`Case 1:23-cv-21572-CMA Document 1 Entered on FLSD Docket 04/06/2023 Page 1 of 72
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`MAURICE D. PESSAH (SBN: 275955)
`maurice@pessahgroup.com
`PESSAH LAW GROUP, PC
`9100 Wilshire Boulevard, Suite 850E
`Beverly Hills, CA 90212
`Tel. (310) 772-2261
`
`STUART N. CHELIN (SBN: 320357)
`stuart@chelinlaw.com
`CHELIN LAW FIRM
`16133 Ventura Boulevard, Suite 700
`Encino, CA 91436
`Tel. (310) 556-9664
`
`JEFFREY A. KLAFTER (pro hac vice to be requested)
`jak@klafterlesser.com
`KLAFTER LESSER LLP
`Two International Drive, Suite 350
`Rye Brook, NY 10573
`Tel. (914) 934-9200
`
`Attorneys for Plaintiffs and the Proposed Class
`
`
`
`ROBINHOOD FINANCIAL, LLC, a
`Delaware limited liability company;
`ROBINHOOD SECURITIES, LLC, a
`Delaware limited liability company; and
`ROBINHOOD MARKETS, INC.,
`
` Defendants.
`
`
`UNITED STATES DISTRICT COURT
`CENTRAL DISTRICT OF CALIFORNIA
`MAURICE SCARBOROUGH and
`Case No.:
`SCOTT SCHILLER, each individually,
`
`CLASS ACTION COMPLAINT FOR
`and on behalf of all others similarly
`DAMAGES
`situated,
`
`
`
` Plaintiffs,
`[DEMAND FOR JURY TRIAL]
`
`
`
`
`
`v.
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`______________________________________________________________________________
`CLASS ACTION COMPLAINT
`
`

`

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`Case 1:23-cv-21572-CMA Document 1 Entered on FLSD Docket 04/06/2023 Page 2 of 72
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`Plaintiffs Maurice Scarborough and Scott Schiller (“Plaintiffs”), individually
`and on behalf of all other persons similarly situated, by Plaintiff’s undersigned attorneys,
`for Plaintiffs’ Complaint against defendants Robinhood Markets, Inc. and two of its
`wholly owned subsidiaries, Robinhood Financial, LLC and Robinhood Securities, LLC
`(unless otherwise noted, collectively “Robinhood” or the “Robinhood Defendants”)
`alleges the following based upon personal knowledge as to Plaintiff and Plaintiff’s own
`acts, and information and belief as to all other matters, based upon, inter alia, the
`investigation conducted by and through their attorneys, which included, among other
`things, a review of the statements made by defendants and their senior management,
`SEC filings, court records, Congressional testimony, administrative proceedings, and
`information readily obtainable on the Internet. Plaintiffs believe that substantial
`evidentiary support will exist for the allegations set forth herein after a reasonable
`opportunity for discovery.
`SUMMARY OF THE ACTION
`This is a class action on behalf of persons or entities who held call options
`1.
`the “Affected Options”)
`to purchase common stock
`in AMC
`(collectively
`Entertainment Holdings, Inc., GameStop Corp. (“GME”), American Airlines Group
`Inc. (NASDAQ: AAL), Bed Bath & Beyond Inc. (“BBBY”), BlackBerry Ltd. (“BB”),
`or American Depositary Shares of foreign-issuers Nokia Corp. (“NOK”) (collectively
`the “Affected Stocks”), as of the close of trading on January 27, 2021, and who sold such
`Affected Options at a loss, or whose Affected Options expired between January 28, 2021
`and February 19, 2021 (the “Class”). Excluded from the Class are the Defendants, the
`officers and directors of Defendants, members of their immediate families and their
`legal representatives, heirs, successors or assigns and any entity in which Defendants
`or any excluded persons have or had a controlling interest.
`Robinhood’s singular actions distorted the prices of the Affected Stocks
`2.
`and of the Affected Options for many weeks because of its domination of the online
`retail brokerage industry. Robinhood, which claims to have opened nearly 50% of all
`
`2
`______________________________________________________________________________
`CLASS ACTION COMPLAINT
`
`

`

`
`Case 1:23-cv-21572-CMA Document 1 Entered on FLSD Docket 04/06/2023 Page 3 of 72
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`retail brokerage accounts in the past five years,1 boasted an industry-leading 12.5
`million online accounts by the end of 2020 and added another 3 million during the
`month of January 2021. By one estimate, approximately 4% of all shares traded in the
`U.S. in January 2021 were traded on the Robinhood app.2
`Robinhood violated the bedrock principle of our free-market economy:
`3.
`the price of a stock and options on such stock are meant to be set by the law of supply
`and demand, unfettered by external controls. Robinhood’s deliberate interference with,
`and manipulation of, the market changed that.
`Only in rare instances of extreme price volatility, and in accordance with
`4.
`a SEC- regulated plan, would all trading be halted in a particular issuer, and even then
`for only a few minutes at a time. By completely shutting down, initially, and later
`restricting, the demand side of the equation for the Affected Stocks and Affected
`Options in the accounts of more than 15 million very active traders,3 for days rather
`than just minutes, Robinhood unlawfully manipulated market prices for the Affected
`Stocks and the Affected Options.
`Although it was relatively unknown to a national audience before January
`5.
`28, 2021, Robinhood’s name was on everyone’s lips after it roiled the markets for the
`Affected Stocks and Affected Options through the unique and extreme actions it took
`that day. Not only were there immediate calls for government investigations, and
`questions raised about whether Robinhood colluded with hedge funds and market
`makers to stop an alleged short squeeze by retail investors (Robinhood’s own customer
`
`
`1 Robinhood Markets, Inc, S-1, filed July 2021, at 2.
`
` 2
`
` 3
`
` Caitlin McCabe, “It Isn’t Just AMC. Retail Traders Increase Pull in the Stock Market,” The Wall
`Street Journal (June 18, 2021).
`
` In the first quarter of 2020, Robinhood customers traded nine times as many shares as online retail
`broker E*Trade’s customers and 40 times the number of shares traded by the customers of Charles
`Schwab. See Nathaniel Popper,“Robinhood Has Lured Young Traders, Sometimes With
`Devastating Results,” The New York Times (July 8, 2020, last updated Sept. 25, 2021). The numbers
`are even more skewed with respect to options trading.
`
`3
`______________________________________________________________________________
`CLASS ACTION COMPLAINT
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`Case 1:23-cv-21572-CMA Document 1 Entered on FLSD Docket 04/06/2023 Page 4 of 72
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`base), but the impact that this single online broker had on the markets suddenly
`demonstrated Robinhood’s significant market power.
` Despite facing heavy criticism by many in government and in the media,
`6.
`Robinhood became a venture capital darling overnight. By February 1, 2021, only four
`days after its severe undercapitalization almost caused Robinhood to close its doors as
`a result of a major liquidity crisis, Robinhood had raised $3.4 billion in 96 hours –
`significantly more that it had raised in the eight years since its founding. While the
`national exposure delivered a critical funding boost that propelled Robinhood to its
`initial public offering (“IPO”) in the summer of 2021; however, Class members were
`left with staggering losses.
`At the 2014 LAUNCH Festival in San Francisco, Robinhood Markets
`7.
`CEO Vladimir Tenev challenged the supposition that “brokerages exist for the purpose
`of making money,” claiming instead: “The purpose of Robinhood is to make buying
`and selling stocks as frictionless as possible. So, if we make money as a side effect of
`that, you know, that’s great but it will never be at the cost of introducing frictions
`between our customers and the markets.” (Emphasis supplied.) Commencing on
`January 28, 2021, substantial frictions between its customers and the markets were the
`very cost Robinhood forced its customers.
`Throughout 2020 and in January 2021, Robinhood whipped up a frenzy
`8.
`of trading and then shut it down, unevenly reopening the demand spigot over the course
`of a week, directly affecting the markets’ bid-offer pricing mechanism for the Affected
`Stocks and the Affected Options. As set forth in greater detail below, with a lucrative
`IPO already being planned, Robinhood manipulated the share prices of the Affected
`Stocks and the prices of the Affected Options, which were contributing to the rapid
`increases in the prices of the Affected Stocks and the Affected Options, to avoid
`liquidation due to an inability to pay its core charges and excess net capital charges to
`the NSCC:
`
`
`4
`______________________________________________________________________________
`CLASS ACTION COMPLAINT
`
`

`

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`Case 1:23-cv-21572-CMA Document 1 Entered on FLSD Docket 04/06/2023 Page 5 of 72
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`On January 28, 2021, only a combination of disabling the “buy”
`(a)
`button for eight (soon thereafter, 13) stocks, including the Affected Stocks and
`the Affected Options, and the NSCC waiving the excess capital premium charge
`– more than $2.2 billion of the $3.7 billion deposit requested that day –
`temporarily solved what Robinhood Markets’ COO described as a “major
`liquidity issue”. However, the NSCC only used its discretion to waive excess
`capital premium charges until February 1, 2021, the two days it took transactions
`from January 27, 2021 and January 28, 2021 to clear.
`On January 29, 2021, when all other brokers lifted stock purchase
`(b)
`restrictions and Robinhood started to do the same, the prices of the Affected
`Stocks and the Affected Options rebounded so strongly that Robinhood – which
`had only raised capital of $1 billion on January 28, 2021 – realized that it would
`be unable to meet an excess capital premium charge on February 2, 2021 for the
`trading on its platform on January 29, 2021 and could once again face a major
`liquidity issue. For this reason, at several points throughout the trading day
`Robinhood – the only retail broker still restricting stock and option purchases –
`not only tightened the purchase restrictions on the Affected Stocks and the
`Affected Options but increased the number of issuers to which restrictions
`applied from 13 to 23 to 50. That Friday was the day set for certain options on
`the Affected Stocks to expire. Specifically, Robinhood imposed the following
`purchase limits on the Affected Stocks and the Affected Options on January 29,
`2021, before market open:
`Symbol Shares Options contracts
`AAL
`55
`50
`AMC 115
`100
`BB
`65
`100
`BBBY 30
`50
`
`5
`______________________________________________________________________________
`CLASS ACTION COMPLAINT
`
`

`

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`Case 1:23-cv-21572-CMA Document 1 Entered on FLSD Docket 04/06/2023 Page 6 of 72
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`Symbol Shares Options contracts
`CTRM 1650 N/A
`EXPR 200
`100
`GME 5
`10
`KOSS 25
`N/A
`NAKD 750 N/A
`NOK 110
`100
`SNDL 1200 100
`TR
`25
`50
`TRVG 400
`100
`Over the weekend, Robinhood raised an additional $2.4 billion of
`(c)
`capital, which could prevent the NSCC from assessing steep excess capital
`premium charges for the January 29, 2021 transactions. At that point, Robinhood
`started the process of easing purchase and option exercise restrictions, a process
`it dragged out over several days so that Robinhood could avoid a sharp increase
`in risk in its unsettled portfolio akin to what it had experienced on January 29,
`2021 when its partial lifting of restrictions caused an upward price spike in the
`share prices of the Affected Stocks and the Affected Options.
`Robinhood knew the prices of the Affected Stocks and the Affected
`9.
`Options would plummet because of its purchase and option exercise restrictions:
`As early as January 23, 2021, Robinhood executives were
`(a)
`analyzing the impact of making margin calls on its customers with respect to
`their GameStop positions. They knew that their customers – most of who were
`just starting on their investment journey – would not have the funds to meet the
`margin calls, which could force Robinhood to close out their positions
`potentially exposing Robinhood to financial risk.
`
`6
`______________________________________________________________________________
`CLASS ACTION COMPLAINT
`
`

`

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`Case 1:23-cv-21572-CMA Document 1 Entered on FLSD Docket 04/06/2023 Page 7 of 72
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`On January 26, 2021, when the President and COO of Robinhood
`(b)
`Securities, a 30-year industry veteran, alerted others that Robinhood Securities
`was moving GameStop to 100% margin the next day, he started his
`communication with the statement “I sold my AMC today.” This seasoned
`securities industry executive was well aware (and informed the others with his
`statement) that the result of the Robinhood’s introduction of frictions between
`its customers and the markets – be it a margin call or a total inability to purchase
`shares – would be a sharp decline in the price of the stocks subjected to the
`restrictions and a decline in the price of the Affected Stocks and the Affected
`Options.
`Throughout the week it was artificially distorting the price of the
`10.
`Affected Stocks and the Affected Options, Robinhood went to great lengths to convince
`investors that was not what was occurring. On multiple occasions, Robinhood falsely
`assured investors that the national exchanges were free of manipulation, to wit, that
`Robinhood’s actions were the same as its peers and simply part of any retail broker’s
`“normal operations.” Robinhood even went as far as to blame our national markets’
`failure to implement a real-time settlement system – something the CEO of the
`Depositary Trust & Clearing Corporation testified would be unworkable and deprive
`financial markets of liquidity– rather than its massive undercapitalization for the
`actions it took to distort the markets.
`The frictions between its customers and the markets introduced and
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`maintained by Robinhood during the Class period, to ensure that its upcoming IPO was
`not derailed by a liquidity crisis, are against the law. Tenev later rationalized
`Robinhood’s actions by claiming, during a discussion with Dave Portnoy of Barstool
`Sports, that “[i]f Robinhood ceases to exist,” that would have caused more harm. Thus,
`Tenev reasoned, “protecting the firm and protecting the system, ultimately, that was
`the best thing for customers.” Even if Tenev were correct, unlawful actions undertaken
`
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`CLASS ACTION COMPLAINT
`
`

`

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`Case 1:23-cv-21572-CMA Document 1 Entered on FLSD Docket 04/06/2023 Page 8 of 72
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`to ensure the survival of a company do not get a free pass under our nation’s federal
`securities laws.
`
`JURISDICTION AND VENUE
`The claims asserted herein arise under and pursuant to Sections 9(a)(2)
`12.
`and 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.
`This Court has jurisdiction over the subject matter of this action
`13.
`pursuant to 28 U.S.C. § 1331, and Section 27 of the Exchange Act (15 U.S.C. §78aa).
`14. Venue is proper in this judicial district pursuant to 28 U.S.C. § 1391(b)(2)
`and Section 27 of the Exchange Act (15 U.S.C. § 78aa(c)) because defendants conduct
`business in this District and caused damages within this District.
`In connection with the acts, conduct and other wrongs alleged in this
`15.
`complaint, defendants, directly or indirectly, used the means and instrumentalities of
`interstate commerce, including but not limited to, the United States mails, interstate
`telephone communications and the facilities of national securities exchanges.
`PARTIES
`16. As of the close on January 27, 2021, Plaintiff Maurice Scarborough
`(“Scarborough”) owned call option contracts for NOK and AMC.
`17. During and immediately after the period of Robinhood placing its trading
`restrictions on the Affected Stocks and the Affected Options, and thereby manipulated
`their prices, Scarborough, during the period between January 28, 2021 and February
`19, 2021, was economically damaged through selling some of his options at a loss and
`being forced to let other options expire since their strike price was unreasonably below
`the severely detrimental market price manipulated by Robinhood. The options which
`Scarborough owned and in respect of which he suffered economic damage and losses
`as a result of Robinhood’s conduct as alleged herein are set forth on his certification
`attached hereto as part of Exhibit A.
`18. As of the close on January 27, 2021, Plaintiff Scott Schiller (“Schiller”)
`owned call option contracts for AAL.
`
`8
`______________________________________________________________________________
`CLASS ACTION COMPLAINT
`
`

`

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`Case 1:23-cv-21572-CMA Document 1 Entered on FLSD Docket 04/06/2023 Page 9 of 72
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`19. During and immediately after the period of Robinhood placing its trading
`restrictions on the Affected Stocks and the Affected Options, and thereby manipulated
`their prices, Schiller, during the period between January 28, 2021 and February 19,
`2021, was economically damaged through being forced to let his options expire since
`their strike price was unreasonably below the severely detrimental market price
`manipulated by Robinhood. The options which Schiller owned and in respect of which
`he suffered economic damage and losses as a result of Robinhood’s conduct as alleged
`herein are set forth on his certification attached hereto as part of Exhibit A.
`20. Defendant Robinhood Financial, LLC (“Robinhood Financial”) is a
`brokerage company providing online and mobile application-based discount stock
`brokerage services that allow users to invest in publicly traded companies and
`exchange-traded funds. Robinhood Financial, LLC’s business address is 85 Willow
`Road, Menlo Park, CA 94025.
`21. Defendant Robinhood Securities, LLC (“Robinhood Securities”) is
`registered as a broker-dealer with the SEC. Robinhood Securities, LLC acts as a clearing
`broker and clears trades introduced by its affiliate Defendant Robinhood Financial.
`Robinhood Securities, LLC’s business address is 500 Colonial Center Parkway, Suite
`100, Lake Mary, FL 32746.
`22. Defendant Robinhood Markets, Inc. (“Robinhood Markets”) is the
`corporate parent of defendants Robinhood Financial LLC and Robinhood Securities,
`LLC, both of which are wholly owned subsidiaries of Robinhood Markets. Robinhood
`Markets, Inc.’s business address is 85 Willow Road, Menlo Park, CA 94025.
`23. Robinhood Markets and its wholly owned subsidiaries operate as one
`entity, and they are treated as one entity in Robinhood Markets’ IPO Registration
`Statement. See S-1, Robinhood Markets, at F-7 (“Robinhood Markets, Inc. (‘RHM’,
`together with its subsidiaries, ‘Robinhood,’ the ‘Company,’ ‘we,’ or ‘us,’)”. The S-1
`explains that “[t]he consolidated financial statements include the accounts of RHM and
`its wholly-owned subsidiaries. All intercompany balances and transactions have been
`
`9
`______________________________________________________________________________
`CLASS ACTION COMPLAINT
`
`

`

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`Case 1:23-cv-21572-CMA Document 1 Entered on FLSD Docket 04/06/2023 Page 10 of 72
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`eliminated.”). Id. at F-8. The S-1 also describes Robinhood Markets and its subsidiaries
`as a “Vertically Integrated Platform.” Id. at 6.
`24. Robinhood Financial and Robinhood Securities are single member,
`limited liability companies, with all tax effects of income or loss included in the tax
`returns of their parent, Robinhood Markets.
`25. Robinhood Markets, Robinhood Financial and Robinhood Securities
`acted jointly in the market manipulation that is alleged herein. See id. at 41 (explaining
`that “we temporarily prevented our customers from purchasing certain specified
`securities”) (emphasis added).
`26. Unless specified, the named Defendants are collectively referred to
`herein as “Robinhood.”
`SUBSTANTIVE ALLEGATIONS
`
`Background
`In 2011, Robinhood founders Vlad Tenev and Baiju Bhatt owned and
`27.
`operated Chronos Research, a company that developed backend trading technology
`which increased the speed of trade execution. That summer, the company introduced
`Zardoz, software platforms that lowered tick-to-trade4 latencies to either five
`microseconds or fifteen microseconds. Chronos Research’s products were created to
`enable hedge funds and other HFTs to use speed to obtain a trading advantage over
`those without such high-end technology. In fact, HFTs are known to front- run other
`traders and to exploit differences in the bid-ask spreads across multiple exchanges.
`Several months later, purportedly inspired by the Occupy Wall Street
`28.
`protests, Bhatt and Tenev conceived the idea for Robinhood – a company whose stated
`mission is to democratize investing by providing access to financial markets at no cost
`to its customers. In 1973, sculptor and videographer Richard Serra coined the phrase “if
`
`
`
`4 For HFT’s whose trades are automated, “tick-to trade” is the response time between receiving a
`market “tick” (a price movement in the market, either an uptick or a downtick) presenting the
`opportunity to the algorithm and processing the buy or sell order.
`
`10
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`CLASS ACTION COMPLAINT
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`

`

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`Case 1:23-cv-21572-CMA Document 1 Entered on FLSD Docket 04/06/2023 Page 11 of 72
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`something is free, you’re the product.” Although most of Robinhood’s revenues came
`from selling customer orders to HFT market makers – the same firms for whom
`Chronos Research’s products were designed – for much of its short life, Robinhood had
`gone to great lengths to hide that fact.
`29. Although it is now widely known that Robinhood’s revenues come from
`routing its customers’ orders to a handful of market makers for execution – a practice
`known as “payment for order flow” (“PFOF”) – a December 17, 2020, SEC Cease-and-
`Desist Order imposing a $65 million civil penalty exposed how Robinhood Financial
`had methodically altered its public disclosures about PFOF for a number of years, with
`each adjustment moving farther away from the truth:
`Before the app launched, Robinhood had disclosed PFOF as a
`(a)
`source of
`revenue in its FAQ answer to the question “How does Robinhood make
`money?”;5
`Apparently concerned about negative publicity surrounding PFOF
`(b)
`and HFTs, by late 2014, PFOF was taken out of the answer to “How does
`Robinhood make money?”, a prominent topic on the Robinhood Help Center
`webpage, and placed elsewhere. There, Robinhood described PFOF revenue as
`“indirect” and “negligible” and stated that PFOF would be moved to the “How
`does Robinhood make money?” page if PFOF became a direct or significant
`source of revenue.6
`
`
`5 In the Matter of Robinhood Fin., LLC, SEC Admin. Proc. File 3-20171, (“SEC C&D Order”)
`Finding of Fact No. 15. https://www.sec.gov/litigation/admin/2020/33-10906.pdf.
`
`6 Id. at Finding of Fact Nos. 16-17. Consistent with the SEC’s findings, some time before April
`2016, the discussion of PFOF was placed into an article entitled “Order Routing and Exchanges”
`that one would have to click through to reach on the “Trading with Robinhood” section of the Help
`Center. Toward the bottom of page is the following statement: “Prior to launching the product, we
`had some language saying that we intended to generate revenue through PFOF. The reason we
`removed this was because currently we execute all of our orders through our clearing partner
`APEX Clearing; as a result, Robinhood does not directly receive PFOF and any revenue we
`
`11
`______________________________________________________________________________
`CLASS ACTION COMPLAINT
`
`

`

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`Case 1:23-cv-21572-CMA Document 1 Entered on FLSD Docket 04/06/2023 Page 12 of 72
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`Although PFOF made up 80% of Robinhood’s income through
`(c)
`mid-2016, PFOF was never disclosed as a revenue source, as had been promised,
`in the answer on the “How does Robinhood make money?” FAQ page. To the
`contrary, at some point during 2016, Robinhood removed all reference to PFOF
`from its website and even trained those responding to inquiries that PFOF as a
`source of revenues was an “incorrect” answer to a question about how Robinhood
`makes money. This deception continued through late 2018, despite PFOF being
`Robinhood’s largest revenue source.7
`The SEC also found that Robinhood Financial knowingly violated
`30.
`its duty of “best execution” for customer orders by routing trades only to executing
`brokers that would split the PFOF 80% to Robinhood and only 20% to price reduction
`for customers, a reverse of the split paid to large retail broker-dealers.8 Not
`surprisingly, an extensive internal analysis conducted by Robinhood in March 2019
`bluntly concluded: “ ‘[n]o matter how we cut the data, our % orders receiving price
`improvement lags behind that of other retail brokerages by a wide margin.’ ” The SEC
`continued: “Robinhood further found that the amount of price improvement obtained
`for Robinhood customers was far lower than at competing broker-dealers, measured on
`
`
`
`indirectly generate from it is negligible. If we were ever to receive it directly, or if it becomes a
`significant
`source of
`revenue, we will
`reintroduce
`that
`language
`into
`the FAQ.”
`(https://web.archive.org/web/20160412113038/https://support.robinhood.com/hc/en-
`us/articles/204336175-Order-Routing-and-Exchanges, last accessed November 29, 2021).
`
`7 SEC C&D Order, Finding of Fact Nos. 18, 27, 31-36.
`
` Id. at Finding of Fact Nos. 21-23, 27. A September 2018 article on Seeking Alpha first noted key
`differences in PFOF payment reporting in SEC Rule 606 filings. Author Logan Kane queried:
`“Every other discount broker reports their payments from HFT ‘per share,’ but Robinhood reports
`‘per dollar’, and when you do the math, they appear to be receiving far more from HFT firms than
`other brokerages. This raises questions about the quality of execution that Robinhood provides if
`their true customers are HFT firms.” (https://seekingalpha.com/article/4205379-robinhood-is-
`making-millions-selling-out-millennial-customers-to-high-frequency-traders,
`last
`accessed
`November 29, 2021).
`
`
` 8
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`12
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`Case 1:23-cv-21572-CMA Document 1 Entered on FLSD Docket 04/06/2023 Page 13 of 72
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`a per order, per share, and per dollar traded basis. Senior Robinhood personnel were
`aware of this analysis.” Although Robinhood had a Best Execution Committee, from
`2016 to 2019 it did nothing to either assess or address whether Robinhood was
`breaching its duty of best execution.9
`Even though PFOF is banned in other countries because of the inherent
`31.
`conflicts it poses – including, in addition to a brokerage firm pocketing most of the
`payment, market maker front-running and broker inducements to increase customers’
`trading frequency10 – since 1994, the SEC has instead opted for full disclosure of PFOF
`and adherence to a broker’s duty of best execution for its customers. As laid out in detail
`by the SEC, even before the events of late January and early February 2021 unfolded,
`Robinhood had already failed its customers spectacularly on both measures. But the
`worst was yet to come.
`32. During the pandemic lockdown, with stimulus checks in one hand and
`time on both hands, large numbers of Americans started to follow the markets and trade
`for the first time. The popularity of mobile app-based brokers such as Robinhood
`exploded among younger, first- time traders.11 Social media sites such as the
`WallStreetBets sub-Reddit and Stocktwit provided millions of new investors with a
`platform to discuss investment strategy and the merits of trading in particular stocks.
`Not surprisingly, retail trading surged tremendously. On several occasions in 2020,
`Robinhood’s platform crashed due to the steep increase in trading volume, causing
`
`
`
`9 SEC C&D Order, Finding of Fact Nos. 29, 30 & 39.
`
`10 Robinhood’s “gamification” of its app to induce frequent trading is under scrutiny by the SEC.
`See https://www.sec.gov/rules/other/2021/34-92766.pdf.
`
`11 Robinhood, whose investors’ median age is 31, seeks to drive that figure even lower. In
`“Robinhood Is Going on a College Tour to Recruit New Customers,” the Wall Street Journal
`reported on September 15, 2021, that Robinhood planned to give community college and HBCU
`students $15 to sign up, with five lucky customers to receive $20,000 for tuition.
`
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`

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`Case 1:23-cv-21572-CMA Document 1 Entered on FLSD Docket 04/06/2023 Page 14 of 72
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`millions of dollars in investor losses.12
`The extent to which novice, retail traders entered the market during the
`33.
`pandemic was detailed in a recent SEC Staff Report. Notable statistics include:
`During 2020, the 60-day moving average of off-exchange market
`(a)
`volume,
`i.e., trades routed through wholesalers instead of being executed on an
`established exchange (deemed to be a proxy for retail trading), increased from 38.4%
`on March 23 to 46.5% at the end of the 2020, with the single-day percentage
`exceeding 50% for the first time on December 23, 2020, at 50.4%.13
`(b)
`Trading in single option contracts in the 50 most-traded stocks rose
`from 10% to 14% in a matter of months, with number of contracts trading per
`day increasing from 19.6 million in December 2019 to 34.3 million in December
`2020.14
`In December 2020, over the counter, non-exchange listed equity
`(c)
`volume (including “penny” stocks) surged, with a daily average of nearly 50
`billion shares, compared to roughly 14.7 billion shares per day in November
`2020, which had been the most active month over the prior two years.15
`This enormous growth in online retail trading corresponded to the
`34.
`
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`12 Failure to supervise the technology relied upon to provide core broker-dealer services caused
`multiple outages, including one for 26 hours on March 2-3, 2020. This is one reason Robinhood was
`fined $70 million by the Financial Industry Regulatory Authority (“FINRA”) in June 2021. See
`“FINRA Orders Record Financial Penalties Against Robinhood Financial, LLC,” June 30, 2021.
`(“FINRA Order”) (https://www.finra.org/media-center/newsreleases/2021/finra-orders- record-
`financial-penalties-against-robinhood-financial last accessed November 29, 2021).
`
`13 SEC “Staff Report on Equity and Options Market Structure Conditions in Early 2021,” at 16 n. 51
`(Oct. 14, 2021) (“SEC Staff Report”)
`(https://www.sec.gov/files/staff-report-equity-options-
`market-struction-conditions-early-2021.pdf)
`
`14 Id. at n.52.
`
`15 Id. at n.51.
`
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`Case 1:23-cv-21572-CMA Document 1 Entered on FLSD Docket 04/06/2023 Page 15 of 72
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`destruction of many of the guardrails established by government entities and by self-
`regulatory organizations to protect investors. As explained on its website, FINRA is
`“authorized by Congress to protect America’s investors by making sure the broker-
`dealer industry operates fairly and honestly.” One rule enacted to protect investors, Rule
`2111, sets standards for investment recommendations to customers, providing, in
`relevant part:
`(a) A member or an associa