Several traders have challenged a ruling in favor of Robinhood in a multi-district litigation concerning the January 2021 short squeeze. This becomes clear from a document filed with the Florida Southern District Court on Monday, February 28, 2022.
The notice, seen by FX News Group, states that plaintiffs Andrea Juncadella, Edward Goodan, William Makeham, Mark Sanders, Jaime Rodriguez, Patryck Krasowski, Cody Hill, Sammy Gonzalez, Joseph Daniluk, Jonathan Cornwell, Paul Prunean, and Julie Moody, on behalf of themselves and others similarly situated, appeal to the United States Court of Appeals for the Eleventh Circuit from the final Order entered on January 27, 2022, which granted defendants Robinhood Markets, Inc., Robinhood Financial LLC, and Robinhood Securities, LLC’s Motion to Dismiss the Robinhood Tranche Complaint, and dismissed Plaintiffs’ Amended Consolidated Class Action Complaint with prejudice.
This case is about meme stocks. In January 2021, scores of retail investors rushed to purchase stocks that hedge funds and institutional investors had bet would decline in value, causing a dramatic increase in those stocks’ share prices. The mass rush to purchase these “meme stocks” led to a highly volatile securities trading market, with the prices of certain stocks varying wildly by the hour.
When meme stock share prices took off in January 2021, regulators reacted. In a span of three days, Robinhood Securities, a clearing broker, incurred both a deposit surplus of $11 million and a deposit deficit of over $3 billion. These oscillating collateral requirements were driven primarily by Robinhood customers’ concentrated positions in meme stocks. Robinhood Securities proved able to meet its daily deposit requirements each day up to January 28, 2021.
Still, it and its affiliates — parent company Robinhood Markets and introducing broker Robinhood Financial — grew concerned about the rapidly changing circumstances. It then made the decision to restrict purchases of the meme stocks on the Robinhood platform for a week. That decision helped fix Robinhood’s compliance quandary. But, Robinhood customers say, it also forced share prices of the meme stocks into a steep decline.
Several of those customers sued Robinhood, and their suits were consolidated into this Multi-District Litigation. Robinhood has moved to dismiss. The Motion to Dismiss challenges whether any of Plaintiffs’ seven claims is viable.
Defendants moved to dismiss the Amended Complaint. They argued that their duties to Plaintiffs are defined by the Customer Agreement rather than by tort law. And because the Customer Agreement permitted Robinhood to restrict customers’ abilities to trade, Defendants asserted that their decision to impose the PCO restrictions did not transgress their obligations under the Agreement.
The Court agreed with Robinhood that the duty that Plaintiffs seek to impose is remarkably broad: they assert Defendants owe a tort duty to permit trading in all securities, at all times, to all “foreseeable” Plaintiffs, even during periods of market volatility. Plaintiffs offer virtually no limiting principle to this theory of duty, other than to point to Robinhood’s retail investor-focused marketing tactics.
All the while, they do not cite a single California case holding that a company’s marketing or business philosophy created an independent duty in tort — much less a duty of the breadth that Plaintiffs propose.
Further, the Judge found that the plaintiffs repackage their dissatisfaction with the PCO restrictions as negligence claims. In doing so, they seek to obtain precisely what the Customer Agreement that they freely entered denied: a right to unrestricted trading. They also ask the Court to extend California tort law into uncharted waters by imposing on Robinhood a tort duty to all foreseeable investors to permit trading of any security, at any time.
California law does not endorse such freewheeling liability, and it is not the Court’s role to second-guess that policy determination. Counts I and II fail under California law.
Also, the Customer Agreement merits judicial respect under Florida law. And the Court declined Plaintiffs’ invitation to rewrite the Agreement under the guise of novel negligence claims. Because Counts I and II do not adequately allege the existence of a tort duty under either California or Florida law, they were dismissed.
Robinhood’s relationships with its many customers are not special or confidential, the Court found. Plaintiffs might not be finance experts, but they do not allege that they lack the capacity to make their own decisions or that Robinhood Financial personally took advantage of them. Tellingly, they cite no example of a confidential relationship arising from a garden-variety consumer contract signed by millions of customers. And understandably so. Extending fiduciary obligations to all such relationships would revolutionize the brokerage industry — a consequence California courts have not embraced.