Securities Industry Commentator by Bill Singer Esq

January 31, 2022
By now, you'd think that Wall Street's regulatory community would want something akin to full disclosure to the investing public about successful public customer lawsuits against Robinhood. Certainly, you'd think that FINRA Dispute Resolution Services is mindful of the clamor surrounding Robinhood: meme stocks, gamification, payment for order flow, systems outages. Going by the lack of a fact pattern and rationale in a recent public customer arbitration against Robinhood, FINRA seems to think that disclosing nothing is sound public advocacy. Ah yes, FINRA, the Sheriff of Nothing-ham, and a modern-day Robinhood!

In re: JANUARY 2021 SHORT SQUEEZE TRADING LITIGATION (This Document Relates to the Robinhood Tranche) (Order, United States District Court for the Southern District of Florida ("SDFL"), 21-02989 / January 27, 2022)
SDFL granted Defendants' Motion to Dismiss the Robinhood Tranche Complaint, and, accordingly, dismissed with prejudice the Amended Consolidated Class Action Complaint. In part the SDFL Order offers this background;


THIS CAUSE came before the Court on the Motion to Dismiss the Robinhood Tranche Complaint [ECF No. 421] filed by Defendants Robinhood Markets, Inc.; Robinhood Financial LLC; and Robinhood Securities, LLC (collectively, "Defendants" or "Robinhood") on October 15, 2021. Plaintiffs filed a Response in Opposition [ECF No. 436], and Defendants filed a Reply [ECF No. 439]. The Court has carefully considered the Amended Consolidated Class Action Complaint [ECF No. 409], the parties' written submissions, the record, and applicable law.


This case is about meme stocks.1 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. 

For securities brokers who execute investor trades, the regulatory environment became correspondingly unpredictable. In the securities trading industry, registered clearing brokers must meet daily deposit requirements set by self-regulatory organizations. The amount clearing brokers must deposit each day depends on the level of volatility in the securities they trade. The purpose of deposit requirements is to stabilize the marketplace and reduce the risk that market participants will prove unable to meet financial obligations related to securities trades. 

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 fateful 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. 2 Robinhood now moves to dismiss. The Motion to Dismiss challenges whether any of Plaintiffs' seven claims is viable. 
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Footnote 1:  The Securities and Exchange Commission ("SEC") recently defined "meme stocks" as stocks that "experienced a dramatic increase in their share price in January 2021 as bullish sentiments of individual investors filled social media." SEC, Staff Report on Equity and Options Market Structure Conditions in Early 2021, at 2 (Oct. 28, 2021),

Footnote 2: The Plaintiffs are Andrea Juncadella, Edward Goodan, William Makeham, Mark Sanders, Jaime Rodriguez, Patryk Krasowski, Cody Hill, Sammy Gonzalez, Joseph Daniluk, Jonathan Cornwell, Paul Prunean, and Julie Moody. (See Am. Compl. ¶¶ 29-84).

In offering its rationale, in part, SDFL summarizes that:

The result in this case comes down to a simple truth: both California and Florida law require courts to respect and enforce the terms of valid contracts, even when one party to a contract boasts greater bargaining power. Plaintiffs have not argued or alleged that the Customer Agreement is unenforceable. Thus, both California and Florida law require holding Plaintiffs to the Agreement's terms. Those terms permitted Defendants to do precisely what they did.

Plaintiffs' request to enlarge Defendants' obligations beyond those contained in the Agreement is understandable but misguided. California and Florida law each carve out a vital gatekeeping function for courts faced with novel tort claims. Indeed, both California and Florida recognize that tort law is an imperfect - and often, an undesirable - mechanism for allocating financial risk and responsibility. Unlike contract law, which encourages parties to allocate risks related to future events, tort law concerns itself with after-the-fact determinations of fault. Expanding tort law at contract law's expense may cause uncertainty. And the uncertain threat of ruinous tort liability can discourage behavior that benefits society. That is why California, Florida, and virtually every other state in the nation make a point of setting "[m]eaningful limits" on tort liability. S. Cal. Gas Leak Cases, 441 P.3d at 896 (alteration added). One of those limits is a healthy skepticism of tort claims better suited for resolution by contract law - for example, claims for purely economic losses, like those asserted by Plaintiffs here.

No doubt, Plaintiffs were gravely disappointed when Robinhood suspended purchases of the meme stocks and their holdings declined in value. But the law does not afford relief to every unfulfilled expectation. Sometimes, it requires "denying recovery in negligence cases like this one even though purely economic losses inflict real pain." Id. Plaintiffs' claims fail because entertaining them would sanction a departure from the parties' own agreement and California and Florida tort-law principles. For that reason, the Amended Complaint must be dismissed.

at Pages 64 - 65 of the SDFL Order

The United States District Court for the Southern District of Florida entered a Restraining Order to preserve records and freeze assets controlled by defendants Rajiv Patel, a/k/a Ravi Patel, a/k/a/ Raj Patel (Patel) and Bluprint LLC (Bluprint). In a Complaint filed on January 18, 2022, the CFTC alleged that, from approximately June 2019 to the present, Bluprint and Patel, its owner and managing director, defrauded at least 16 pool participants of approximately $9.8 million through a commodity pool that purported to trade commodity futures and options. On January 28, 2022, the Court cancelled a preliminary injunction hearing for January 31, 2022 due to the death of Patel.  As alleged in part in the CFTC Release:

According to the complaint, the defendants misappropriated pool participants' funds and used the funds to pay personal expenses and to trade, among other things, commodity futures and options in personal trading accounts. The trading was unprofitable and resulted in significant losses of the pool participants' funds. The defendants, however, falsely reported to pool participants that their investments were accruing interest. The complaint also alleges that in order to conceal their fraud, the defendants made false statements to an introducing broker and to futures commission merchants that held the defendants' trading accounts and pool participants' funds. The complaint further alleges that the defendants failed to comply with CFTC registration requirements and disclosure and reporting requirements.
Pursuant to a Settlement Agreement filed in the United States District Court for the District of Massachusetts pharmaceutical distributor Cardinal Health, Inc. agreed to pay $13,125,000 to resolve allegations that it had violated the False Claims Act by paying "upfront discounts" to its physician practice customers, in violation of the Anti-Kickback Statute. The False Claims Act settlements resolve allegations originally brought in lawsuits filed by qui tam whistleblowers, and those relators will receive about $2.6 million of the recovery. As alleged in part in the DOJ Release:

The Anti-Kickback Statute prohibits pharmaceutical distributors from offering or paying any compensation to induce physicians to purchase drugs for use on Medicare patients. When a pharmaceutical distributor sells drugs to a physician practice for administration in an outpatient setting, the distributor may legally offer commercially available discounts to its customers under certain circumstances permitted by the Office of Inspector General for the Department of Health and Human Services (HHS-OIG). HHS-OIG has advised that upfront discount arrangements present significant kickback concerns unless they are tied to specific purchases and that distributors maintain appropriate controls to ensure that discounts are clawed back if the purchaser ultimately does not purchase enough product to earn the discount. According to facts that the company has acknowledged in the settlement agreement, Cardinal Health, Inc. failed to meet these requirements because the upfront discounts it provided to its customers were not attributable to identifiable sales or were purported rebates which Cardinal Health's customers had not actually earned.
The SEC issued its annual "Staff Report on Nationally Recognized Statistical Rating Organizations" ("NRSROs"), which purports to provide a summary of the SEC staff's examinations of NRSROs and discussing the state of competition, transparency, and conflicts of interest among NRSROs. In reality, as is the case with far too many similar reports emanating from the federal regulator, it's beautifully prepared with graphics and charts but, ultimately, the effort comes off as disappointingly generic and offering little more than broad brushstrokes of non-specific issues. In part, the SEC Report asserts:

In past years, the SEC's Office of Credit Ratings (OCR) covered these subject areas in two separate annual reports. The combined report includes a variety of substantive and organizational changes to provide greater transparency about NRSROs and their credit ratings businesses, and the market more broadly.

"The oversight of Nationally Recognized Statistical Rating Organizations is critical to the Commission's focus on investor protection," said SEC Chair Gary Gensler. "The Office of Credit Ratings' work contributes to our efforts to promote accuracy in credit ratings and help ensure that credit ratings are not unduly influenced by conflicts of interest."

"OCR's examinations protect investors by scrutinizing NRSRO compliance with applicable laws and rules and identifying instances of non-compliance," said OCR Director Ahmed Abonamah. "The report provides a comprehensive and integrated overview of OCR's activities, demonstrating the exceptional work of my colleagues in their efforts to protect investors."

The report highlights the risk-based approach of OCR's examination program. As described in the report, in addition to the eight statutorily mandated review areas, OCR staff examined the NRSROs':
  • Consideration of ESG factors and products;
  • COVID-19 related risk areas;
  • Activities related to collateralized loan obligations, commercial real estate, and consumer asset-backed securities;
  • Adherence to policies, procedures, and methodologies with respect to rating low-investment grade corporate securities; and
  • Controls, policies, and procedures for ratings of municipal securities. . . .