Robinhood Antitrust Suit Over GameStop Losses Faces Uphill Climb

Investors who allege they lost billions of dollars in a GameStop Corp. stock trading frenzy will face a high bar in convincing an appeals court to point the finger at financial trading platform Robinhood Markets Inc.

The US Court of Appeals for the 11th Circuit heard arguments Thursday from attorneys of investors who say Robinhood colluded with global market maker Citadel Securities LLC to unfairly block them from trading high-flying stocks in 2021. Plaintiffs, who are seeking more than $10 billion in damages, failed in three attempts to convince a district court of their claims, and appealed the case to the 11th Circuit.

At issue is whether Robinhood and Citadel formed an illegal agreement to freeze trades of highly shorted GameStop stock options and other “meme” stocks—including AMC Entertainment Holdings Inc. and Bed Bath & Beyond Inc.—bought by retail investors during a social media-fueled trading frenzy. The alleged agreement drove prices down and forced investors to sell at a loss, but allowed Citadel to recoup its massive short positions.

The case is one of several legal challenges in multidistrict litigation facing brokerage Robinhood around the “short squeeze” in early 2021, when stocks rose sharply and distressed short positions. The 11th Circuit earlier this year affirmed a lower district court’s decision on a separate case brought by investors against the app-based trading platform.

Plaintiffs allege the Robinhood-Citadel agreement violated Section 1 of the Sherman Act, which prohibits agreements in restraint of trade.

Steven Brannock, an attorney for the investor plaintiffs, detailed the alleged conspiracy before the 11th Circuit panel Thursday. “We have evidence of the actual conversations that took place,” he said. “We have evidence of inside knowledge. For example, the Robinhood president saying that he was going to be dumping his AMC stock the night before when prices of AMC were still going up.”

Kevin Orsini, an attorney for Robinhood, said the plaintiffs didn’t suffer any reduced competition in the “no-fee brokerage market” as defined in their appeal—a key flaw in the investors’ argument, he said. “They still had the ability to purchase securities, just not these particular securities through the Robinhood app,” he said.

“You have to allege an anticompetitive effect in the relevant market,” Orsini said.

Antitrust experts say the plaintiffs face long odds on their appeal.

“The fact that the judge has rejected the claims three times makes it an uphill climb to reverse on appeal,” said Michael Carrier, an antitrust professor at Rutgers Law School. “Because direct evidence of an agreement is hard to find, courts accept circumstantial evidence, but the question is how much is enough.”

Legal Challenges

The legal challenges together raise the question of exactly how regulators should treat entities like Robinhood, which are part tech company and part securities brokerage, with fiduciary duties to investors, said Maurice Pessah, a lawyer on the court-appointed plaintiffs’ steering committee handling the MDL.

“I’ve always said Robinhood is a brokerage from the waist up and a tech company from the waist down,” Pessah said in an interview Wednesday. “The tech company mindset is, ‘Let’s get as many users as we can.’ In my view, that is antithetical about what it means to be a broker with fiduciary duties.”

According to the plaintiffs, Citadel allegedly leveraged its power over Robinhood to form the agreement and recoup short positions. Citadel is Robinhood’s market-maker partner, a practice that allows the two firms to split profits made on trades from retail customers.

Robinhood didn’t return inquiries for comment. The Securities and Exchange Commission is also investigating Robinhood’s cryptocurrency business.

Citadel has said it first learned of Robinhood’s 2021 trading restrictions on Twitter, seeking to rebut accusations that the two firms colluded.

Plausible Evidence

The investor plaintiffs also argue their case raises questions about a judge’s responsibilities when evaluating a case from the outset.

Last year, Judge Cecilia Altonaga of the US District Court for the Southern District of Florida dismissed the plaintiffs’ amended complaint, stating it failed to plausibly allege that Robinhood and Citadel froze trading through an illegal agreement.

“There were no additional factual allegations supporting a plausible inference of a conspiracy—except for references to a few vague and ambiguous emails that were exchanged between a brokerage, Robinhood, and its market maker, Citadel Securities,” Altonaga wrote.

The investors, however, say the district court erred in dismissing the case by ignoring facts that could give rise to an inference of collusion at that stage of the proceeding. They say the judge essentially acted as a jury that weighed all the evidence.

“The only question is ‘Did we allege a plausible antitrust conspiracy?’ and I think it’s clear in great detail that we did,” Brannock, the plaintiffs’ attorney, said at the hearing.

The plaintiffs are represented by firms including Joseph Saveri Law Firm, LLP, Brannock Berman & Seider, and Hach Rose Schirripa & Cheverie LLP. Robinhood is represented by law firms including Cravath, Swaine & Moore LLP; Farella Braun + Martel LLP; and Hunton Andrews Kurth.

The case is Angel Guzman v. Robinhood Markets Inc., 11th Cir., No. 22-11873.