham, Mark Sanders, Jaime
`Rodriguez, Patryk Krasowski, Cody Hill, Sammy Gonzalez, Joseph Daniluk, Jonathan Cornwell, Paul
`Prunean, and Julie Moody. (See Am. Compl. ¶¶ 29–84).
`2
`
`
`
`
`
`Case 1:21-md-02989-CMA Document 453 Entered on FLSD Docket 01/27/2022 Page 3 of 66
`
`CASE NO. 21-02989-MDL-ALTONAGA/Torres
`
`
`BACKGROUND
`
`I.
`
`The Mechanics of Securities Trading
`
`a. Securities Transactions
`
`A securities transaction involves several steps. A decision to invest in or disinvest from a
`
`particular security is referred to as taking a “position.” Positions may be long or short. A “long”
`
`position refers to the purchase of a security based on the belief that its value will rise over time.
`
`Investors who take a long position on a security may close their position by selling the security.
`
`By contrast, a “short” position assumes that the price of the security will fall. (See Am.
`
`Compl. ¶ 106 n.8). Short position holders typically borrow a security from a lender, sell the
`
`security at a high price, and then purchase the security at a much lower price before it is due back
`
`to the lender. (See id.). Short traders earn revenue from the difference between the purchase and
`
`sale prices of the shorted security. (See id.). If the price of the security increases between the time
`
`of the sale and repurchase, the short seller incurs a loss. (See id.).
`
`Investors may initiate a securities transaction by placing an order to buy or sell a security
`
`with an introducing broker. (See id. ¶¶ 89–90; Robinhood Financial LLC Form CRS Relationship
`
`Summ., Am. Compl. Ex. B [ECF No. 409-2] 2 [hereinafter CRS]).3 The introducing broker may
`
`choose to accept or reject the order. (See, e.g., Robinhood Financial LLC & Robinhood Securities,
`
`LLC Customer Agreement, Am. Compl. Ex. A [ECF No. 409-1] § 16 [hereinafter Cust. Agmt.]).
`
`If the introducing broker accepts an order, it sends the order to a clearing broker. (See Am. Compl.
`
`¶ 93; CRS 2).
`
`Clearing brokers forward accepted orders to “market makers” — firms that execute the
`
`orders. (Am. Compl. ¶ 140). In executing orders, market makers determine what prices investors
`
`
`3 The Court uses the pagination generated by the electronic CM/ECF database, which appears in the headers
`of all court filings.
`
`
`
`3
`
`
`
`Case 1:21-md-02989-CMA Document 453 Entered on FLSD Docket 01/27/2022 Page 4 of 66
`
`CASE NO. 21-02989-MDL-ALTONAGA/Torres
`
`will pay and receive. (See id.). Market makers profit by buying and selling the ordered securities
`
`for better prices than those investors pay or receive. (See id.). Thus, market makers pay brokers
`
`like Robinhood significant sums for the right to fill investors’ orders. (See id.). These payments
`
`are known in the industry as “payment for order flow.” (Id. ¶ 137; see id. ¶¶ 137–41). A
`
`consequence of this revenue structure is that brokers earn more the more that investors trade. (See
`
`id. ¶ 137).
`
`b. Regulation of Securities Markets
`
`After an order is executed, the clearing broker submits the trade to a clearinghouse for final
`
`clearance and settlement. (See id. ¶¶ 152–54). The National Securities Clearing Corporation
`
`(“NSCC”) is the main clearinghouse for securities traded in the United States. See Rules Relating
`
`to Confidentiality Requirements and Market Disruption Events, 86 Fed. Reg. 57,230 (Oct. 8,
`
`2021). The NSCC is part of a larger holding company called the Depository Trust & Clearing
`
`Corporation (“DTCC”) that operates clearing agencies registered with the Securities and Exchange
`
`Commission (“SEC”), the independent agency authorized to regulate U.S. financial markets. See
`
`id.; 15 U.S.C. § 78d.
`
`Securities trading can be risky. Sometimes, market participants will be unable to meet
`
`obligations in connection with their trades. (See, e.g., Am. Compl. ¶ 158). This possibility creates
`
`risks not just for the parties to a particular transaction, but also for the market as a whole. (See
`
`id.). In part for that reason, the securities trading industry is heavily regulated.
`
`The DTCC plays an important role in mitigating systemic risk to securities markets. It
`
`“keeps a record of the stocks owned through the clearing brokerage firms for NSCC members”
`
`and imposes daily deposit requirements on clearing brokers. (Id. ¶ 152; see id. ¶ 156). The DTCC
`
`sets daily deposit requirements based on several volatility-based metrics. (See id. ¶¶ 156, 158).
`
`
`
`4
`
`
`
`Case 1:21-md-02989-CMA Document 453 Entered on FLSD Docket 01/27/2022 Page 5 of 66
`
`CASE NO. 21-02989-MDL-ALTONAGA/Torres
`
`For example, if the DTCC determines that certain securities are particularly risky, it may assign
`
`those securities a “volatility multiplier” that increases the amount of collateral a clearing broker
`
`must post. (Id. ¶ 156). Although the DTCC follows formulas in setting deposit requirements, it
`
`also retains discretion to depart from formulaic calculations. (See, e.g., id. ¶ 223). Clearing
`
`brokers must meet the deposit requirements set by the DTCC every trading day by 10:00 a.m. EST
`
`until their trades clear and settle. (See id. ¶ 156). A broker that fails to meet the DTCC’s daily
`
`requirements might suffer significant penalties, including the forced liquidation of its business.
`
`(See id. ¶ 155). The DTCC may also require intraday deposits. (See id. ¶¶ 209, 212).
`
`Securities brokers and dealers must comply with regulations issued by the Financial
`
`Industry Regulatory Authority, or “FINRA.” Although FINRA is a private nonprofit corporation,
`
`it is authorized by statute to regulate the trading of certain types of securities. See 15 U.S.C. §
`
`78o-3(b). FINRA rules obligate members to “observe high standards of commercial honor and
`
`just and equitable principles of trade.” FINRA Rule 2010.4 FINRA also requires its members to
`
`design and implement supervisory systems that permit them to monitor and mitigate systemic
`
`risks. See FINRA Rule 3110; FINRA Rule 4370; (see also Am. Compl. ¶ 169). On March 18,
`
`2021, FINRA issued a notice announcing: “Fair dealing is a core principle that underlies many
`
`FINRA rules, and FINRA guidance repeatedly has emphasized the importance of preserving fair
`
`customer treatment, even during times of market stress.” FINRA Regulatory Notice 21-12.
`
`The SEC likewise issues regulations to sustain the health of securities markets. Brokers
`
`must comply with the SEC’s Net Capital Rule, which requires all registered brokers and dealers
`
`to “at all times have and maintain net capital no less than the greater of the highest minimum
`
`
`4 The Court takes judicial notice of FINRA regulations under Federal Rule of Evidence 201, subsections
`(b)(2) and (d). See Banco Safra S.A.-Cayman Islands Branch v. Samarco Mineracao S.A., 849 F. App’x
`289, 294 (2d Cir. 2021) (taking judicial notice of FINRA rules).
`5
`
`
`
`
`
`Case 1:21-md-02989-CMA Document 453 Entered on FLSD Docket 01/27/2022 Page 6 of 66
`
`CASE NO. 21-02989-MDL-ALTONAGA/Torres
`
`requirement applicable to its ratio requirement . . . and [to] otherwise not be ‘insolvent[.]’”
`
`17 C.F.R. § 240.15c3-1(a) (alterations added); see also id. § 240.17Ad-22. Ultimately, liquidity-
`
`focused regulations like the Net Capital Rule and the DTCC deposit requirements aim to preserve
`
`market stability and protect investors from broker defaults. (See Am. Compl. ¶¶ 158, 161).
`
`II.
`
`Robinhood and its Customers
`
`a. Robinhood’s Business Model and Compliance History
`
`Robinhood is a collection of financial services companies that prides itself on
`
`“democratiz[ing] finance” and providing “everyone [with] access to the financial system.” (Id. ¶¶
`
`1, 108 (alterations added; emphasis, citations, and quotation marks omitted)). Three Robinhood
`
`entities are relevant here. Robinhood Markets, Inc. is the parent company of Robinhood Financial
`
`LLC and Robinhood Securities, LLC. (See id. ¶¶ 85–94). Robinhood Financial is a customer-
`
`facing introducing broker that offers investors access to various types of financial assets on its
`
`electronic trading platform. (See id. ¶ 88). Robinhood Securities clears trades introduced to
`
`customers by Robinhood Financial. (See id. ¶ 93).
`
`Robinhood Financial and Robinhood Securities are registered brokers and FINRA
`
`members. (See id. ¶¶ 89, 92). Robinhood Securities is a member of the NSCC and DTCC. (See
`
`id. ¶ 92).
`
`In its effort to “democratize finance[,]” Robinhood provides customers with an electronic
`
`trading platform that caters to non-professional retail investors. (Id. ¶ 108 (alteration added;
`
`citation and quotation marks omitted)). Robinhood does not charge customers commissions for
`
`trades or require them to maintain account minimums to invest. (See id. ¶¶ 107, 109, 133).
`
`Because Robinhood does not charge commissions, it derives most of its revenue from payment for
`
`order flow. (See id. ¶¶ 142, 145).
`
`
`
`6
`
`
`
`Case 1:21-md-02989-CMA Document 453 Entered on FLSD Docket 01/27/2022 Page 7 of 66
`
`CASE NO. 21-02989-MDL-ALTONAGA/Torres
`
`Robinhood also offers customers various user-friendly educational resources. These tools
`
`include the “Robinhood Snacks” daily podcast with courses on the basics of investing; the
`
`“Robinhood Snacks” newsletter, which provides daily financial news to tens of millions of people;
`
`“Robinhood Learn,” a series of web publications with tutorials on investment fundamentals; and
`
`Robinhood’s “Gold” paid subscription service, which provides professional market research and
`
`data prepared by outside research firms like Morningstar and NASDAQ. (Id. ¶ 123 (citations and
`
`quotation marks omitted); CRS 2). Additionally, Robinhood provides its customers with cash
`
`management services that enable them to write checks, withdraw funds, and make payments with
`
`Robinhood-branded debit cards. (See Am. Compl. ¶ 123).
`
`
`
`Other features make Robinhood’s trading platform especially attractive to younger, less
`
`experienced investors who use smartphones. (See id. ¶ 133). The platform uses a variety of
`
`“behavioral nudges” and “gamification” features, including emojis, prizes, graphics, and
`
`animation. (Id. ¶¶ 128–29 (citation and quotation marks omitted)). For instance, traders might
`
`receive an image of falling confetti after making their first trade using Robinhood’s smartphone
`
`application. (See id. ¶ 130).
`
`Robinhood’s access-focused approach to facilitating trading has fueled rapid company
`
`growth. Between 2015 and today, Robinhood’s customer base increased from 500,000 to more
`
`than 31 million. (See id. ¶ 116). By the second quarter of 2021, Robinhood had 21 times the
`
`number of funded customer accounts than it did in 2016. (See id. ¶ 117).
`
`The Amended Complaint alleges that Robinhood was unprepared to scale up its business
`
`to then-current levels and connects this putative unpreparedness to a series of regulatory violations.
`
`(See id. ¶¶ 146–151). Between 2015 and 2016, Robinhood Financial violated FINRA rules by,
`
`among other things, failing to satisfy its obligations of best execution and to maintain supervisory
`
`
`
`7
`
`
`
`Case 1:21-md-02989-CMA Document 453 Entered on FLSD Docket 01/27/2022 Page 8 of 66
`
`CASE NO. 21-02989-MDL-ALTONAGA/Torres
`
`systems and procedures designed to satisfy those obligations. (See id. ¶ 149). FINRA fined
`
`Robinhood Financial $1,250,000 as a result. (See id. ¶ 148).
`
`In June 2021, FINRA again penalized Robinhood Financial, this time to the tune of $70
`
`million, after finding “systemic supervisory failures and significant harm suffered by millions of
`
`customers.” (Id. ¶ 146 (quotation marks omitted)). The acts and omisions pertained to
`
`Robinhood’s “false and misleading statements to customers, failure to supervise technology
`
`critical to providing customers with core broker-dealer services, and failure to create a reasonably
`
`designed business continuity plan[.]” (Id. ¶ 147 (alteration added; quotation marks omitted)). The
`
`$70 million fine was the largest financial penalty ever imposed by FINRA. (See id. ¶ 146).
`
`The Amended Complaint alleges that Robinhood’s reliance on payment for order flow
`
`“create[s] conflicts of interest” because Robinhood earns greater profit the more its customers
`
`trade. (Id. ¶ 144 (alteration added; citation and quotation marks omitted); see id. ¶ 137). It further
`
`alleges that Robinhood has designed its trading platform in a manner “intended to keep the
`
`attention of [Robinhood] users” and “draw inexperienced investors into risky trading.” (Id. ¶ 129
`
`(alteration added)). These features allegedly go beyond merely introducing investors to securities
`
`and executing trades. According to Plaintiffs, the Robinhood platform’s “gamified” features
`
`“encourage more rapid trading than a buy-and-hold approach[] and . . . recommend particular
`
`strategies, such as option trading or use of margin.” (Id. ¶ 131 (alterations added; citation and
`
`quotation marks omitted)).
`
`b. The Customer Agreement
`
`Robinhood requires its customers to enter into a Customer Agreement between the
`
`customer, Robinhood Financial, and Robinhood Securities.5 (See, e.g., id. ¶¶ 311, 328). Each of
`
`
`5 Robinhood Markets is not a party to the Customer Agreement. (See Cust. Agmt.; Mot. 21 n.8).
`
`
`
`
`8
`
`
`
`Case 1:21-md-02989-CMA Document 453 Entered on FLSD Docket 01/27/2022 Page 9 of 66
`
`CASE NO. 21-02989-MDL-ALTONAGA/Torres
`
`the Plaintiffs entered into the Customer Agreement. (See Am. Compl. ¶¶ 30, 34, 42, 47, 51, 55,
`
`61, 65, 69, 73, 77, 81, 311, 328). In it, they agreed to “appoint Robinhood Financial as [their]
`
`agent for the purpose of carrying out [their] directions to Robinhood Financial in accordance with
`
`the terms and conditions of th[e] Agreement and any attendant risks with respect to the purchase
`
`or sale of securities.” (Cust. Agmt. § 4 (alterations added)).
`
`The Customer Agreement suggests that customers bear responsibility for their own
`
`investment decisions on Robinhood’s platform. Investors who sign the Customer Agreement agree
`
`that their Robinhood accounts are “self-directed,” they are “solely responsible for any and all
`
`orders” made on their account, and their orders reflect their “own investment decisions[.]” (Cust.
`
`Agmt. § 5.A (alteration added)). They also agree that Robinhood Financial and Robinhood
`
`Securities do not “provide investment advice in connection with [the customer’s] Account” or
`
`“recommend any security, transaction or order[.]” (Id. (alterations added)).
`
`Several provisions of the Customer Agreement purport to reserve Robinhood’s discretion
`
`to accept customer orders and restrict customers’ abilities to trade on its platform. These are a few
`
`examples:
`
`• Robinhood Financial and Robinhood Securities “may at any time, at [their] sole discretion
`and without prior notice to [the customer] (i) prohibit or restrict [the customer’s] access to
`the use of the App or the Website or related services and . . . ability to trade, (ii) refuse to
`accept any of [the customer’s] transactions, (iii) refuse to execute any of [the customer’s]
`transactions, or (iv) terminate [the customer’s] Account.” (Id. § 16 (alterations added)).
`
`• Robinhood Financial and Robinhood Securities “may, in [their] discretion, prohibit or
`restrict the trading of securities, or the substitution of securities, in any of [the customer’s]
`Accounts.” (Id. (alterations added)).
`
`• Robinhood Financial and Robinhood Securities “may at any time, in [their] sole discretion
`and without prior notice . . . prohibit or restrict [the customer’s] ability to trade securities.”
`(Id. § 5.F (alterations added)).
`
`9
`
`
`
`
`
`
`
`
`
`
`
`Case 1:21-md-02989-CMA Document 453 Entered on FLSD Docket 01/27/2022 Page 10 of 66
`
`CASE NO. 21-02989-MDL-ALTONAGA/Torres
`
`Section 13 of the Customer Agreement is captioned “Market Volatility; Market Orders;
`
`Limit Orders; and Queued Orders.” (Id. § 13). Section 13 addresses what customers can expect
`
`in a volatile securities market. It provides: “Particularly during periods of high volume, illiquidity,
`
`fast movement or volatility in the marketplace, the execution price received may differ from the
`
`quote provided on entry of an order, and [customers] may receive partial executions of an order at
`
`different prices.” (Id. (alteration added)). Despite its caption, Section 13 does not state that it
`
`contains an exhaustive list of rights that Robinhood retains to address volatile market conditions.
`
`Finally, the Agreement contains a choice-of-law clause that states:
`
`This Agreement and all transactions made in [the customer’s] Account shall be
`governed by the laws of the State of California (regardless of the choice of law rules
`thereof), except to the extent governed by the federal securities laws, FINRA Rules,
`and the regulations, customs and usage of the exchanges or market (and its clearing
`house) on which transactions are executed.
`
`
`(Id. § 37.K (alteration added)).
`
`The Customer Agreement is attached to the Complaint.
`
`III. The Meme Stock Short Squeeze
`
`a. The Short Squeeze Drives Volatility and Large Daily Deposit Requirements
`
`Plaintiffs’ claims center around the rapidly shifting conditions of securities trading markets
`
`in January 2021. That month, many retail investors, including Plaintiffs, collectively began
`
`purchasing stocks that hedge funds were short selling. (See Am. Compl. ¶¶ 183–84). The mass
`
`rush to purchase these meme stocks upended many institutional investors’ and regulators’
`
`expectations and volatilized the securities trading market.6 (See id. ¶¶ 185, 191, 209, 213, 239).
`
`
`6 The “meme stocks” at issue in this case include GameStop Corporation (GME); Blackberry Ltd. (BB);
`Nokia (NOK); AMC Entertainment Holdings, Inc. (AMC); American Airlines Group, Inc. (AAL); Bed
`Bath & Beyond, Inc. (BBBY); Castor Maritime, Inc. (CTRM); Express, Inc. (EXPR); Koss Corporation
`(KOSS); Naked Brand Group Ltd. (NAKD); Sundial Growers, Inc. (SDNL); Tootsie Roll Industries, Inc.
`(TR); and Trivago NV (TRVG). (See Am. Compl. ¶ 4).
`
`
`
`
`10
`
`
`
`Case 1:21-md-02989-CMA Document 453 Entered on FLSD Docket 01/27/2022 Page 11 of 66
`
`CASE NO. 21-02989-MDL-ALTONAGA/Torres
`
`For example, the closing share price of GameStop Corporation (GME), a meme stock, increased
`
`by more than 707 percent between January 21 and January 27, 2021. (See id. ¶¶ 185, 191).
`
`The precipitously increasing value of the meme stocks resulted in a “short squeeze.” (Id.
`
`¶¶ 187–88). A short squeeze occurs when the price of a security that traders have taken short
`
`positions on begins rising, thus pressuring short traders to repurchase shares to prevent even greater
`
`losses. (See id.). In a short squeeze, investors who take long positions benefit from securities’
`
`rising prices, while short sellers risk incurring significant losses. (See id. ¶ 189). Market makers
`
`whose payments for order flow account for the majority of Robinhood’s revenue were among the
`
`investors who had taken short positions on the meme stocks. (See id. ¶ 190). Thus, according to
`
`Plaintiffs, the short squeeze pitted the interests of Robinhood’s retail-investor customer base
`
`against those of Robinhood’s revenue-generating clients. (See id.).
`
`As the squeeze progressed, Robinhood sensed that something was awry. One Robinhood
`
`“insider” suggested “consider[ing] the risks our customers face[,]” noting that “[a]lthough we
`
`don’t have a straightforward obligation here because our customers are self directed, the perception
`
`is that they are relatively inexperienced[.]” (Id. ¶ 195 (alterations added; emphases omitted)). On
`
`January 26, 2021, Jim Swartwout, Robinhood Securities’ President and COO, told others: “I sold
`
`my AMC today. FYI — tomorrow morning we are moving GME to 100% - so you are aware.”
`
`(Id. ¶ 12 (quotation marks omitted)).
`
`
`Throughout the Complaint, Plaintiffs refer to these stocks as the “Suspended Stocks,” while Defendants
`call them “meme stocks,” borrowing the phrase assigned to the stocks by popular and social media. At the
`time the market volatility began in January 2021, Robinhood had not yet suspended trading on its platform.
`Thus, the Court refers to the stocks as “meme stocks” here but alternates between the phrases “meme
`stocks” and “suspended stocks” as contextually appropriate.
`
`
`
`
`
`11
`
`
`
`Case 1:21-md-02989-CMA Document 453 Entered on FLSD Docket 01/27/2022 Page 12 of 66
`
`CASE NO. 21-02989-MDL-ALTONAGA/Torres
`
`Both AMC and GME are meme stocks. (See id. ¶ 4). On January 27, 2021, Robinhood
`
`broke its record for single-day app downloads and became the number one app on the Apple App
`
`Store for the first time. (See id. ¶ 203).
`
`
`
`The ongoing market volatility exposed Robinhood Securities to wildly fluctuating daily
`
`deposit requirements. On January 25, 2021, the NSCC informed Robinhood Securities that it had
`
`a deposit surplus exceeding $11 million. (See id. ¶ 208). Just two days later, the firm had a deposit
`
`deficit of roughly $407 million. (See id. ¶ 213).
`
`This volatility culminated early the next morning — January 28, 2021 — when the NSCC
`
`advised Robinhood Securities that its deposit deficit had ballooned to more than $3 billion. (See
`
`id. ¶ 215). The NSCC’s notice also warned that “[i]f an intraday call is made, all deficits must be
`
`received within one hour of the notification[.]” (Id. (alterations added; emphasis omitted)).
`
`Markets would not open for several more hours. (See id.; Resp. 23). In an internal communication,
`
`a Robinhood employee said, “We aren’t paying $3B worth.” (Am. Compl. ¶ 219 (emphasis and
`
`quotation marks omitted)).
`
`Plaintiffs suggest that Robinhood was never in real danger of having to pay the initial $3
`
`billion deficit because “[t]he DTCC was willing to work with Robinhood, adjust the premiums,
`
`and not let it fail.” (Id. ¶ 218 (alteration added); see also id. ¶ 234). The morning of January 28,
`
`Robinhood Markets Chief Operating Officer David Dusseault told colleagues in a Slack chat that
`
`Robinhood was “to [sic] big for [the NSCC] to actually shut us down.” (Id. ¶ 6 (second alteration
`
`added; emphasis, footnote call number, and quotation marks omitted)).
`
`
`
`
`
`
`
`
`
`12
`
`
`
`Case 1:21-md-02989-CMA Document 453 Entered on FLSD Docket 01/27/2022 Page 13 of 66
`
`CASE NO. 21-02989-MDL-ALTONAGA/Torres
`
`
`b. Robinhood’s Position Closing Only (“PCO”) Policy
`
`
`
`Several hours after receiving the NSCC’s notice, but before markets opened for the day,
`
`Robinhood elected to prohibit further purchases of some, but not all, of the meme stocks.7 (See
`
`id. ¶¶ 219–20). Although Plaintiffs allege that Swartwout, in his capacity as COO of Robinhood
`
`Securities, made the ultimate decision to restrict these stock purchases (see id. ¶ 28), they at times
`
`suggest that all three Defendants collectively made the decision (see id. ¶ 219).
`
`The initial restriction on purchases of the meme stocks was a “position closing only” or
`
`“PCO” restriction. (Id. ¶¶ 7, 15–16, 219–20, 240, 247). A PCO restriction permits customers to
`
`close out their positions on the restricted stocks by selling their holdings but prohibits them from
`
`purchasing new shares. (See id. ¶¶ 3, 7). The initial PCO restriction affected Plaintiffs. They and
`
`other Robinhood customers could not purchase shares of the meme stocks covered by the
`
`restriction on January 28. (See id. ¶¶ 240–41). And Robinhood notified those customers who had
`
`placed orders to purchase shares of those stocks the day before that their orders were cancelled.
`
`(See id. ¶¶ 242–44).
`
`
`
`Markets still had not opened on January 28 when the NSCC informed Robinhood Securities
`
`that it had waived the excess capital premium charge for the day, decreasing Robinhood Securities’
`
`deposit deficit to $1.4 billion. (See id. ¶ 223). Shortly after Robinhood Securities received the
`
`NSCC’s notice, Robinhood Securities’ Clearing Operations Manager wrote in a note, “We don’t
`
`have that either.” (Id. ¶ 224 (quotation marks omitted)). The NSCC reduced Robinhood’s deposit
`
`deficit “despite no change in the underlying factors that go into a calculation of the risk of the”
`
`
`7 The stocks covered by this initial restriction included GameStop Corporation; Blackberry Ltd.; Nokia,
`AMC Entertainment Holdings, Inc.; Bed Bath & Beyond, Inc.; Express, Inc.; Koss Corporation; and Naked
`Brand Group Ltd. (See Am. Compl. ¶ 220).
`
`
`
`13
`
`
`
`Case 1:21-md-02989-CMA Document 453 Entered on FLSD Docket 01/27/2022 Page 14 of 66
`
`CASE NO. 21-02989-MDL-ALTONAGA/Torres
`
`meme stocks. (Id. ¶ 223). The NSCC then further reduced the firm’s net deposit requirement —
`
`again before markets opened for the day — to roughly $734 million. (See id. ¶ 225).
`
`Robinhood met its revised deposit requirements shortly after 9 a.m. EST that morning.
`
`(See id. ¶ 235). Yet Robinhood kept its initial PCO restriction in place. (See id.). In the meantime,
`
`Robinhood Securities rushed to raise enough cash to meet clearinghouses’ rapidly evolving deposit
`
`requirements. (See id. ¶¶ 226–34). The firm managed to round up roughly $3.4 billion in a few
`
`days, including hundreds of millions of dollars borrowed from its parent, Robinhood Markets.
`
`(See id. ¶¶ 226–34, 265). Robinhood Securities drew some of these funds from several revolving,
`
`unsecured lines of credit with Robinhood Markets worth $550 million. (See id. ¶¶ 99, 232).
`
`
`
`Throughout the next week, Robinhood adjusted the restrictions placed on users. Later on
`
`January 28, Robinhood applied its PCO restriction to all of the meme stocks, citing “current market
`
`volatility.” (Id. ¶ 247 (quotation marks omitted); see id. ¶ 248). It raised margin requirements —
`
`the amount of the purchase price that an investor must pay in cash — for certain securities. (See
`
`id. ¶ 249). It also imposed limitations on long option contracts and capped the numbers of shares
`
`and options contracts that a user could hold in some securities. (See id. ¶ 259). On January 29,
`
`Robinhood permitted customers to purchase limited shares of most of the suspended stocks. (See
`
`id. ¶ 261).8
`
`
`
`The next day, the SEC released an investor alert summarizing the risks associated with
`
`short-term trading based on recommendations made on social media. See SEC, Thinking About
`
`Investing in the Latest Hot Stock? (Jan. 30, 2021), https://www.sec.gov/oiea/investor-alerts-and-
`
`bulletins/risks-short-term-trading-based-social-media-investor-alert (hereinafter SEC Invs. Alert).
`
`
`8 The only meme stock not covered by this restriction was Castor Maritime, Inc. (See Am. Compl. ¶¶ 4,
`261).
`
`
`
`
`14
`
`
`
`Case 1:21-md-02989-CMA Document 453 Entered on FLSD Docket 01/27/2022 Page 15 of 66
`
`CASE NO. 21-02989-MDL-ALTONAGA/Torres
`
`The Alert warned that “broker-dealers may reserve the ability to reject or limit customer
`
`transactions[,]” especially when “a transaction presents certain associated compliance or legal
`
`risks.” Id. (alteration added). It also noted that the flexibility to impose such restrictions “is
`
`typically discussed in the customer account agreement.”9 Id.
`
`Robinhood lifted all purchasing restrictions on February 5. (See Am. Compl. ¶ 266).
`
`Plaintiffs acknowledge that other broker-dealers imposed trading restrictions during the same
`
`week. (See id. ¶¶ 252–53). But they assert that Robinhood’s restrictions lasted longer and swept
`
`more broadly than those implemented by its peers. (See id.).
`
`
`
`Robinhood publicly explained its decision to impose the PCO restrictions. In a January
`
`28, 2021 blog post, Robinhood Markets’ Chief Executive Officer, Vlad Tenev, suggested that
`
`Robinhood had imposed the restrictions because of “market volatility[.]” (Id. ¶ 235 (alteration
`
`added; quotation marks omitted)). Tenev later testified before Congress that Robinhood imposed
`
`the restrictions “[i]n the face of . . . unprecedented volatility . . . to facilitate compliance with
`
`clearinghouse deposit requirements.”10 Hearing Before the H. Comm. on Fin. Servs., 117th Cong.
`
`8 (2021) (statement of Vlad Tenev, Chief Executive Officer, Robinhood Markets, Inc.) (alterations
`
`added),
`
`https://financialservices.house.gov/uploadedfiles/hhrg-117-ba00-wstate-tenevv-
`
`20210218.pdf.
`
`
`9 Federal Rule of Evidence 201(b)(2) allows the Court to take judicial notice of the SEC’s statement.
`
`10 The Amended Complaint references portions of Tenev’s testimony. (See Am. Compl. ¶ 235). The Court
`takes judicial notice of Tenev’s full statement to Congress under Federal Rules of Evidence 201 (b)(2) and
`(d). See D.A.M. v. Barr, 474 F. Supp. 3d 45, 55 n.12 (D.D.C. 2020); see also In re Healthsouth Corp. Secs.
`Litig., No. CV-98-J-2634-S, 2000 WL 34211319, at *2 (N.D. Ala. Dec. 13, 20