Juncadella v. Robinhood Fin. LLC (In re Jan. 2021 Short Squeeze Trading Litig.)

76 F.4th 1335

IN RE: JANUARY 2021 SHORT SQUEEZE TRADING LITIGATION,

Andrea Juncadella, Edward Goodan,William Makeham, Mark Sanders, Jaime Rodriguez, et al., Plaintiffs-Appellants, v. Robinhood Financial LLC, Robinhood Securities, LLC, Robinhood Markets, Inc., Defendants-Appellees.

No. 22-10669

United States Court of Appeals, Eleventh Circuit

Filed: August 10, 2023

Appeal from the United States District Court for the Southern District of Florida, D.C. Docket Nos. 1:21-md-02989-CMA, 1:21-cv-20414-CMA.

Jesse Panuccio, Carl Edward Goldfarb, Boies Schiller & Flexner, LLP, Fort Lauderdale, FL, Blake Atherton, Boies Schiller & Flexner, LLP, Washington, FL, Sean Alexander Burstyn, Burstyn Law PLLC, Miami, FL, James L. Ferraro, James Louis Ferraro, Jr., Mathew Daniel Gutierrez, Natalia Salas, The Ferraro Law Firm, PA, Miami, FL, Rachel Wagner Furst, Maderal Byrne & Furst, PLLC, Coral Gables, FL, Jeffrey E. Kwatinetz, The Law Office of Jeffrey Kwatinetz PC, Encino, CA, for Plaintiffs-Appellants.

Kevin J. Orsini, Andrew D. Huynh, Antony L. Ryan, Brittany L. Sukiennik, Cravath Swaine & Moore, LLP, New York, NY, Eric D. Monek Anderson, Carl Brandon Wisoff, Farella Braun & Martel, LLP, San Francisco, CA, Maria Castellanos, Samuel Danon, Hunton Andrews Kurth, LLP, Miami, FL, Kevin A. Crass, Elizabeth Robben Murray, Friday Eldredge & Clark, Little Rock, AR, Benjamin H. Diessel, John M. Doroghazi, Wiggin & Dana, LLP, New Haven, CT, Rachel Wagner Furst, Maderal Byrne & Furst, PLLC, Coral Gables, FL, Grace Kang, Bird Marella, Los Angeles, CA, Craig Crandall Reilly, Law Office of Craig C. Reilly, Alexandria, VA, Naeun Rim, Craig Steven Rutenberg, Manatt Phelps & Phillips, LLP, Los Angeles, CA, Dennis Parker Waggoner, Joshua Clark Webb, Hill Ward & Henderson, PA, Tampa, FL, for Defendants-Appellees.

Before Jill Pryor and Grant, Circuit Judges, and Maze,^* District Judge.

Grant, Circuit Judge.

Like so many other industries, retail investing has been transformed by the internet. Once upon a time, a person who wanted to trade stocks needed a flesh-and-blood stockbroker. Now, most anyone with a smartphone and a bank account can trade stocks from the comfort of their own home.

Sometimes that goes well; other times not. In January 2021, many customers of the online financial services company Robinhood were aggressively buying specific stocks known as "meme stocks" in a frenzy that generated widespread attention. This phenomenon brought Robinhood additional revenue and a huge number of new customers, but it also exposed the company to unprecedented regulatory compliance risk. Robinhood then made a high-profile and controversial decision: it suddenly restricted its customers' ability to buy these meme stocks (but not their ability to sell them). Some Robinhood customers who could not buy the restricted stocks brought this putative class action, seeking to represent both Robinhood customers and all other holders of the restricted meme stocks nationwide who sold the stocks during a certain period. As Robinhood customers, they allege that they lost money because Robinhood stopped them from acquiring an asset that would have continued to increase in value. And as stockholders, they allege that Robinhood's restriction on purchasing the meme stocks caused the price of their stocks to fall.

The plaintiffs fail to state a claim—their contract with Robinhood gives the company the specific right to restrict its customers' ability to trade securities and to refuse to accept any of their transactions. Because Robinhood had the right to do exactly what it did, the plaintiffs' claims in agency and contract cannot stand. And under basic principles of tort law, Robinhood had no tort duty to avoid causing purely economic loss. We thus affirm the district court's dismissal of the claims.

I.

A.

The company known as "Robinhood" is a collection of distinct entities, three of which are relevant here: Robinhood Markets, Inc., Robinhood Financial LLC, and Robinhood Securities, LLC.¹ Robinhood Markets is the parent corporation, with its principal place of business in California. Robinhood Financial is an "introducing broker-dealer," with its principal place of business in California, and is the company that Robinhood's customers actually interface with whenever they use the Robinhood app. It "introduces" its customers to the market by showing them financial products that they can buy and processing trade requests. The last of the three companies is Robinhood Securities, a "clearing broker-dealer," with its principal place of business in Florida.² When Robinhood Financial accepts one of its customers' requests to buy a stock, it forwards that request to Robinhood Securities. Robinhood Securities then finds a "market maker" who is willing to sell the stock and submits the trade to the National Securities Clearing Corporation to clear the transaction. The trade is finalized two days after that submission.

Robinhood's popularity reached new heights in January 2021. That's when several "meme stocks" became a phenomenon in the retail investment community—especially among young, relatively new investors who followed investing trends online. Take for example the stock of GameStop Corporation, which became the most prominent of the meme stocks.³ Sec. Exch. Comm'n, Staff Report on Equity and Options Market Structure Conditions in Early 2021 2 (Oct. 14, 2021). Several institutional investors were shorting GameStop stock (which means, in effect, that they were betting that its price would go down). Id. at 21. And social media platforms, most notably the subreddit WallStreetBets, soon hosted vigorous discussions about GameStop. Id. at 17. Some of this discussion pushed GameStop as a wise investment because of potential improvements in the company. Id. Other chatter emphasized the possibility of a "short squeeze." Id. The theory behind a short squeeze is that, if coordinated purchases of a stock drive its price up, those shorting the stock will be forced to cover their position by buying the very stock they are shorting, creating a positive feedback loop in which the price continues to rise, affecting increasing numbers of short sellers, who then buy even more of the affected stock, and so on. Id. at 25.

Whatever the exact motivations, purchases of GameStop shares surged. Id. at 21, 26-27. As a result, the closing price of the stock rose more than 700% between January 21 and January 27. In re: Jan. 2021 Short Squeeze Trading Litig., 584 F. Supp. 3d 1161, 1174 (S.D. Fla. 2022). And similar (though less drastic) price increases occurred for other meme stocks. See Staff Report on Equity and Options Market at 2, 32, 43. Naturally, more than just a few online retail investors started paying attention. And that led to a large increase in Robinhood users, as more than 3 million people downloaded the app in January, at one point making it the top app in the Apple App Store. Id. at 16 n.53; In re: Jan. 2021 Short Squeeze Trading Litig., 584 F. Supp. 3d at 1174.

While this volume of trading was good for Robinhood's business, it also raised serious regulatory compliance challenges. Because of the two-day lag between a trade agreement and its clearing by the National Securities Clearing Corporation, the market maker (who sells the stock) has a two-day wait between when it agrees to sell the stock to Robinhood (who facilitates the transaction) and when it actually gets the money from the individual Robinhood customer (who is the ultimate purchaser). That delay introduces risk for the market makers in the transaction—the person who bought the stock might not have the money two days later. To guard against that risk, clearing brokers like Robinhood Securities are required to post their own money (not their customers' money) as collateral every day with the National Securities Clearing Corporation, with severe penalties for a failure to do so. The amount of collateral, broadly speaking, depends on the amount of risk that the market maker faces. And the amount of risk depends on both the volume of trading and the volatility of the stock price. The upshot is that, if a stockbroker experiences a sudden surge of demand for stocks with rapidly changing prices, it is going to need a lot of cash as collateral. See generally Matt Levine, Meme Stocks Were Too Good to Robinhood, Bloomberg (June 27, 2022, 2:24 PM), https://www.bloomberg.com/opinion/articles/2022-06-27/matt-levine-s-money-stuff-meme-week-was-too-good-to-robinhood [https://perma.cc/PSV3-A43M].

When Robinhood had unprecedented trading volumes in extremely volatile stocks, the market makers faced an unprecedented amount of risk in the two-day clearing process. The National Securities Clearing Corporation, in response, required Robinhood Securities to meet unprecedented collateral requirements. Just past 5 a.m. on January 28, Robinhood learned that it needed to deposit more than $3 billion of additional collateral by 10 a.m.; its total collateral requirement had been $282 million the previous morning, and $125 million three days earlier. The National Securities Clearing Corporation soon reduced Robinhood's $3 billion collateral deficit to about $734 million, but even that amount was large enough that Robinhood Securities needed to borrow money from its parent, Robinhood Markets. And the very next day, Robinhood's deposit requirement leapt back to over $1 billion; it covered the amount thanks to fundraising from investors.

The continuing market volatility and high trading volume meant Robinhood's high collateral requirements were also likely to continue. So, beginning on January 28, Robinhood placed "position closing only" restrictions on certain meme stocks and related options. That meant that Robinhood customers could still sell any shares of the stock that they had already purchased on the platform, but they could not buy any new shares. Over the next week, Robinhood imposed a variety of restrictions on purchasing the meme stocks, which the...