throbber
Case 1:21-md-02989-CMA Document 503 Entered on FLSD Docket 08/11/2022 Page 1 of 52
`
`UNITED STATES DISTRICT COURT
`SOUTHERN DISTRICT OF FLORIDA
`
`CASE NO. 21-2989-MDL-ALTONAGA/Torres
`
`
`In re:
`
`JANUARY 2021 SHORT SQUEEZE
`TRADING LITIGATION
`_________________________________/
`
`This Document Relates to the Securities Tranche
`
`
`ORDER
`
`THIS CAUSE came before the Court on Defendants, Robinhood Markets, Inc.;
`
`Robinhood Financial, LLC; and Robinhood Securities, LLC’s (collectively, “Robinhood[’s]”)
`
`Motion to Dismiss the Federal Securities Tranche Complaint [ECF No. 449], filed on January 7,
`
`2022. Plaintiffs filed a Response [ECF No. 454], to which Defendants filed a Reply [ECF No.
`
`455]. The Court has carefully considered the Consolidated Class Action Complaint (“CCAC”)
`
`[ECF No. 446], the parties’ written submissions, the record, and applicable law. For the following
`
`reasons, the Motion is granted in part and denied in part.
`
`INTRODUCTION
`
`In January 2021, market volatility prompted regulators to raise deposit requirements for
`
`clearing brokers, including Robinhood, to ensure that they could cover the costs of unexecuted
`
`trades. Robinhood could not afford the new deposit requirements and sought another way to
`
`appease regulators. It succeeded after regulators agreed to waive the deposit requirements so long
`
`as Robinhood restricted its customers’ access to certain stocks.
`
`What followed is disputed, but Plaintiffs characterize it as market manipulation. While
`
`Robinhood agreed to restrict access to certain stocks, it did not want knowledge of its lack of
`
`liquidity to become widespread because such information might undermine Robinhood’s
`
`

`

`Case 1:21-md-02989-CMA Document 503 Entered on FLSD Docket 08/11/2022 Page 2 of 52
`
`CASE NO. 21-2989-MDL-ALTONAGA/Torres
`
`credibility with customers and investors alike. To divert the public’s attention away from
`
`Robinhood’s lack of liquidity, Robinhood blamed market volatility for its restrictions and
`
`vehemently denied any trouble with its own liquidity.
`
`Now, Robinhood asks the Court to dismiss the pleading setting forth Plaintiffs’ market
`
`manipulation theory. It relies on the unconventional nature of the theory, among other reasons, as
`
`a basis for dismissal. Plaintiffs, in contrast, argue that irrespective of the theory’s unconventional
`
`nature, it is sufficient that Robinhood’s alleged actions artificially affected supply and demand,
`
`thereby depriving investors of an accurate picture of the market. The Court agrees with Plaintiffs
`
`and explains further below.
`
`I.
`
`Robinhood’s History
`
`BACKGROUND
`
`In the wake of the Occupy Wall Street protests, Vlad Tenev and Baiju Bhatt came up with
`
`an idea to democratize finance: Robinhood. (See CCAC ¶ 31). The two Robinhood founders set
`
`out to create an application-based trading platform that would give anyone with a smart phone
`
`access to public markets. (See id. ¶ 2). Its users joined a growing trend of lay traders, also known
`
`as retail investors, who use online brokerage firms to trade securities. (See id. ¶¶ 2, 5, 8, 35, 37).
`
`With Robinhood leading the pack, the online retail trading industry exploded, bringing markets to
`
`consumers’ fingertips. (See id. ¶ 35).
`
`Democratizing finance proved to be extremely lucrative. Robinhood earned millions of
`
`dollars from a system called “payment for order flow” (“PFOF”). (Id. ¶ 32 (quotation marks
`
`omitted)). PFOF is a revenue model whereby customers bid on securities through their brokerage
`
`platform, but instead of taking the bid directly to an exchange, like the New York Stock Exchange
`
`(NYSE) or NASDAQ, the broker brings the bid to a market maker. (See id.). Market makers
`
`
`
`2
`
`

`

`Case 1:21-md-02989-CMA Document 503 Entered on FLSD Docket 08/11/2022 Page 3 of 52
`
`CASE NO. 21-2989-MDL-ALTONAGA/Torres
`
`stand ready to buy or sell securities but typically respond to the bid with an ask price that, if
`
`accepted, decreases or increases the return for the customer. (See Robinhood Fin., LLC, Securities
`
`Act Release No. 10906, Exchange Act Release No. 90694, 2020 WL 7482170, at *3 (Dec. 17,
`
`2020)).1 High volume trading makes PFOF extremely lucrative because market makers
`
`compensate brokers for routing their customers’ orders to them –– hence “payment for order flow.”
`
`(See CCAC ¶¶ 32, 49). For example, in 2020, Citadel Securities, a market maker, paid Robinhood
`
`$326 million, up from $80.5 million in 2019. (See id. ¶ 49).
`
`Market makers also route the trading data from Robinhood’s platform to high-frequency
`
`traders (“HFTs”). (See id. ¶¶ 3, 33 n.9). HFTs use algorithms that automatically trade based on
`
`existing trends. (See id. ¶ 30 n.5). Upon receiving bid data from market makers, HFTs front-run
`
`the bid, anticipating the effect of the bid on the security’s price before the transaction is
`
`consummated. (See id. ¶¶ 3, 30 n.5, 31, 34).
`
`Robinhood’s popularity also reflected the growing trend of retail trading during the
`
`COVID-19 pandemic. (See id. ¶ 35). Retail investors convened on social media sites, like Reddit
`
`and Stockwit, “to discuss investment strategy and the merits of trading in particular stocks.” (Id.).
`
`By December 2020, Robinhood claimed “to have opened nearly 50% of all retail brokerage
`
`accounts in the past five years” and had a total of 12.5 million online accounts. (Id. ¶ 5 (footnote
`
`call number omitted)). Before Robinhood would go on to add another 3 million accounts in
`
`January 2021, the press reported in December that Robinhood had selected Goldman Sachs to
`
`manage Robinhood’s initial public offering in 2021. (See id. ¶¶ 5, 39 (citation omitted)).
`
`
`
`
`
`
`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
`
`
`
`

`

`Case 1:21-md-02989-CMA Document 503 Entered on FLSD Docket 08/11/2022 Page 4 of 52
`
`CASE NO. 21-2989-MDL-ALTONAGA/Torres
`
`
`II.
`
`The Short-Squeeze Crisis
`
`Several prominent investors planted seeds of crisis in November 2020, when they
`
`purchased shares in what became known as “meme stocks” or the “Affected Stocks.”2 (Id. ¶¶ 4,
`
`40 (quotation marks omitted)). The investments pitted these well-known investors against several
`
`hedge funds that took short positions in the meme stocks. (See id. ¶¶ 35, 40, 43). Melvin Capital
`
`was one such hedge fund that took a short position in GameStop. (See id. ¶ 43).
`
`Short positions derive from a belief that the price of a security is overvalued and will
`
`eventually fall. To capitalize on this hunch, investors, known as short sellers, purchase a “short.”
`
`(See id. ¶¶ 40–43, 70–72). The mechanics of a short are as follows: (1) an investor identifies a
`
`security that it wants to short, such as a stock, and deposits capital, or margin, into a brokerage
`
`account to cover the risk of loss associated with the short; (2) a lender loans the security to the
`
`investor; (3) upon receiving the borrowed security, the investor sells it for a high price; and (4) the
`
`investor waits until the anticipated drop in share price occurs and then repurchases the stock for
`
`less than she sold it. (See Jan. 26, 2022 Order [ECF No. 453] 3 [hereinafter “Robinhood Tranche
`
`Order”]).
`
`Short positions may bear substantial risk. (See, e.g., CCAC ¶¶ 41–43). If the stock price
`
`rises a little, the short seller loses money. (See, e.g., id. ¶ 41). If the stock price rises a lot, the
`
`broker may issue a margin call, which requires that the short seller deposit more capital into its
`
`brokerage account to minimize the risk of the rising stock. (See id. ¶¶ 38, 38 n.18, 42; see also
`
`SEC, Staff Report on Equity and Options Market Structure Conditions in Early 2021, at 26 (Oct.
`
`28, 2021), https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-
`
`
`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).
`4
`
`
`
`

`

`Case 1:21-md-02989-CMA Document 503 Entered on FLSD Docket 08/11/2022 Page 5 of 52
`
`CASE NO. 21-2989-MDL-ALTONAGA/Torres
`
`early-2021.pdf (“SEC Staff Report”))). If the stock price continues to rise with no end in sight,
`
`short sellers will capitulate and purchase the stock to cover their losses. (See CCAC ¶ 43). This
`
`pattern results in a vicious cycle known as a short squeeze: (1) a stock’s price rises; (2) short sellers
`
`purchase the stock to cover their losses; (3) short sellers’ capitulation causes the stock price to rise
`
`further; (4) and other short sellers are forced to purchase the stock; (5) sending the stock price
`
`rising even further, and so on.
`
`After noticing the contest between hedge funds and other investors, retail investors rallied
`
`against the hedge funds. (See id. ¶¶ 40–41). Using a sub-Reddit thread called WallStreetBets as
`
`a collective action platform, retail investors purchased millions of shares of GME, sending the
`
`stock price soaring. (See id. ¶¶ 35, 40–43).
`
`GME closed at $43.03 on January 21, 2021. (See id. ¶ 41). Twenty-four hours later, it
`
`closed at $65.01. (See id.). By January 27, the share price reached $347.51. (See id. ¶ 121). The
`
`skyrocketing share price created a short squeeze, which forced hedge funds, like Melvin Capital,
`
`to take short positions in GME to quickly cover their losses. (See id. ¶ 43). Despite receiving two
`
`loans for $750 million and $2 billion each, Melvin Capital had to close out its short position. (See
`
`id.).
`
`III. Robinhood’s Reckoning: January 28 – February 2, 2021
`
`Hedge funds were not alone. The short squeeze forced Robinhood to reckon with its
`
`newfound popularity. Specifically, the short squeeze created volatile market conditions that forced
`
`the National Securities Clearing Corporation (“NSCC”) to impose higher collateral requirements
`
`on Robinhood (see id. ¶ 58) — requirements that Robinhood could not meet.
`
`Before delving into how the collateral requirements affected Robinhood, it is worth pausing
`
`to explain the NSCC’s role in this matter. The NSCC is a national clearing agency regulated by
`
`
`
`5
`
`

`

`Case 1:21-md-02989-CMA Document 503 Entered on FLSD Docket 08/11/2022 Page 6 of 52
`
`CASE NO. 21-2989-MDL-ALTONAGA/Torres
`
`the SEC that provides services to its clearinghouse members, including Robinhood Securities. (See
`
`Robinhood Tranche Order 3 n.7). Among its services, the NSCC guarantees that clearinghouses
`
`will complete securities transactions. (See id.). To ensure that it can guarantee the transaction, the
`
`NSCC imposes collateral requirements on its members. (See id.). These collateral requirements
`
`create the capital necessary for clearinghouses to complete a trade. (See id.). The NSCC imposes
`
`higher collateral requirements for volatile stocks. (See CCAC ¶¶ 12, 58).
`
`Market volatility affects two components of the collateral requirements: the core clearing
`
`fund charge and excess capital premium charge. (See id. ¶¶ 58–59). The core clearing fund charge
`
`also encompasses a value at risk (“VaR”) charge, which the NSCC calculates based on the
`
`estimated risk in the member’s portfolio. (See id. ¶ 58). The excess capital premium charge is the
`
`difference between the member’s excess net capital and its core clearing fund charge. (See id.).
`
`“The more the core charges exceed the member’s capital cushion, the larger the [excess] capital
`
`premium charge. To avoid incurring the latter charge the member must either reduce the level of
`
`risk or raise additional capital.” (Id. (alteration added; footnote call number omitted)).
`
`Robinhood knew that its collateral requirements would rise. (See id. ¶¶ 44–47). Not only
`
`had it become the most downloaded application on the App Store (see id. ¶ 47), it also predicted
`
`having to raise margin requirements on its users (see id. ¶ 42). It was right.
`
`Robinhood raised margin requirements for GME to 80% on January 26, 2021. (See id. ¶
`
`47). Later that day, Jim Swartwout, Robinhood Securities’ President and Chief Operating Officer,
`
`told his staff that he “sold [his] AMC today. FYI — tomorrow morning we are moving GME to
`
`100% — so you are aware.” (Id. ¶ 47 n.24 (alteration added; citation and quotation marks
`
`omitted)). Sure enough, on January 27, 2021, Robinhood moved GME to 100% margin. (See id.
`
`¶ 47). Despite its efforts, Robinhood knew its collateral requirements would still rise.
`
`
`
`6
`
`

`

`Case 1:21-md-02989-CMA Document 503 Entered on FLSD Docket 08/11/2022 Page 7 of 52
`
`CASE NO. 21-2989-MDL-ALTONAGA/Torres
`
`On January 28, 2021, in anticipation of the NSCC’s deposit requirements, Robinhood
`
`imposed a position closing only (“PCO”) restriction on GME and AMC options with an expiration
`
`of January 29, 2021. (See id. ¶ 52). This meant that option holders could only sell their options.
`
`Despite Robinhood’s preemptive attempt to decrease its deposit requirements, the NSCC requested
`
`that Robinhood deposit $3.7 billion to ensure that it could complete its unsettled trades. (See id. ¶
`
`58).
`
`The $3.7 billion deposit proved too much. Robinhood Markets’ Chief Operating Officer,
`
`Gretchen Howard, sent an email describing the circumstances as a “major liquidity issue” and
`
`moved eight stocks — AMC, GME, NOK, BB, NAKD, KOSS, EXPR and BBBY — to PCO; no
`
`Robinhood user could purchase these stocks. (Id. ¶ 59 (quotation marks omitted)). After
`
`Robinhood promised to maintain the PCO restriction on stocks “that had driven the increased
`
`deposit requirements,” the NSCC waived Robinhood’s capital premium charge through February
`
`1, 2021. (Id. ¶ 60 (quotation marks and footnote call number omitted)).3
`
`Robinhood notified its customers that several stocks had been moved to PCO but failed to
`
`apprise investors that it had also closed out existing options (see id. ¶ 52)4 and cancelled orders
`
`after markets closed on January 27 (see id. ¶ 62). Instead, customers received an abbreviated
`
`explanation of Robinhood’s actions:
`
`
`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)).
`
` 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).
`
` 4
`
`
`
`7
`
`

`

`Case 1:21-md-02989-CMA Document 503 Entered on FLSD Docket 08/11/2022 Page 8 of 52
`
`

`

`Case 1:21-md-02989-CMA Document 503 Entered on FLSD Docket 08/11/2022 Page 9 of 52
`
`CASE NO. 21-2989-MDL-ALTONAGA/Torres
`
`
`(Id. ¶ 76).
`
`Robinhood’s trading restrictions prompted immediate outrage from investors and elected
`
`officials alike. (See id. ¶ 69). Many speculated that Robinhood had imposed the restrictions to
`
`appease hedge funds, including Robinhood’s largest source of revenue: Citadel Securities. (See
`
`id. ¶ 70).
`
`To assuage investors and onlookers, Tenev appeared on several news outlets, where he
`
`made two notable statements. (See id. ¶¶ 77–80). First, he rejected the theory that Robinhood
`
`issued the restrictions “at the direction of any market maker or hedge fund or anyone we route to
`
`or any other market participants.” (Id. ¶ 77 (emphasis and footnote call number omitted)). Second,
`
`he stated “[t]here was no liquidity problem” at Robinhood (id. ¶ 79 (alteration added; emphasis
`
`omitted), instead attributing the restrictions to market volatility (see id. ¶ 78).
`
`According to Plaintiffs, Tenev’s assurances led to a flurry of premarket trading activity on
`
`the morning of January 29, 2021. (See id. ¶ 83). Investors believed Robinhood would lift the PCO
`
`restrictions soon, a belief bolstered after Robinhood received $1 billion of investor financing. (See
`
`id.). They were wrong.
`
`Robinhood maintained restrictions on the numbers of shares and option contracts an
`
`investor could purchase. (See id. ¶¶ 84–85). It continued to impose greater purchase restrictions
`
`throughout January 29 as the Affected Stocks rebounded from the previous day’s close price. (See
`
`id. ¶ 85). The Affected Stocks were not alone; Robinhood subjected other issuers, such as
`
`Starbucks and General Motors, to purchase restrictions. (See id. ¶ 87).
`
`Once again, reactions to the restrictions prompted Tenev to appear on media outlets to
`
`pacify outraged investors and onlookers. This time he directed viewers’ focus to other brokers
`
`and financial institutions, claiming the trade restrictions were commonplace and “just a standard
`
`
`
`9
`
`

`

`Case 1:21-md-02989-CMA Document 503 Entered on FLSD Docket 08/11/2022 Page 10 of 52
`
`CASE NO. 21-2989-MDL-ALTONAGA/Torres
`
`part of practices in the brokerage industry and the broader financial industry.” (Id. ¶ 92). But
`
`unlike other institutions, Robinhood imposed broader restrictions that coincided with price dips in
`
`the restricted stocks. (See id. ¶¶ 87, 90, 93).
`
`Tenev continued damage control throughout the weekend, on January 30 and 31. He
`
`maintained that Robinhood simply followed standard industry practices and was not in the pocket
`
`of institutional investors like Citadel Securities. (See id. ¶¶ 98–100). When asked by Elon Musk
`
`why Robinhood implemented a purchase-only restriction as opposed to a complete purchase-sale
`
`restriction, Tenev stated it would be “categorically worse” to restrict both purchases and sales
`
`because “[p]eople get really pissed off if they’re holding stock and they want to sell it and they
`
`can’t.” (Id. ¶ 101 (alteration added; quotation marks omitted)). But other Robinhood employees
`
`felt the PCO restriction would still result in outrage, noting that Robinhood would “get crucified
`
`for pco-ing.” (Id. ¶ 102 n.60 (alteration adopted; citations and quotation marks omitted)).
`
`The weekend also gave Robinhood time to build up capital in anticipation of fresh
`
`collateral requirements from the NSCC. Robinhood raised $2.4 billion from venture capital funds
`
`and consequently loosened trading restrictions on some, but not all, of the Affected Stocks going
`
`into Monday, February 1, 2021. (See id. ¶¶ 107, 109–10).
`
`The purchase restrictions eased further on February 2, 2021; still, some restrictions
`
`remained in place. (See id. ¶¶ 112–13). Robinhood did not lift all restrictions until late in the day
`
`on February 4, 2021. (See id. ¶ 121). Despite the delay and backlash, Robinhood’s “IPO [was]
`
`full steam ahead.” (Id. ¶ 120 (alteration added; footnote call number and quotation marks
`
`omitted)).
`
`
`
`
`
`
`
`10
`
`

`

`Case 1:21-md-02989-CMA Document 503 Entered on FLSD Docket 08/11/2022 Page 11 of 52
`
`CASE NO. 21-2989-MDL-ALTONAGA/Torres
`
`
`IV.
`
`The Aftermath
`
`Robinhood’s conduct left investors and onlookers disgruntled and concerned. (See id. ¶¶
`
`80, 101–03, 119, 126). On February 23, 2021, the CEO of Barstool Sports, Dave Portnoy, outlined
`
`the frustrations during an interview with Tenev. (See id. ¶ 80).
`
`First, Portnoy probed Robinhood’s liquidity. He asked Tenev whether Robinhood would
`
`have permitted trading to continue absent the NSCC’s initial deposit requirements. (See id.).
`
`Tenev conceded that under such circumstances, Robinhood would have allowed trading to
`
`continue. (See id.). Portnoy pointed out that Tenev’s answer suggested Robinhood had a liquidity
`
`problem (see id.) — a problem Tenev had previously denied (see, e.g., id. ¶ 79 (“There was no
`
`liquidity problem.” (emphasis and quotation marks omitted)). Tenev initially resisted Portnoy’s
`
`observation but conceded that Robinhood might have experienced a liquidity crisis if it had not
`
`restricted trading. (See id. ¶ 80).
`
`Second, Portnoy asked why Robinhood had instituted purchase-only restrictions instead of
`
`a complete freeze on meme stock trading. (See id. ¶ 103). Tenev had previously told Elon Musk
`
`that Robinhood implemented PCOs to avoid “piss[ing] off” customers eager to sell (id. ¶ 101
`
`(alteration added; quotation marks omitted)); to Portnoy, Tenev changed his answer and conceded
`
`that the PCO restrictions allowed Robinhood to mitigate its deposit requirements (see id. ¶ 103).
`
`In particular, Tenev stated that restricting sales, as opposed to purchases, would not have
`
`decreased Robinhood’s VaR charges from the NSCC. (See id. (“The VaR formula was in this case
`
`driven by the one-sided long position, so it actually wouldn’t help us; wouldn’t help the deposit
`
`requirements to restrict selling in this case[.]” (alteration added))).
`
`Five months after Tenev’s interview with Portnoy, Robinhood went public at $38 per share.
`
`(See id. ¶ 126). After the IPO ceremony, Tenev responded to questions about the short squeeze,
`
`
`
`11
`
`

`

`Case 1:21-md-02989-CMA Document 503 Entered on FLSD Docket 08/11/2022 Page 12 of 52
`
`CASE NO. 21-2989-MDL-ALTONAGA/Torres
`
`stating that Robinhood had “learned a lot” and improved certain services to make it “easier for
`
`customers that want to come back to the service[.]” (Id. (alteration added)). Tenev also noted that
`
`“it’s been an amazing six months and it really [sic] 18 months and much, much more than that[.]”
`
`(Id. (alteration added)).
`
`Plaintiffs filed the CCAC against Defendants on November 30, 2021. (See generally id.).5
`
`Plaintiffs all owned shares of at least one of the Affected Stocks at the close of markets on January
`
`27, 2021 and sold those shares leading up to February 4, 2021. (See id. ¶¶ 21–22). Of the Plaintiffs,
`
`only some used the Robinhood platform. (See id.).
`
`The CCAC contains two claims for relief. Count I alleges that Robinhood manipulated the
`
`prices of the Affected Stocks in violation of section 9(a) of the Securities Exchange Act of 1934.
`
`(See id. ¶¶ 136–41).6 Count II alleges an identical theory, but it relies on section 10(b) and rule
`
`10b-5 promulgated thereunder. (See id. ¶¶ 142–49).
`
`Count I contains two subclaims under sections 9(a)(2) and 9(a)(4), respectively. (See id.
`
`¶¶ 137–39; Resp. 32).7 Plaintiffs allege that Robinhood violated section 9(a)(2) by intentionally
`
`manipulating the market to artificially depress the prices of the Affected Stocks. (See CCAC ¶
`
`138; Resp. 32–37). As for section 9(a)(4), Plaintiffs allege that Robinhood misstated or omitted
`
`material facts to mislead investors into thinking that it did not have a liquidity problem — a
`
`problem that would cause Robinhood to lose investors, customers, money, and relatedly, the
`
`
`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).
`
` 6
`
` Codified in 15 U.S.C. section 78i(a).
`
` 7
`
` The Court uses the pagination generated by the electronic CM/ECF database, which appears in the headers
`of all court filings.
`
`
`
`
`12
`
`

`

`Case 1:21-md-02989-CMA Document 503 Entered on FLSD Docket 08/11/2022 Page 13 of 52
`
`CASE NO. 21-2989-MDL-ALTONAGA/Torres
`
`
`chance at a lucrative initial public offering. (See CCAC ¶ 139; Resp. 37–46).
`
`Count II alleges that Robinhood manipulated the market when it (1) raised margin
`
`requirements (2) canceled purchase orders for the Affected Stocks, (3) closed out options in AMC
`
`and GME early, and (4) prohibited and restricted purchases of the Affected Stocks on its platform.
`
`(See CCAC ¶¶ 72, 143; Resp. 20).8 These actions allegedly “created a false impression of actual
`
`demand for the Affected Stocks” and “artificially increased supply of the Affected Stocks[.]”
`
`(Resp. 20 (alteration added)).
`
`Defendants move to dismiss the CCAC for failure to satisfy the requisite pleading
`
`requirements.
`
`LEGAL STANDARDS
`
`“To survive a motion to dismiss, a complaint must contain sufficient factual matter,
`
`accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556
`
`U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). Although
`
`this pleading standard “does not require ‘detailed factual allegations,’ . . . it demands more than an
`
`unadorned, the-defendant-unlawfully-harmed-me accusation.” Id. (alteration added; quoting
`
`Twombly, 550 U.S. at 555). Pleadings must contain “more than labels and conclusions, and a
`
`formulaic recitation of the elements of a cause of action will not do[.]” Twombly, 550 U.S. at 555
`
`(alteration added). Indeed, “only a complaint that states a plausible claim for relief survives a
`
`motion to dismiss.” Iqbal, 556 U.S. at 679 (citing Twombly, 550 U.S. at 556).
`
`To meet this “plausibility standard,” a plaintiff must “plead[] factual content that allows
`
`the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”
`
`Id. at 678 (alteration added; citing Twombly, 550 U.S. at 556). When reviewing a motion to
`
`
`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.”
`
`
`
`13
`
`

`

`Case 1:21-md-02989-CMA Document 503 Entered on FLSD Docket 08/11/2022 Page 14 of 52
`
`CASE NO. 21-2989-MDL-ALTONAGA/Torres
`
`dismiss, a court must construe the complaint in the light most favorable to the plaintiff and take
`
`the factual allegations therein as true. See Brooks v. Blue Cross & Blue Shield of Fla., Inc., 116
`
`F.3d 1364, 1369 (11th Cir. 1997) (citing SEC v. ESM Grp., Inc., 835 F.2d 270, 272 (11th Cir.
`
`1988)).
`
`While run-of-the-mill complaints are adequate if they contain “a short and plain statement
`
`of the claim showing that the pleader is entitled to relief[,]” Fed. R. Civ. P. 8(a)(2) (alteration
`
`added), securities fraud claims are subject to the heightened pleading requirements of Federal Rule
`
`of Civil Procedure 9(b), see Edward J. Goodman Life Income Tr. v. Jabil Cir., Inc., 594 F.3d 783,
`
`789 (11th Cir. 2010) (citations omitted). Securities fraud claims therefore must state “with
`
`particularity the circumstances constituting fraud[.]” Fed. R. Civ. P. 9(b) (alteration added). Rule
`
`9(b) is satisfied if the complaint includes:
`
`(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.
`
`Mizzaro v. Home Depot, Inc., 544 F.3d 1230, 1237 (11th Cir. 2008) (quotation marks omitted;
`
`quoting Tello v. Dean Witter Reynolds, Inc., 494 F.3d 956, 972 (11th Cir. 2007)).
`
`“[U]nder Rule 9(b), it is sufficient to plead the who, what, when, where, and how of the
`
`allegedly false statements and then allege generally that those statements were made with the
`
`requisite intent.” Id. (alteration added). The purpose for this degree of particularity is to “alert[]
`
`defendants to the precise misconduct with which they are charged and protect[] defendants against
`
`spurious charges of immoral and fraudulent behavior.” Durham v. Bus. Mgmt. Assocs., 847 F.2d
`
`1505, 1511 (11th Cir. 1988) (alterations added; citation and quotation marks omitted).
`
`The pleading requirements do not end with those found in Rule 9(b). Under the Private
`
`Securities Litigation Reform Act of 1995 (“PSLRA”), Pub. L. No. 104-67, 109 Stat. 737 (1995)
`14
`
`
`
`

`

`Case 1:21-md-02989-CMA Document 503 Entered on FLSD Docket 08/11/2022 Page 15 of 52
`
`CASE NO. 21-2989-MDL-ALTONAGA/Torres
`
`(codified as amended in scattered sections of 15 U.S.C.), a complaint must “specify each statement
`
`alleged to have been misleading” and “the reason or reasons why the statement is misleading,” 15
`
`U.S.C. § 78u–4(b)(1)(B). “[W]ith respect to each act or omission alleged[,]” the complaint must
`
`also “state with particularity facts giving rise to a strong inference that the defendant acted with
`
`the required state of mind.” Id. § 78u–4(b)(2)(A) (alterations added).
`
`A “‘strong inference’ is one that is ‘cogent and at least as compelling as any opposing
`
`inference one could draw from the facts alleged.’” Carvelli v. Ocwen Fin. Corp., 934 F.3d 1307,
`
`1318 (11th Cir. 2019) (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324
`
`(2007)). And the required state of mind, commonly referred to as scienter, “is an ‘intent to defraud
`
`or severe recklessness on the part of the defendant.’” Id. (quoting FindWhat Inv. Grp. v.
`
`FindWhat.com, 658 F.3d 1282, 1299 (11th Cir. 2011)). Scienter can be inferred from an aggregate
`
`of the factual allegations. See id.
`
`ANALYSIS
`
`Plaintiffs’ market manipulation claims under sections 9(a)(2) and 10(b) satisfy the
`
`heightened pleading requirements under the PSLRA and Rule 9(b) and thus may proceed. The
`
`same cannot be said for Plaintiffs’ misstatement claim under section 9(a)(4). The Court explains.
`
`I.
`
`Section 9(a) Claims
`
`Section 9(a) contains six subparts, each of which prohibits a different form of price
`
`manipulation. See 15 U.S.C. §§ 78i(a)(1)–(6). While the CCAC does not identify which of the
`
`sections Plaintiffs seek to recover under (see CCAC ¶¶ 136–41), the Response narrows the claims
`
`to sections 9(a)(2) and 9(a)(4) (see Resp. 32). And while the section 9(a)(2) claim contains a
`
`particularized theory of relief, Plaintiffs’ section 9(a)(4) claim falls short of demonstrating that
`
`
`
`15
`
`

`

`Case 1:21-md-02989-CMA Document 503 Entered on FLSD Docket 08/11/2022 Page 16 of 52
`
`CASE NO. 21-2989-MDL-ALTONAGA/Torres
`
`Robinhood misrepresented and omitted material facts for the purpose of inducing retail investors
`
`into selling their shares.
`
`a. Section 9(a)(2)
`
`Section 9(a)(2) prohibits “any person” from effecting
`
`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
`
`‘used to persuade the public that activity in a security is the reflection of a genuine demand instead
`
`of a mirage.’” Crane Co. v. Westinghouse Air Brake Co., 419 F.2d 787, 794 (2d Cir. 1969)
`
`(quoting 3 Loss, Securities Regulations 1549–55 (2d ed. 1961)).
`
`A section 9(a)(2) cause of action consists of five elements:
`
`(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.
`
`Chemetron Corp. v. Bus. Funds, Inc., 682 F.2d 1149, 1164 (5th Cir. 1982) (alteration added;
`
`footnote call numbers omitted), vacated on other grounds 460 U.S. 1007 (1983).
`
`i. Transactions in a Security
`
`Plaintiffs partially clear the first element. They allege that canceling purchase orders,
`
`closing out options, restricting purchases, and liquidating customers’ shares of Affected Stocks
`
`after raising capital requirements all co

This document is available on Docket Alarm but you must sign up to view it.


Or .

Accessing this document will incur an additional charge of $.

After purchase, you can access this document again without charge.

Accept $ Charge
throbber

Still Working On It

This document is taking longer than usual to download. This can happen if we need to contact the court directly to obtain the document and their servers are running slowly.

Give it another minute or two to complete, and then try the refresh button.

throbber

A few More Minutes ... Still Working

It can take up to 5 minutes for us to download a document if the court servers are running slowly.

Thank you for your continued patience.

This document could not be displayed.

We could not find this document within its docket. Please go back to the docket page and check the link. If that does not work, go back to the docket and refresh it to pull the newest information.

Your account does not support viewing this document.

You need a Paid Account to view this document. Click here to change your account type.

Your account does not support viewing this document.

Set your membership status to view this document.

With a Docket Alarm membership, you'll get a whole lot more, including:

  • Up-to-date information for this case.
  • Email alerts whenever there is an update.
  • Full text search for other cases.
  • Get email alerts whenever a new case matches your search.

Become a Member

One Moment Please

The filing “” is large (MB) and is being downloaded.

Please refresh this page in a few minutes to see if the filing has been downloaded. The filing will also be emailed to you when the download completes.

Your document is on its way!

If you do not receive the document in five minutes, contact support at support@docketalarm.com.

Sealed Document

We are unable to display this document, it may be under a court ordered seal.

If you have proper credentials to access the file, you may proceed directly to the court's system using your government issued username and password.


Access Government Site

We are redirecting you
to a mobile optimized page.





Document Unreadable or Corrupt

Refresh this Document
Go to the Docket

We are unable to display this document.

Refresh this Document
Go to the Docket