Robinhood seeks to depose seven brokers in short squeeze lawsuit

As Robinhood faces a renewed traders’ motion for class certification in a lawsuit concerning the January 2021 short squeeze, the company is seeking to take additional depositions.

On January 5, 2024, Robinhood Markets, Inc., Robinhood Financial LLC and Robinhood Securities, LLC submitted a Motion for Leave to Take Additional Depositions at the Florida Southern District Court.

The Court ordered bifurcated discovery in this action, with class certification discovery preceding merits discovery. During class certification discovery, Robinhood deposed the 12 named plaintiffs, as well as five third-party retail investors who were directly involved in the social-media driven stock frenzy at the center of this case.

Robinhood now seeks to depose 14 additional third-parties: the NSCC (which issued the margin deposit requirement that led Robinhood to implement the challenged restrictions), certain other brokers that implemented trading restrictions similar to those at issue here and the issuers of some of the stocks Plaintiffs call the “Affected Stocks.”

Although Robinhood has agreed to let Plaintiffs take 20 depositions of Robinhood employees alone, Plaintiffs refuse to permit Robinhood to take more than a single further deposition. Robinhood thus requests that the Court grant Robinhood’s Motion to take up to 14 additional fact depositions.

Plaintiffs allege that Robinhood manipulated the securities market by imposing trading restrictions at the height of the so-called Meme Stock frenzy. Robinhood intends to prove that extreme market volatility driven by retail investors’ investment in “meme stocks” led to unprecedented collateral requirements that required Robinhood to put in place the challenged trading restrictions.

To date, Robinhood has deposed the 12 class representatives, as well as five third-party individuals who participated in social media posts at the heart of this case. Those depositions were taken in the context of class certification and therefore focused on predominance and adequacy. The Court denied class certification because Plaintiffs failed to establish that common issues predominate over individual issues.

Plaintiffs now argue that Robinhood is stuck with no merits-related deposition—except a single deposition of the NSCC, to which Plaintiffs originally objected but now consent—because Robinhood used up its 10 depositions when it reasonably decided to depose all 12 putative class representatives in connection with class certification. That would obviously be unfair, Robinhood says, and Robinhood’s additional requested depositions relate directly to key issues in this case.

First, the NSCC lies at the heart of this case because it issued the collateral call that led Robinhood to implement the challenged trading restrictions. The NSCC can provide testimony about the reason for margin requirements, how those requirements are calculated, why there were unprecedented increases in margin requirements in January 2021, and why the NSCC reduced Robinhood’s initial deposit requirement on January 28, 2021, after Robinhood notified the NSCC of its trading restrictions. This testimony is relevant to, inter alia, Robinhood’s reasons for putting the challenged restrictions in place, Robinhood’s alleged scienter and the inefficiency of the markets for the relevant stocks at that time.

Second, Robinhood seeks to depose certain third-party brokers who put similar restrictions in place (Apex; Axos; Interactive Brokers; TradeStation; E*TRADE; TD/Charles Schwab and Merrill Edge, collectively the “Brokers”). Here too, Plaintiffs have already acknowledged the Brokers’ relevance by serving some of them with document and deposition subpoenas. In fact, Plaintiffs’ pleadings compare the Brokers’ actions to Robinhood’s during the Relevant Time Period.

The fact that other brokers restricted trading in the Relevant Time Period, the reasons for each Broker’s restrictions (which may vary from Broker to Broker) and the extent to which those restrictions impacted a significant number of customers are all relevant to, inter alia, Plaintiffs’ allegation that Robinhood’s restrictions caused the price declines, Robinhood’s scienter and damages.

Third, Robinhood seeks to depose the issuers of six of the nine Affected Stocks (AMC; Bed, Bath & Beyond; BlackBerry; Express; GameStop and Nokia, collectively the “Stock Issuers”). Plaintiffs allege that the prices for these securities reflected an efficient market during the time immediately preceding the class period and that any decline in the price of those securities was directly related to Robinhood’s trading restrictions.

Robinhood expects that the Stock Issuers will provide testimony that the extreme fluctuations in the stock prices did not correlate with any announcements the companies made about their underlying businesses. This is directly relevant to loss causation and damages.