Vlad Tenev, CEO and Co-Founder of Robinhood, at his office in Menlo Park, California on July 15, 2021.
Kimberly White | Getty Images Entertainment | Getty Images
Robinhood executives had a lot to say about the week Reddit users did a historic short squeeze on GameStop.
New documents in a lawsuit allegedly show internal conversations between executives panicking to meet financial requirements, debating the severity of a Reddit-powered short squeeze, and contradicting the CEO's public statements.
Plaintiffs in the lawsuit, which was filed in the U.S. District Court in Southern Florida, allege they suffered damage when Robinhood imposed trading restrictions on Jan. 28 amid volatile activity at GameStop and other meme stocks. You are suing for damages, interest and legal fees. The plaintiffs are also demanding class action status.
"As a brokerage firm, we have many financial requirements, including net capital commitments from the SEC and deposits from clearinghouses," the brokerage firm said in a Jan. 28 blog post addressing trade restrictions. "Some of these requirements fluctuate due to market volatility and can be significant in the current environment."
According to the lawsuit, Gretchen Howard, Robinhood's Chief Operating Officer, announced internally in one case that the start-up was facing a "major liquidity crisis". Publicly, the company's CEO said the opposite.
"There was no liquidity problem," CEO Vlad Tenev told CNBC's Andrew Ross Sorkin a day later, on January 29th.
Sharp increase in trading volume
Robinhood and other brokerage firms saw unprecedented trading volume in heavily short stocks, including GameStop and AMC, in January. The brokerage start-up, which is required to deposit money with a clearinghouse based on trading volume, said it restricted purchases of certain securities because the company was unable to meet deposit requirements. These requirements increase when the volatility increases in the case of large losses from option trades.
"This clearing thing strikes me as pretty scary – I'd say this is our biggest fire right now," Robinhood's director of engineering reportedly said in a Slack message, adding that the company could see hundreds of millions of dollars in margin. "In the worst case scenario, we will exhaust our credit lines and they will liquidate our positions."
According to the lawsuit, David Dusseault, chief operating officer of subsidiary Robinhood Financial, said the company was "too big to actually close us down," referring to National Securities Clearing Corp., a provider of centralized clearing services. In the same conversation, another executive, whose name had been blacked out, said "we will be crucified" according to the complaint because they stopped trading.
"A tidal wave of volume and volatility"
The chats were part of the discovery process in a lawsuit against Robinhood. A plaintiffs attorney argued that Robinhood knew the Reddit-led chaos was coming and had not done enough.
“Robinhood and his managers were aware of this tidal wave of volume and volatility going in their direction,” Maurice Pessah, founder of the Pessah Law Group, told CNBC. "In our opinion, and as we allege in the lawsuit, you have failed to do your job and your duties in terms of risk analysis and risk management as a broker."
In response, Robinhood said it disputes the plaintiff's allegations and stands by January 28 public statements. A company spokesperson said, "The communication is in line with Robinhood's focus on taking appropriate, incremental, risk mitigation measures."
In another excerpt, data scientists and Tenev discussed how intense the Reddit frenzy could get, according to the lawsuit.
"Maybe I'm an alarmist, but I think we should consider all situations on deck and change some priorities to cope with increasing volumes," allegedly wrote Robinhood's Director of Engineering. The company's head of data science replied, "You may not be a panic maker" after seeing a graph showing the increase in volume, the plaintiffs alleged.
"Today was a great day. There are internal things that start to buckle under pressure," said another software engineer, according to the suit.
Tenev reportedly replied that "only the paranoid survive". His response to a comment that "someone who panics first, panics best" was "joy".
In another message, the company admitted that "the setback will get exponentially worse over time" and they "are concerned about the long-term effects [sic]," according to the lawsuit.
In the months that followed these talks, the CEO of Robinhood, as well as the CEOs of Citadel and Melville Capital, testified before Congress. Tenev told representatives that the GameStop mania was a 1 in 3.5 million event that he described as "non-modelable," and that Robinhood's risk management processes were deploying as they should. To meet its capital requirements and support its balance sheet, Robinhood raised more than $ 3.4 billion in just a few days.
The company went on a blockbuster listing in August.
The chairman of the Securities and Exchange Commission, Gary Gensler, is expected to publish a report on the GameStop saga in the coming weeks, as well as recommendations on what changes, if any, should be made to the US trading system.