Case 1:21-md-02989-CMA Document 503 Entered on FLSD Docket 08/11/2022 Page 1 of 52
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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:
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`JANUARY 2021 SHORT SQUEEZE
`TRADING LITIGATION
`_________________________________/
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`This Document Relates to the Securities Tranche
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`ORDER
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`THIS CAUSE came before the Court on Defendants, Robinhood Markets, Inc.;
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`Robinhood Financial, LLC; and Robinhood Securities, LLC’s (collectively, “Robinhood[’s]”)
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`Motion to Dismiss the Federal Securities Tranche Complaint [ECF No. 449], filed on January 7,
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`2022. Plaintiffs filed a Response [ECF No. 454], to which Defendants filed a Reply [ECF No.
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`455]. The Court has carefully considered the Consolidated Class Action Complaint (“CCAC”)
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`[ECF No. 446], the parties’ written submissions, the record, and applicable law. For the following
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`reasons, the Motion is granted in part and denied in part.
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`INTRODUCTION
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`In January 2021, market volatility prompted regulators to raise deposit requirements for
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`clearing brokers, including Robinhood, to ensure that they could cover the costs of unexecuted
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`trades. Robinhood could not afford the new deposit requirements and sought another way to
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`appease regulators. It succeeded after regulators agreed to waive the deposit requirements so long
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`as Robinhood restricted its customers’ access to certain stocks.
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`What followed is disputed, but Plaintiffs characterize it as market manipulation. While
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`Robinhood agreed to restrict access to certain stocks, it did not want knowledge of its lack of
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`liquidity to become widespread because such information might undermine Robinhood’s
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`credibility with customers and investors alike. To divert the public’s attention away from
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`Robinhood’s lack of liquidity, Robinhood blamed market volatility for its restrictions and
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`vehemently denied any trouble with its own liquidity.
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`Now, Robinhood asks the Court to dismiss the pleading setting forth Plaintiffs’ market
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`manipulation theory. It relies on the unconventional nature of the theory, among other reasons, as
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`a basis for dismissal. Plaintiffs, in contrast, argue that irrespective of the theory’s unconventional
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`nature, it is sufficient that Robinhood’s alleged actions artificially affected supply and demand,
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`thereby depriving investors of an accurate picture of the market. The Court agrees with Plaintiffs
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`and explains further below.
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`I.
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`Robinhood’s History
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`BACKGROUND
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`In the wake of the Occupy Wall Street protests, Vlad Tenev and Baiju Bhatt came up with
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`an idea to democratize finance: Robinhood. (See CCAC ¶ 31). The two Robinhood founders set
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`out to create an application-based trading platform that would give anyone with a smart phone
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`access to public markets. (See id. ¶ 2). Its users joined a growing trend of lay traders, also known
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`as retail investors, who use online brokerage firms to trade securities. (See id. ¶¶ 2, 5, 8, 35, 37).
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`With Robinhood leading the pack, the online retail trading industry exploded, bringing markets to
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`consumers’ fingertips. (See id. ¶ 35).
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`Democratizing finance proved to be extremely lucrative. Robinhood earned millions of
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`dollars from a system called “payment for order flow” (“PFOF”). (Id. ¶ 32 (quotation marks
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`omitted)). PFOF is a revenue model whereby customers bid on securities through their brokerage
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`platform, but instead of taking the bid directly to an exchange, like the New York Stock Exchange
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`(NYSE) or NASDAQ, the broker brings the bid to a market maker. (See id.). Market makers
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`2
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`stand ready to buy or sell securities but typically respond to the bid with an ask price that, if
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`accepted, decreases or increases the return for the customer. (See Robinhood Fin., LLC, Securities
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`Act Release No. 10906, Exchange Act Release No. 90694, 2020 WL 7482170, at *3 (Dec. 17,
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`2020)).1 High volume trading makes PFOF extremely lucrative because market makers
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`compensate brokers for routing their customers’ orders to them –– hence “payment for order flow.”
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`(See CCAC ¶¶ 32, 49). For example, in 2020, Citadel Securities, a market maker, paid Robinhood
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`$326 million, up from $80.5 million in 2019. (See id. ¶ 49).
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`Market makers also route the trading data from Robinhood’s platform to high-frequency
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`traders (“HFTs”). (See id. ¶¶ 3, 33 n.9). HFTs use algorithms that automatically trade based on
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`existing trends. (See id. ¶ 30 n.5). Upon receiving bid data from market makers, HFTs front-run
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`the bid, anticipating the effect of the bid on the security’s price before the transaction is
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`consummated. (See id. ¶¶ 3, 30 n.5, 31, 34).
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`Robinhood’s popularity also reflected the growing trend of retail trading during the
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`COVID-19 pandemic. (See id. ¶ 35). Retail investors convened on social media sites, like Reddit
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`and Stockwit, “to discuss investment strategy and the merits of trading in particular stocks.” (Id.).
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`By December 2020, Robinhood claimed “to have opened nearly 50% of all retail brokerage
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`accounts in the past five years” and had a total of 12.5 million online accounts. (Id. ¶ 5 (footnote
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`call number omitted)). Before Robinhood would go on to add another 3 million accounts in
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`January 2021, the press reported in December that Robinhood had selected Goldman Sachs to
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`manage Robinhood’s initial public offering in 2021. (See id. ¶¶ 5, 39 (citation omitted)).
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`1 Federal Rule of Evidence 201(b)(2) allows the Court to take judicial notice of the Securities & Exchange
`Commission’s (“SEC[’s]”) cease-and-desist order, as well as other SEC publications.
`3
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`II.
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`The Short-Squeeze Crisis
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`Several prominent investors planted seeds of crisis in November 2020, when they
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`purchased shares in what became known as “meme stocks” or the “Affected Stocks.”2 (Id. ¶¶ 4,
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`40 (quotation marks omitted)). The investments pitted these well-known investors against several
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`hedge funds that took short positions in the meme stocks. (See id. ¶¶ 35, 40, 43). Melvin Capital
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`was one such hedge fund that took a short position in GameStop. (See id. ¶ 43).
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`Short positions derive from a belief that the price of a security is overvalued and will
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`eventually fall. To capitalize on this hunch, investors, known as short sellers, purchase a “short.”
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`(See id. ¶¶ 40–43, 70–72). The mechanics of a short are as follows: (1) an investor identifies a
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`security that it wants to short, such as a stock, and deposits capital, or margin, into a brokerage
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`account to cover the risk of loss associated with the short; (2) a lender loans the security to the
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`investor; (3) upon receiving the borrowed security, the investor sells it for a high price; and (4) the
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`investor waits until the anticipated drop in share price occurs and then repurchases the stock for
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`less than she sold it. (See Jan. 26, 2022 Order [ECF No. 453] 3 [hereinafter “Robinhood Tranche
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`Order”]).
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`Short positions may bear substantial risk. (See, e.g., CCAC ¶¶ 41–43). If the stock price
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`rises a little, the short seller loses money. (See, e.g., id. ¶ 41). If the stock price rises a lot, the
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`broker may issue a margin call, which requires that the short seller deposit more capital into its
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`brokerage account to minimize the risk of the rising stock. (See id. ¶¶ 38, 38 n.18, 42; see also
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`SEC, Staff Report on Equity and Options Market Structure Conditions in Early 2021, at 26 (Oct.
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`28, 2021), https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-
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`2 The “Affected Stocks” include AMC Entertainment Holdings, Inc. (“AMC”); Bed Bath & Beyond Inc.
`(“BBBY”); BlackBerry Ltd. (“BB”); Express Inc. (“EXPR”); GameStop Corp. (“GME”); Koss Corp.
`(“KOSS”); Tootsie Roll Industries Inc. (“TR”); and American Depositary Shares of foreign-issuers Nokia
`(“NOK”) and trivago N.V (“TRVG”). (See CCAC ¶¶ 1, 128).
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`early-2021.pdf (“SEC Staff Report”))). If the stock price continues to rise with no end in sight,
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`short sellers will capitulate and purchase the stock to cover their losses. (See CCAC ¶ 43). This
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`pattern results in a vicious cycle known as a short squeeze: (1) a stock’s price rises; (2) short sellers
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`purchase the stock to cover their losses; (3) short sellers’ capitulation causes the stock price to rise
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`further; (4) and other short sellers are forced to purchase the stock; (5) sending the stock price
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`rising even further, and so on.
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`After noticing the contest between hedge funds and other investors, retail investors rallied
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`against the hedge funds. (See id. ¶¶ 40–41). Using a sub-Reddit thread called WallStreetBets as
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`a collective action platform, retail investors purchased millions of shares of GME, sending the
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`stock price soaring. (See id. ¶¶ 35, 40–43).
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`GME closed at $43.03 on January 21, 2021. (See id. ¶ 41). Twenty-four hours later, it
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`closed at $65.01. (See id.). By January 27, the share price reached $347.51. (See id. ¶ 121). The
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`skyrocketing share price created a short squeeze, which forced hedge funds, like Melvin Capital,
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`to take short positions in GME to quickly cover their losses. (See id. ¶ 43). Despite receiving two
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`loans for $750 million and $2 billion each, Melvin Capital had to close out its short position. (See
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`id.).
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`III. Robinhood’s Reckoning: January 28 – February 2, 2021
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`Hedge funds were not alone. The short squeeze forced Robinhood to reckon with its
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`newfound popularity. Specifically, the short squeeze created volatile market conditions that forced
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`the National Securities Clearing Corporation (“NSCC”) to impose higher collateral requirements
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`on Robinhood (see id. ¶ 58) — requirements that Robinhood could not meet.
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`Before delving into how the collateral requirements affected Robinhood, it is worth pausing
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`to explain the NSCC’s role in this matter. The NSCC is a national clearing agency regulated by
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`the SEC that provides services to its clearinghouse members, including Robinhood Securities. (See
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`Robinhood Tranche Order 3 n.7). Among its services, the NSCC guarantees that clearinghouses
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`will complete securities transactions. (See id.). To ensure that it can guarantee the transaction, the
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`NSCC imposes collateral requirements on its members. (See id.). These collateral requirements
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`create the capital necessary for clearinghouses to complete a trade. (See id.). The NSCC imposes
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`higher collateral requirements for volatile stocks. (See CCAC ¶¶ 12, 58).
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`Market volatility affects two components of the collateral requirements: the core clearing
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`fund charge and excess capital premium charge. (See id. ¶¶ 58–59). The core clearing fund charge
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`also encompasses a value at risk (“VaR”) charge, which the NSCC calculates based on the
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`estimated risk in the member’s portfolio. (See id. ¶ 58). The excess capital premium charge is the
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`difference between the member’s excess net capital and its core clearing fund charge. (See id.).
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`“The more the core charges exceed the member’s capital cushion, the larger the [excess] capital
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`premium charge. To avoid incurring the latter charge the member must either reduce the level of
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`risk or raise additional capital.” (Id. (alteration added; footnote call number omitted)).
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`Robinhood knew that its collateral requirements would rise. (See id. ¶¶ 44–47). Not only
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`had it become the most downloaded application on the App Store (see id. ¶ 47), it also predicted
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`having to raise margin requirements on its users (see id. ¶ 42). It was right.
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`Robinhood raised margin requirements for GME to 80% on January 26, 2021. (See id. ¶
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`47). Later that day, Jim Swartwout, Robinhood Securities’ President and Chief Operating Officer,
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`told his staff that he “sold [his] AMC today. FYI — tomorrow morning we are moving GME to
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`100% — so you are aware.” (Id. ¶ 47 n.24 (alteration added; citation and quotation marks
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`omitted)). Sure enough, on January 27, 2021, Robinhood moved GME to 100% margin. (See id.
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`¶ 47). Despite its efforts, Robinhood knew its collateral requirements would still rise.
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`On January 28, 2021, in anticipation of the NSCC’s deposit requirements, Robinhood
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`imposed a position closing only (“PCO”) restriction on GME and AMC options with an expiration
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`of January 29, 2021. (See id. ¶ 52). This meant that option holders could only sell their options.
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`Despite Robinhood’s preemptive attempt to decrease its deposit requirements, the NSCC requested
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`that Robinhood deposit $3.7 billion to ensure that it could complete its unsettled trades. (See id. ¶
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`58).
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`The $3.7 billion deposit proved too much. Robinhood Markets’ Chief Operating Officer,
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`Gretchen Howard, sent an email describing the circumstances as a “major liquidity issue” and
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`moved eight stocks — AMC, GME, NOK, BB, NAKD, KOSS, EXPR and BBBY — to PCO; no
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`Robinhood user could purchase these stocks. (Id. ¶ 59 (quotation marks omitted)). After
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`Robinhood promised to maintain the PCO restriction on stocks “that had driven the increased
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`deposit requirements,” the NSCC waived Robinhood’s capital premium charge through February
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`1, 2021. (Id. ¶ 60 (quotation marks and footnote call number omitted)).3
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`Robinhood notified its customers that several stocks had been moved to PCO but failed to
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`apprise investors that it had also closed out existing options (see id. ¶ 52)4 and cancelled orders
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`after markets closed on January 27 (see id. ¶ 62). Instead, customers received an abbreviated
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`explanation of Robinhood’s actions:
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`3 According to Michael Bodson, Chief Executive Officer of the Depository Trust and Clearing Corporation
`(“DTCC”) that oversees the NSCC, the NSCC never “instruct[ed] any clearing member to impose
`restrictions during the market volatility events of late January.” (CCAC ¶ 60 n.37 (alteration added; citation
`and quotation marks omitted)).
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` The CCAC does not specify whether Robinhood cancelled put or call options. Call options give the buyer
`the ability to pay a premium to purchase a security at a certain price, known as a strike price. (See SEC
`Staff Report 5 n.5). Put options are the opposite: they give the purchaser the ability to sell the security at
`the strike price. (See SEC, Investor Bulletin: An Introduction to Options (Mar. 18, 2015)
`https://www.sec.gov/oiea/investor-alerts-bulletins/ib_introductionoptions). While the CCAC is silent on
`this point, the SEC’s report suggests that call options contributed to the short squeeze. (See SEC Staff
`Report 29, 43, 43 n.117).
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`(Id. ¶ 76).
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`Robinhood’s trading restrictions prompted immediate outrage from investors and elected
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`officials alike. (See id. ¶ 69). Many speculated that Robinhood had imposed the restrictions to
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`appease hedge funds, including Robinhood’s largest source of revenue: Citadel Securities. (See
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`id. ¶ 70).
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`To assuage investors and onlookers, Tenev appeared on several news outlets, where he
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`made two notable statements. (See id. ¶¶ 77–80). First, he rejected the theory that Robinhood
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`issued the restrictions “at the direction of any market maker or hedge fund or anyone we route to
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`or any other market participants.” (Id. ¶ 77 (emphasis and footnote call number omitted)). Second,
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`he stated “[t]here was no liquidity problem” at Robinhood (id. ¶ 79 (alteration added; emphasis
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`omitted), instead attributing the restrictions to market volatility (see id. ¶ 78).
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`According to Plaintiffs, Tenev’s assurances led to a flurry of premarket trading activity on
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`the morning of January 29, 2021. (See id. ¶ 83). Investors believed Robinhood would lift the PCO
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`restrictions soon, a belief bolstered after Robinhood received $1 billion of investor financing. (See
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`id.). They were wrong.
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`Robinhood maintained restrictions on the numbers of shares and option contracts an
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`investor could purchase. (See id. ¶¶ 84–85). It continued to impose greater purchase restrictions
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`throughout January 29 as the Affected Stocks rebounded from the previous day’s close price. (See
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`id. ¶ 85). The Affected Stocks were not alone; Robinhood subjected other issuers, such as
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`Starbucks and General Motors, to purchase restrictions. (See id. ¶ 87).
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`Once again, reactions to the restrictions prompted Tenev to appear on media outlets to
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`pacify outraged investors and onlookers. This time he directed viewers’ focus to other brokers
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`and financial institutions, claiming the trade restrictions were commonplace and “just a standard
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`part of practices in the brokerage industry and the broader financial industry.” (Id. ¶ 92). But
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`unlike other institutions, Robinhood imposed broader restrictions that coincided with price dips in
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`the restricted stocks. (See id. ¶¶ 87, 90, 93).
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`Tenev continued damage control throughout the weekend, on January 30 and 31. He
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`maintained that Robinhood simply followed standard industry practices and was not in the pocket
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`of institutional investors like Citadel Securities. (See id. ¶¶ 98–100). When asked by Elon Musk
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`why Robinhood implemented a purchase-only restriction as opposed to a complete purchase-sale
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`restriction, Tenev stated it would be “categorically worse” to restrict both purchases and sales
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`because “[p]eople get really pissed off if they’re holding stock and they want to sell it and they
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`can’t.” (Id. ¶ 101 (alteration added; quotation marks omitted)). But other Robinhood employees
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`felt the PCO restriction would still result in outrage, noting that Robinhood would “get crucified
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`for pco-ing.” (Id. ¶ 102 n.60 (alteration adopted; citations and quotation marks omitted)).
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`The weekend also gave Robinhood time to build up capital in anticipation of fresh
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`collateral requirements from the NSCC. Robinhood raised $2.4 billion from venture capital funds
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`and consequently loosened trading restrictions on some, but not all, of the Affected Stocks going
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`into Monday, February 1, 2021. (See id. ¶¶ 107, 109–10).
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`The purchase restrictions eased further on February 2, 2021; still, some restrictions
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`remained in place. (See id. ¶¶ 112–13). Robinhood did not lift all restrictions until late in the day
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`on February 4, 2021. (See id. ¶ 121). Despite the delay and backlash, Robinhood’s “IPO [was]
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`full steam ahead.” (Id. ¶ 120 (alteration added; footnote call number and quotation marks
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`omitted)).
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`IV.
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`The Aftermath
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`Robinhood’s conduct left investors and onlookers disgruntled and concerned. (See id. ¶¶
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`80, 101–03, 119, 126). On February 23, 2021, the CEO of Barstool Sports, Dave Portnoy, outlined
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`the frustrations during an interview with Tenev. (See id. ¶ 80).
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`First, Portnoy probed Robinhood’s liquidity. He asked Tenev whether Robinhood would
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`have permitted trading to continue absent the NSCC’s initial deposit requirements. (See id.).
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`Tenev conceded that under such circumstances, Robinhood would have allowed trading to
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`continue. (See id.). Portnoy pointed out that Tenev’s answer suggested Robinhood had a liquidity
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`problem (see id.) — a problem Tenev had previously denied (see, e.g., id. ¶ 79 (“There was no
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`liquidity problem.” (emphasis and quotation marks omitted)). Tenev initially resisted Portnoy’s
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`observation but conceded that Robinhood might have experienced a liquidity crisis if it had not
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`restricted trading. (See id. ¶ 80).
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`Second, Portnoy asked why Robinhood had instituted purchase-only restrictions instead of
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`a complete freeze on meme stock trading. (See id. ¶ 103). Tenev had previously told Elon Musk
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`that Robinhood implemented PCOs to avoid “piss[ing] off” customers eager to sell (id. ¶ 101
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`(alteration added; quotation marks omitted)); to Portnoy, Tenev changed his answer and conceded
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`that the PCO restrictions allowed Robinhood to mitigate its deposit requirements (see id. ¶ 103).
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`In particular, Tenev stated that restricting sales, as opposed to purchases, would not have
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`decreased Robinhood’s VaR charges from the NSCC. (See id. (“The VaR formula was in this case
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`driven by the one-sided long position, so it actually wouldn’t help us; wouldn’t help the deposit
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`requirements to restrict selling in this case[.]” (alteration added))).
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`Five months after Tenev’s interview with Portnoy, Robinhood went public at $38 per share.
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`(See id. ¶ 126). After the IPO ceremony, Tenev responded to questions about the short squeeze,
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`stating that Robinhood had “learned a lot” and improved certain services to make it “easier for
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`customers that want to come back to the service[.]” (Id. (alteration added)). Tenev also noted that
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`“it’s been an amazing six months and it really [sic] 18 months and much, much more than that[.]”
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`(Id. (alteration added)).
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`Plaintiffs filed the CCAC against Defendants on November 30, 2021. (See generally id.).5
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`Plaintiffs all owned shares of at least one of the Affected Stocks at the close of markets on January
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`27, 2021 and sold those shares leading up to February 4, 2021. (See id. ¶¶ 21–22). Of the Plaintiffs,
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`only some used the Robinhood platform. (See id.).
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`The CCAC contains two claims for relief. Count I alleges that Robinhood manipulated the
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`prices of the Affected Stocks in violation of section 9(a) of the Securities Exchange Act of 1934.
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`(See id. ¶¶ 136–41).6 Count II alleges an identical theory, but it relies on section 10(b) and rule
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`10b-5 promulgated thereunder. (See id. ¶¶ 142–49).
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`Count I contains two subclaims under sections 9(a)(2) and 9(a)(4), respectively. (See id.
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`¶¶ 137–39; Resp. 32).7 Plaintiffs allege that Robinhood violated section 9(a)(2) by intentionally
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`manipulating the market to artificially depress the prices of the Affected Stocks. (See CCAC ¶
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`138; Resp. 32–37). As for section 9(a)(4), Plaintiffs allege that Robinhood misstated or omitted
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`material facts to mislead investors into thinking that it did not have a liquidity problem — a
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`problem that would cause Robinhood to lose investors, customers, money, and relatedly, the
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`5 The Plaintiffs are Blue Laine-Beveridge, Abraham Huacuja, Ava Bernard, Brandon Martin, Brendan
`Clarke, Brian Harbison, Cecilia Rivas, Garland Ragland Jr., Joseph Gurney, Santiago Gil Bóhorquez, and
`Trevor Tarvis. (See CCAC ¶¶ 21–22).
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` 6
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` Codified in 15 U.S.C. section 78i(a).
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` 7
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` 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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`chance at a lucrative initial public offering. (See CCAC ¶ 139; Resp. 37–46).
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`Count II alleges that Robinhood manipulated the market when it (1) raised margin
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`requirements (2) canceled purchase orders for the Affected Stocks, (3) closed out options in AMC
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`and GME early, and (4) prohibited and restricted purchases of the Affected Stocks on its platform.
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`(See CCAC ¶¶ 72, 143; Resp. 20).8 These actions allegedly “created a false impression of actual
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`demand for the Affected Stocks” and “artificially increased supply of the Affected Stocks[.]”
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`(Resp. 20 (alteration added)).
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`Defendants move to dismiss the CCAC for failure to satisfy the requisite pleading
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`requirements.
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`LEGAL STANDARDS
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`“To survive a motion to dismiss, a complaint must contain sufficient factual matter,
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`accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556
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`U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). Although
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`this pleading standard “does not require ‘detailed factual allegations,’ . . . it demands more than an
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`unadorned, the-defendant-unlawfully-harmed-me accusation.” Id. (alteration added; quoting
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`Twombly, 550 U.S. at 555). Pleadings must contain “more than labels and conclusions, and a
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`formulaic recitation of the elements of a cause of action will not do[.]” Twombly, 550 U.S. at 555
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`(alteration added). Indeed, “only a complaint that states a plausible claim for relief survives a
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`motion to dismiss.” Iqbal, 556 U.S. at 679 (citing Twombly, 550 U.S. at 556).
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`To meet this “plausibility standard,” a plaintiff must “plead[] factual content that allows
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`the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”
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`Id. at 678 (alteration added; citing Twombly, 550 U.S. at 556). When reviewing a motion to
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`8 Although Count II incorporates a claim under rule 10b-5, for brevity, the Court refers to Count II as the
`“section 10(b) claim.”
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`CASE NO. 21-2989-MDL-ALTONAGA/Torres
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`dismiss, a court must construe the complaint in the light most favorable to the plaintiff and take
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`the factual allegations therein as true. See Brooks v. Blue Cross & Blue Shield of Fla., Inc., 116
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`F.3d 1364, 1369 (11th Cir. 1997) (citing SEC v. ESM Grp., Inc., 835 F.2d 270, 272 (11th Cir.
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`1988)).
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`While run-of-the-mill complaints are adequate if they contain “a short and plain statement
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`of the claim showing that the pleader is entitled to relief[,]” Fed. R. Civ. P. 8(a)(2) (alteration
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`added), securities fraud claims are subject to the heightened pleading requirements of Federal Rule
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`of Civil Procedure 9(b), see Edward J. Goodman Life Income Tr. v. Jabil Cir., Inc., 594 F.3d 783,
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`789 (11th Cir. 2010) (citations omitted). Securities fraud claims therefore must state “with
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`particularity the circumstances constituting fraud[.]” Fed. R. Civ. P. 9(b) (alteration added). Rule
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`9(b) is satisfied if the complaint includes:
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`(1) precisely what statements were made in what documents or oral representations
`or what omissions were made, and (2) the time and place of each such statement
`and the person responsible for making (or, in the case of omissions, not making)
`same, and (3) the content of such statements and the manner in which they misled
`the plaintiff, and (4) what the defendants obtained as a consequence of the fraud.
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`Mizzaro v. Home Depot, Inc., 544 F.3d 1230, 1237 (11th Cir. 2008) (quotation marks omitted;
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`quoting Tello v. Dean Witter Reynolds, Inc., 494 F.3d 956, 972 (11th Cir. 2007)).
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`“[U]nder Rule 9(b), it is sufficient to plead the who, what, when, where, and how of the
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`allegedly false statements and then allege generally that those statements were made with the
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`requisite intent.” Id. (alteration added). The purpose for this degree of particularity is to “alert[]
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`defendants to the precise misconduct with which they are charged and protect[] defendants against
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`spurious charges of immoral and fraudulent behavior.” Durham v. Bus. Mgmt. Assocs., 847 F.2d
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`1505, 1511 (11th Cir. 1988) (alterations added; citation and quotation marks omitted).
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`The pleading requirements do not end with those found in Rule 9(b). Under the Private
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`Securities Litigation Reform Act of 1995 (“PSLRA”), Pub. L. No. 104-67, 109 Stat. 737 (1995)
`14
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`CASE NO. 21-2989-MDL-ALTONAGA/Torres
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`(codified as amended in scattered sections of 15 U.S.C.), a complaint must “specify each statement
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`alleged to have been misleading” and “the reason or reasons why the statement is misleading,” 15
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`U.S.C. § 78u–4(b)(1)(B). “[W]ith respect to each act or omission alleged[,]” the complaint must
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`also “state with particularity facts giving rise to a strong inference that the defendant acted with
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`the required state of mind.” Id. § 78u–4(b)(2)(A) (alterations added).
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`A “‘strong inference’ is one that is ‘cogent and at least as compelling as any opposing
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`inference one could draw from the facts alleged.’” Carvelli v. Ocwen Fin. Corp., 934 F.3d 1307,
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`1318 (11th Cir. 2019) (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324
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`(2007)). And the required state of mind, commonly referred to as scienter, “is an ‘intent to defraud
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`or severe recklessness on the part of the defendant.’” Id. (quoting FindWhat Inv. Grp. v.
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`FindWhat.com, 658 F.3d 1282, 1299 (11th Cir. 2011)). Scienter can be inferred from an aggregate
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`of the factual allegations. See id.
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`ANALYSIS
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`Plaintiffs’ market manipulation claims under sections 9(a)(2) and 10(b) satisfy the
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`heightened pleading requirements under the PSLRA and Rule 9(b) and thus may proceed. The
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`same cannot be said for Plaintiffs’ misstatement claim under section 9(a)(4). The Court explains.
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`I.
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`Section 9(a) Claims
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`Section 9(a) contains six subparts, each of which prohibits a different form of price
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`manipulation. See 15 U.S.C. §§ 78i(a)(1)–(6). While the CCAC does not identify which of the
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`sections Plaintiffs seek to recover under (see CCAC ¶¶ 136–41), the Response narrows the claims
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`to sections 9(a)(2) and 9(a)(4) (see Resp. 32). And while the section 9(a)(2) claim contains a
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`particularized theory of relief, Plaintiffs’ section 9(a)(4) claim falls short of demonstrating that
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`15
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`Robinhood misrepresented and omitted material facts for the purpose of inducing retail investors
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`into selling their shares.
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`a. Section 9(a)(2)
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`Section 9(a)(2) prohibits “any person” from effecting
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`alone or with 1 or more other persons, a series of transactions in any security
`registered on a national securities exchange, any security not so registered, or in
`connection with any security-based swap or security-based swap agreement with
`respect to such security creating actual or apparent active trading in such security,
`or raising or depressing the price of such security, for the purpose of inducing the
`purchase or sale of such security by others.
`
`15 U.S.C. § 78i(a)(2). The text of the statute reflects Congress’s choice to “outlaw every device
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`‘used to persuade the public that activity in a security is the reflection of a genuine demand instead
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`of a mirage.’” Crane Co. v. Westinghouse Air Brake Co., 419 F.2d 787, 794 (2d Cir. 1969)
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`(quoting 3 Loss, Securities Regulations 1549–55 (2d ed. 1961)).
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`A section 9(a)(2) cause of action consists of five elements:
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`(1) a series of transactions in a security creating actual or apparent trading in that
`security or raising or depressing the price of that security, (2) carried out with
`scienter, (3) for the purpose of inducing the security’s sale or purchase by others,
`[that] (4) was relied on by the plaintiff; (5) and affected plaintiff’s purchase or
`selling price.
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`Chemetron Corp. v. Bus. Funds, Inc., 682 F.2d 1149, 1164 (5th Cir. 1982) (alteration added;
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`footnote call numbers omitted), vacated on other grounds 460 U.S. 1007 (1983).
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`i. Transactions in a Security
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`Plaintiffs partially clear the first element. They allege that canceling purchase orders,
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`closing out options, restricting purchases, and liquidating customers’ shares of Affected Stocks
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`after raising capital requirements all co