Explosive Claims in Lawsuit Against Robinhood

As it prepares to IPO this week, Robinhood Markets, Inc. is facing several class action lawsuits from its users. Inside those lawsuits, an explosive claim:

High level executives and employees of Robinhood and Citadel Securities were in contact around the time Robinhood restricted trades, according to the complaint.

This lawsuit grows out of buying restrictions that Robinhood imposed on stock in AMC, GameStop, and others this January as their prices skyrocketed:

Retail investors suing Robinhood Market Inc and others over trading restrictions in the wake of a social media-fueled rally that squeezed short sellers have filed complaints seeking potentially billions in damages.

One of the proposed class actions filed on Tuesday in Miami federal court accuses Robinhood and clearing brokerage Apex Clearing Corp of acting negligently in cutting off trades in late January. The other lawsuit alleges they and others were part of an antitrust conspiracy with Citadel Securities LLC to spare the market maker losses on short bets.

Citadel plays an interesting dual role here. Citadel Securities handles many of Robinhood’s trades, but its hedge fund arm invested money in Melvin Capital, a fund that was imploding due to losses shorting meme stocks.

I see two possibilities:

  1. Citadel Securities handles a lot of Robinhood’s trades, so Robinhood naturally talked with them about issues it was facing holding enough money to back trades in volatile stocks like AMC and GameStop.
  2. Citadel tried to influence Robinhood to stop its users from driving up the price of meme stocks, which would hurt its positions in Melvin (and perhaps elsewhere)

I don’t think we have enough information yet to determine which it is. We need to find out what was said in conversations between Citadel Securities and Robinhood, and what contact Citadel Securities staff had with people on the hedge fund side of the firm. The lawsuit will likely expose phone records, e-mails and more that could shed light on what really happened.

That said, we definitely have at least the appearance of impropriety here. Citadel is exposing itself to a huge risk of regulatory crackdown and legal judgments. And Robinhood customers may be skeptical enough that they move on to any of the countless other brokerages available.

Major financial institutions are in the habit of saying “just trust us.” What they don’t understand is that after decades of bailouts and conflicts of interest, that’s a very hard sell.

More on AMC:

AMC SHORTS LOST $642 MILLION YESTERDAY

HEDGE FUND LOSSES COULD TAKE DECADES TO RECOVER

SHORT SELLERS LOSE $44 BILLION IN 30 DAYS

Photo: “Fruit of the fireball machine” by SiamEye is licensed under CC BY-NC-ND 2.0

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