New Lawsuit Alleges Citadel Conspired with Robinhood to Limit GME Trading

The GameStop/AMC saga has resulted in a class-action lawsuit against parties that are allegedly responsible for restricting the trading of short-squeezed securities.

A Quick Recap of the GME/AMC Situation

On January 28, 2021, retail trading hit a new milestone when Robinhood decided to restrict short-squeezed stocks, citing market volatility, in addition to raising margin requirements.

“In light of recent volatility, we restricted transactions for certain securities to position closing only.”

Soon after, TD Ameritrade and Charles Schwab joined Robinhood in imposing similar restrictions. Headed by GameStop (GME) and AMC Entertainment (AMC) as the main ones, the restricted list also included the following securities:

• Bed Bath & Beyond (BBBY)
• BlackBerry (BB)
• Express (EXPR)
• Koss (KOSS)
• Nokia (NOK)
• Naked Brand Group (NAKD)

Up to that point, hedge funds were heavily invested in betting against GME/AMC. However, they failed to account for the power of social media combined with zero-fee trading. Robinhood had established itself as one of the most popular trading apps, having grown by 80% between 2019 to 2021, from 10 million to 18 million users.

During the pandemic, day trading became something of a new hobby among millennials and Gen Xers, notably spearheaded by the likes of Dave Portnoy and Keith Gill.

Lawsuit Claims Robinhood Conspired with Citadel Securities

Although surprising to some, it was no secret that Robinhood had been making the bulk of its profits through the controversial pay-for-order flow (PFOF) business model, which grants it a small commission for sending trades through to market makers.

However, not only did 75% of Robinhood’s 2020 revenue come from PFOF, it was later revealed that, for Q1 2021, a notable portion of Robinhood’s revenue came from PFOF paid by Citadel Securities.

Alongside hedge funds such as Melvin Capital, Citron Capital, Point72, D1 Capital Partners, and Candlestick Capital Management; Citadel LLC was, the lawsuit claims, taking up short positions against the securities that retail investors were longing. This alleged conflict of interest is at the core of the class action lawsuit.

Without naming names, SEC Chair, Gary Gensler took note of it in his June statement:

”Within the off-exchange market maker space, we are seeing concentration. One firm has publicly stated that it executes nearly half of all retail volume.”

Gensler further observed that…

“…as a significant and growing share of retail orders are routed to a small, concentrated group of wholesalers, certain market makers have more data than others.“

Correspondingly, the 137-page class-action suit brought before the US District Court, Southern District Of Florida, alleges collusion between brokerages and Citadel Securities. Specifically, the lawsuit groups defendants into four categories:

1. Defendants responsible for enacting securities restrictions.

2. Self-clearing brokerages themselves – to include Robinhood.

3. Market Makers – Citadel Securities.

4. Clearing corporations.

The core allegation then follows that all the entities involved had both control and motivation to act unlawfully and anticompetitive, further noting that “subsidiaries, affiliates, and agents thus operated as a single unified entity.“

The lawsuit then lists all the processes that securities have to go through to be settled. This includes the role of market makers, the illicit practice of naked shorting, and various clearing steps, which we recently covered when discussing Computershare as a FAST agent.

However, it is one thing to list procedures and trading routes, and another matter to prove collusion. In an effort to demonstrate this, the lawsuit’s weight then relies on “communications” between Citadel Securities and Robinhood.

There are also claims that Vlad Tenev, CEO of Robinhood, changed his story on why the securities restrictions were imposed. This is a matter of public record and the timeline does seem to follow the one stated in the complaint.

Then around a month later:

Vlad Tenev is also alleged to have been in contact with Ken Griffin, the founder of Citadel Securities, during the height of the GameStop short squeeze.

Moreover, the complaint showcases a string of Slack messages between Miles Wellesley, VP of Business Development at Robinhood, and David Dusseault, President and COO of Robinhood Financial. In the screenshots provided, they appear to have been following the WallStreetBets subreddit closely and had an active line of communication with one of the entities that imposed restrictions; Apex Clearing Corporation.

In the same vein, line 297, claims there was an interaction between Josh Drobnyk, head of Robinhood’s corporate relations, and Citadel’s Head of Execution Services.

As insider dealings go, this appears to be a textbook case. Drobnyk states in his own Twitter profile he is formerly of FINRA and the Treasury Department, positions he purportedly established a relationship with the Citadel Securities representative.

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Citadel Securities’ Response

In response to alleged multiple instances of “subsidiaries, affiliates and agents thus operated as a single unified entity”, Citadel Securities denies all allegations, one by one on their official Twitter account.

The thread includes the denial that Ken Griffin ever spoke to Vlad Tenev.

If that turns out to be untrue, both Vlad Tenev and Ken Griffin could face legal ramifications, as both testified under oath before the US Congressional Hearing that there was no collusion of any kind.

Do you think billions of dollars at stake on short selling would provide sufficient motivation for alleged collusion? Let us know in the comments below.