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