Robinhood claims Customer Agreement permits trading restrictions

Online trading company Robinhood (that is, Robinhood Markets Inc, Robinhood Financial LLC, and Robinhood Securities LLC) has responded to traders’ allegations regarding the trading restrictions it imposed back in January 2021.

The company is a defendant in a multi-district lawsuit accusing it of, inter alia, negligence and breach of contract.

On Monday, August 30, 2021, Robinhood filed a motion to dismiss the complaint against it. The document, seen by FX News Group, focuses on the claim that the Customer Agreement permits the trading restrictions Robinhood imposed back in January this year.

Robinhood argues that its obligations to its retail investor customers are defined by contract. The rights and obligations between Robinhood and its customers are delineated in the Robinhood Customer Agreement, which all Robinhood customers must review and accept when opening an account.

Robinhood says:

“The Customer Agreement expressly permitted Robinhood to implement the restrictions it imposed on January 28, 2021, which are the basis of Plaintiffs’ claims in this Action”.

Specifically, Plaintiffs’ claims arise from the decision that Robinhood Securities made on January 28, 2021 to limit customer trading in certain popular stocks, including GameStop, Inc. (“GME”) and AMC Entertainment Holdings, Inc. (“AMC”). In the days leading up to this decision, retail investors, spurred by social media and online forums, poured into the stock markets in record numbers to trade in stocks for GME, AMC and certain other popular issuers known as the “meme stocks.” This activity pushed trading volatility in the meme stocks to record levels within a matter of days.

Robinhood says that, in late January 2021, this market volatility significantly affected the collateral deposit requirements that clearinghouses impose on clearing brokers to protect investors, brokers and the financial system as a whole.

The company explains that, to ensure market stability in the event that a market participant is unable satisfy its obligations with respect to a trade, clearing brokers, like Robinhood Securities, are required to post collateral to clearinghouses, like the National Securities Clearing Corporation (“NSCC”), at least daily to cover the cost and risk associated with their customers’ trade orders. Deposit requirements are calculated based on order volume and volatility multipliers, with the requirements increasing dramatically as volatility increases. The ultimate purpose of these deposits is to protect investors and the financial system generally.

Robinhood states that:

“As the unprecedented volatility in late January 2021 grew, so too did brokers’ clearinghouse deposit requirements with the NSCC. This substantial increase in trading volume and volatility led the NSCC, on the morning of January 28, 2021, to issue a $3 billion collateral deposit demand on Robinhood Securities—a ten-fold increase from earlier in the week, and more than four times what was required the day before. In order to remain in compliance with its deposit requirements, Robinhood Securities made the difficult decision to place limited restrictions on customer purchases on the small number of securities driving its deposit requirements”.

Robinhood reiterates that its Customer Agreement expressly provides that Robinhood can impose trading restrictions, stating inter alia that “Robinhood may at any time, in its sole discretion, and without prior notice to [the customer], prohibit or restrict [the customer’s] ability to trade securities.”

Robinhood notes that it reserves this right to restrict trading precisely because of situations like the one that unfolded in late January 2021: extreme market volatility can have unpredictable effects, and Robinhood, like all brokers, needs the flexibility to take measures to satisfy its legal obligations so that it can continue serving its customers trading in thousands of available securities.

Robinhood insists that “all of Plaintiffs’ claims must therefore be dismissed”.

  • Counts I (negligence) and II (gross negligence) fail, Robinhood says, because the customer plaintiffs do not identify—and cannot identify—any duty under tort law that arises independent of Robinhood’s contractual obligations.
  • In Count III, according to Robinhood, Plaintiffs attempt to provide the missing duty element of their tort claims by alleging negligence per se. However, negligence per se does not constitute an independent claim under the governing law. And even where such a cause of action is recognized, courts have confirmed that it can be maintained only if the underlying statute creates a private right of action. None of the statutes or regulations that Plaintiffs cite do so.
  • Further, Robinhood says that Count IV (breach of fiduciary duty) fails because, as a non-discretionary broker-dealer that does not provide investment advice, Robinhood owes no general fiduciary duty to its customers.
  • Finally, those claims also fail to the extent they are asserted on behalf of non-Robinhood customers, to whom Robinhood owed no duties, the company argues.

This action should be dismissed with prejudice, Robinhood concludes.

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