Robinhood Lawsuits Face Uphill Battle

Street bets changing the way the market works. I don't know if it's changing the way markets work, but it's certainly opening up trading at a level that we've never seen before because robin Hood is a commission free UH platform in which Robin makes his money and what they call payment for order flow UH. In other words, the product is really the traders, and robin Hood makes money off of the spread between with the buyer of the stock pays versus what robin Hood has to pay to

fill the order UH. And so it's just part of an evolution that began, you know, really in the sixties and seventies with Charles Schwab and then the elimination of fixed commissions and then just the continued reduction and trading cost which has characterized Wall Street really for the past fifty years. So is the story all about these day traders banning together over social media platforms like Reddit's Wall Street bets if that's your following, Reddit, I think are

just part of the story. For example, according to Matt Levine on Bloomberg's Money Stuff column, really only a minority of the purchases last week of Game Stock stock uh were by retail investors. Certainly there's going to be other hedge funds uh, And I think it's not well indicated

or mentioned by the press. That is very likely that other institutional traders are on the buy side, uh, Whereas the current media frenzy really focuses on the short selling hedge fund especially Melvin Capital, which shorts old stock uh. You know, however many months ago. So why are the hedge funds in it? I think it's probably a mixed bag.

I mean, for example, the most famous hedge fund that is long game Stop stock is Michael Burry, ironically famous for shorting the housing market, you know, more than a decade ago, as documented by the Christian Bale character in the movie the big short UH in this situation, Michael Bury started buying game Stop stock I think in the third quarter of But what I suspect that once the best settled an investigation is conducted, you'll see plenty of other hedge funds from to the present UH buying the

stock as opposed to shorting the stock. Robin Hood has been criticized from all sides for restricting trading. So do you buy their reason for restricting trading? You know, I think there's a good case for it. You know, we don't know all of the details. It's really a question of whether their rationale that they stated is truthful. But there's a good case for it. And the rationale that robin Hood gave for stopping trading was they needed to

ensure that they had adequate net capital. This gets into a somewhat esoteric but extremely important question for investors, because if robin Hood kept allowing people to drive the stock up the Game Stop stock to say a thousand or poor more, what you would see is that the net capital of robin Hood itself would likely be UH so a liquid that it would put robin Hood in jeopardy

of collapse. Much has happened with like Lehman Brothers and other actors in the financial crisis, you know, twelve years ago. And so what I think would be ironic would be if robin Hood had allowed people to keep trading, and then when the bubble inevitably burst, the traders in robin Hood buying game Stop stock suddenly would suffer the huge losses and by the way, massive margin calls, ruining their lives.

And then we would see a populoust doubt cry, much like the home buyers in the real estate bubble that led to the financial crisis of two thousand and eight, accusing banks and so forth the predatory lending. Don't forget that robin Hood was extending margin to the redditors, the supposed redditors trading and buying game stop stocks. So these guys buying game Stop stock are not just buying it with their own money. They're buying it, you know, on margin,

with extensions of credit from robin Hood. And the problem is, once the traders started accumulating a massive position in house money, the margin needs to be ratcheted way way down. And so robin Hood certainly had a contractual right. Paragraph sixteen of its customer agreement says it can stop trading in the stock at any time, and that contractual provision is absolutely necessary for any brokerage firm to operate because of extreme market volatility events just like this, and robin Hood

at a certain level. Whether the truth or not here, we don't know. There'll be an investigation and we'll find out did have to comply with the net capital requirements of the Securities and Exchange Commission and the clearing houses through which robin Hood trades. Remember that the buyers of game Stop stock at robin Hood aren't just buying the

stock immediately from some other counterparty robin Hood. They're buying it through an intermediary called the Depository Trust Corporation d t c C. It's a clearing endity, a clearing house, and d t c C requires robin Hood to maintain adequate net capital, as does the Securities and Exchange Commission. So maybe robin Hood's reason for stopping was not truthful or accurate, but there's a plausible explanation as to why they did it. We'll find out. The SEC has said

it's closely monitoring the situation. What kind of regulatory problem would this be? What's the SEC looking for? Well, I think the first thing uh that comes to mind is whether or not robin Hood was in fact truthful in

saying that it's a net capital was in jeopardy. But when you look at the massive increase in the stock price of game Stop and other of the similar shares the reditors were trading in, and the relative newness of the platform of robin Hood, and the fact that robin Hood did in fact have to, you know, draw down from its lines of credit, which you wouldn't have wanted to do. I think that the sec will investigate, and I'm probably with congressional investigations as well to prepare detailed

reports whether or not that actually happened. Again, I tend to think it did, at least at a certain level. Then there's discussion of, you know, how do you regulate these new online trading platforms like robin Hood that you know, allow a lot more flexible trading than the you know,

old conventional commission based model. You know, I don't know exactly what those regulations would be, but from what I see as as securities litigator, I don't see anything here that cries out for a radical change in the securities regulations we have and it has had for you know, nearly a hundred years comparable securities regulations. I mean, even before the nine stock market crash, the New York Stock

Exchange imposed various net capital requirements. They weren't as rigidly enforced as after the Securities and Exchange at nineteen thirty four. But you know, the wild West of stock trading really was in the late nineteenth century, and you know, really came to an end well before any of us were born. And or Elizabeth Warren called for a broader review by the SEC and said, broker dealers that invite individual investors need to operate based on basic rules and to keep

the playing field level. Do you think that's the problem here? You know, I'm not even sure what that means. Because if you're a trader, well just quite literally, if you start out stay with you know, ten thousand dollar trading account, you're a small retail investor and you start buying game

Stop stock. You know, if you started buying it, you know, say three or four months ago when it was whatever the twenties, uh, and all of a sudden that converts into hundreds of thousands of dollars because you've written this huge wave and you've been doing that in part on margin. Um,

I don't know that there's any fundamental right. In fact, I'm pretty sure that uh, you know, once I think Elizabeth one and and the others, and I would say this applies equally to some of the right wing uh populism on the issue, uh that once people really sit down and realize trading in the stock exchange is an incredible privilege and it is not something that just is it just doesn't happen. In other words, you need market

infrastructure to allow for the safe training. And again, just look back to the credit crisis when the regulations were dropped and all of a sudden you have the democratization supposedly of real estate finance that led to horrible outcomes for you know, small you know, low income and middle income uh families, and so you know, I think it was a very you know, the provocative issue. And it is so much fun to see the big shots, you know, get their noses bloodied and uh see the little guys

purportedly winning. I get that. It's great fun. You read the I would invite all of the listeners to subscribe to the Reddit sub account called our slash Wall Street bets because it's just funny. I mean, it's just silly and goofy. But to say that these traders, these retail traders, have a fundamental right to drive up the stock way beyond any rational you know, corporate valuation of that stock. You know, really, I think mistakes. The purpose of the

stock market is warm, Buffett says. The stock market in the short run is a voting machine. You can drive the price way up, But in the long run, it's a weighing machine. It weighs the long term earnings, the long term cash flows of the companies in which the stocks are issued. And I don't think anyone seriously believes the Game Stop stock is going to sit at you know, four hundred dollars for a long time. I mean this morning, at least last night checked it was down down, I

think in the two hundred range. And when you look at the company's cash flows and fundamentals, it's just hard to believe that it's going to stay there. Maybe this short failing hedge fund, Melvin Capital gets wiped out. Uh, maybe there's some yet, you know, come up and for a certain small group of hedge funds traders in New York or whatever. But I mean, I think it would be a mistake to assume that the you know, longside, the purchasers of game Stop, are entirely these small investors.

I think it's very much more likely that there's other hedge funds quietly behind the scenes, letting the Reddit guys take all the publicity while the hedge funds, uh, you know, profit from Melvin's misery. Because hedge funds love beating each other up, they tear their faces off every day. This is just a public example of something that has been going on since trading began. There are close to twenty lawsuits by investors against robin Hood. What are the suits

based on? What do they have to prove? Well, the lawsuit I have in front of me, it makes the mistake of alleging breach of contract, in other words, that the investors supposedly had this contractual right to keep trading. The lawsuit itself attaches the customer agreement I quoted earlier with paragraphs sixteen that says that robin Hood can put a trading halt on customer trading basically at its discretion.

And so it's hard for me to see as a commercial litigator, and especially someone who does a lot of securities litigation. How that constitutes a breach of contract when Robin Hood had the right to stop the trading, especially given the market fundamentals. Now, but it turns out that Robin Who has engaged in some chicanery. Okay, maybe, but I mean Robin Hood, I'm sure did not want to stop trading. I mean, they do better by letting their

customers actually trade. Maybe it's a cabal, Maybe there's a secret tact with Robin Hood and Citadel and these other people to shut down the small investors. But I think that that's you know, gonna be viewed as implausible. People step back and realize how the market system actually works. Again, it's great fun, it's great, great fun to see these guys get beat up, but you've got to really step

back and look at the market infrastructure. So do you think that these lawsuits then won't survive motions to dismiss Well, maybe we find out something provocative in that Robin Hood did something nefarious and underhanded. But if it's just simply the allegation that Robin Hood breached this contract by you know, not allowing people to continue to buy game stop, I mean the Temple Laws, which for example, says that deprived the customers of profitable trading opportunities. That to me seems

like a real stretch. It's going to be very difficult for an investor to claim I had the right to make another a hundred thousand dollars and drive game Stop stock all the way to five hundred when game Stop can come in and say, now we had the right to stop this, and by the way, we had a good reason for it. Again, maybe there's something out there we haven't seen. Much of the facts, you know, by necessity haven't been fully ventilated. But I would I would

find that implausible again, barring some incredible revelations. Also, do the robin Hood investors have to submit to arbitration according to the contract? Yeah, the contract does include mandatory arbitration. Whether or not that actually occurs is going to be interesting, because it may well be robin Hood decides to take the investors who filed lawsuits up on their desire to be in court, which robin Hood would be allowed to do.

In other words, robin Hood would be able to waive the arbitration requirement, get all these cases consolidated in front of a judicial panel. On the multi district litigation and maybe get rid of the cases that way, because individual arbitrations in such a massive context as this might be difficult. You know. I think the Bloomberg piece Chris Dalmus wrote that, uh we you and I discussed indicates that these lawsuits

are probably gonna be around for a while. Uh. My sense of it is that they'll die slow and painful. That why do you think it will be slow because of the massive number of lawsuits that investors have filed all over the country, which will trigger this multi district litigation process. Uh at least that's I think, you know, a one view of it. It. It's conceivable Robin Hood decides to challenge to these lawsuits individually, uh, in in

court after court after court. But given the number of the lawsuits, it kind of makes sense that uh, they would be consolidated for uh you know, pre trial treatment before a multi district litigation channel. That's gonna be again something we just have to see and how it plays out. Uhbin you could also compel these arbitrations. Are compel these

lawsuits to arbitration. That's another way to handle it. Um. But um, you know, I think that the conventional wisdom, and a lot of the like law professors and so forth and other experts are are probably right that'll will be consolidated before the judicial channel and multi district litigation, and that just takes additional time. Just explain briefly why companies usually prefer arbitration to trial. Well, the conventional wisdom is that it avoids runaway juries. Uh and and you

know that's definitely true in many instances. I will say that I'm a little bit more of an agnostic because a lot of planets cases do better in arbitration if if, for example, there's no depositions and no motion practice or at least not much motion practice, and the cases get decided and then once they're decided, there's no appeal. Uh So I think there's really kind of a you know,

pros and cons to arbitration versus court. But there's no question that in most consumer contracts like this, they do contain arbitration. That's very common in the brokerage industry. The cases are typically heard by the UH financial industry regulatory authorities arbitration UH subsidiary, and that that is viewed as generally being favorable to defendants. But you know, there are cases, and I've seen them one I've wanted them myself in

front of center artitrators. So it isn't just a guaranteed victory for the defendants. Uh And in some cases there's advantages to the planoff investors. Thanks for being on the Bloomberg Law Show, Dave. That's David Bissinger of Bissinger, Ashman and Williams. The number of Americans getting divorce plummeted last year, and the marriage rate also dropped as thousands of weddings were postponed or canceled due to the COVID nineteen pandemic.

This early look at COVID nineteen's effect on divorce and marriage statistics comes from Bowling Green State University's Center for Family and Demographic Research. The data contradicts earlier predictions that COVID nineteen and the stresses of the quarantine would cause divorce rates to surge. Joining me as family law attorney, Dan lipschelds of Aaronson, Mayefski and Sloan me, how COVID

affected your divorce practice. Well, I thought there would be you know, there was a lot of news around the country, around the world that COVID would cause a significant increase

in divorces. Um. I have not now agur into the pandemic seen that obviously when the pandemic first is and being a practicier out in New York City, you know, we went down in mid March ahead of other parts of the country, and courts were closed, and with courts being closed and not having the ability to operate virtually at that time, things certainly came to a relatively grinding halt.

But you know, there was talk, as we said at that time and over the course of the summer, that when things opened back up, there would be a major, major uptick in divorce rates. And I can't say that that that's happened. I think that as things have opened back up, yes, we've seen an inflow of new matters, but currently nothing that is significantly greater than prior to

the pandemic. And to some extent, I think there's a certain type of matter that we've seen and there are other types of matters that we have not seen, and that deals with I think people in certain economic situations and socio economic stature of families. I think that you know, a lower socioeconomic stature family or a family where one

or both spouts have lost job. I think the decisions to move forward with the divorce has become certainly a harder one, given that divorces can involve complicated issues and can be expensive, and the you know, there is still a significant backlog of cases, even the courts having been opened back up and and operating virtually, even some wealthy couples are facing some economic uncertainty at this time, and uncertainty you know about kids going to school, things like that.

Does that affect a wealthy couple's decision to get a divorce? M I don't think the same extent that uh, it might affect a less wealthy tuckle um. I think that people who have access to resources, even where there might be a slight downturn, are still going to be in a position to make that decision. I think economic considerations are always important in choosing whether you're going to be

moving forward with this divorce the separation. But I think that the lower income household, that decision has become much

much harder than in a wealthy household. And there is also, as I said, access to court resources or the ability to perhaps engage in some type of alternatives resolution, and you know, higher a private judge, which is something that I have certainly seen in the more affluent families that want to move forward with UM a divorce process that might otherwise stalled or you know, significantly delayed because of

the pandemic. As far as getting a divorce case through the courts during COVID, were you able to do that or were divorces basically stopped for a while in New York State UM, and specifically New York City. Uh, they were, they were stopped. UM who aren't even able to commence an action for divorce for a number of months. I think given that the city or Manhattan the words UM more of an epicenter than other parts of the state

and certainly other parts of the country. UM, other parts of state began to open up sooner than New York City, and then again once things opened back up, UM, it didn't necessarily mean that there were in port in person court appearances. In my fielden matrimonial law in New York County with his Manhattan, there are still no U in person proceedings. That it's all virtual, and that has changed the manner in which we've been practicing law. You are

not appearing in court, you're appearing virtually. UM. The filing has gone predominantly to electronic filing. And I think that has changed the case in which uh you have access to the courthouse, UM, the pace in which cases move forward. I you know that there are far less trials then there were uh pre pandemic. I think we're still adjusting to it. UM. In Manhattan, there are you appear before a judge, but economic issues in the case can be referred out to a special referee, which is sort of

an under judge. And those childs have not been done yet. UM. So you where there was a huge amount of economic cases being sized by a with different referees. UM, those have not really restarted yet. UM. And And in addition, if you don't consent for there to be a trial electronically, then you don't have to participate in one. And it can certainly so if there's not consent on both sides, it can cause further delay. Has COVID changed custody determinations

in any way? It's the same process, um, in terms of you know, how you would adjudicate or you would litigate a custody case. UM. I can't say that there's been a significant change in how UH COVID has affected that. There are certainly, almost on a weekly basis, new issues that arise, and I think judges are consistently confronted with um. You know, the same type of issue would arise, and most judges would do the same one over a course

of a certain period of time. For example, you know what the pandemic UH started, there would be a divorced family or even a family going through a divorce process, and one pair wants to be inno vacation homes and one parent is an essential work they're living in the city and and would like the same access to their child.

But you have quarantine regulations and you see guidelines, and so you know, as the pandemic has evolved, there are new questions that arrived, but consistent that that you'll see judges having to tackle and having to deal with it. And it is interesting, which how can to deal with those issues because on one hand, you have a court order, perhaps a court order document. On the other you have a you know, spec guidelines, or you have a recommendation

from the governor. And certainly I've seen judges give effect to their orders unless there is some type of executive order or something that would trump that something coming out of all THENY for example, I would say that a court should operate in this way given a certain set

of circumstances. But um, there have been a lot of interesting UM custody issues because of the pandemic set of quarantining, because of families desiring to uh you know, divorce, families desiring to one parent with somewhere else, and you know the access child and how parenting time is because of that you mentioned before private judges explain what that's about. So I was touching on sort of alternative dispute resolution, UM, which is, you know, it's different way that you can

approach a litigation. You can go to a mediation, you can go to an arbitration. The difference between you know, I'm sorry if I'm sort of spoon feeding it, but the difference between the mediation and arbitration is you go to a mediator who would make a recommendation, but it wouldn't be binding, and our a trader would be someone who would make a determination. UM that would be binding. Now how binding that is uh depends on the type

of arbitration you're in. But there has certainly been a move towards working with either retired judges, older professionals in our fields that are respected to assist in the adjudication of cases, because, as I talked about before, you may not have the same access to a trial, the same access to a judge, the same ability to UH have a trial as you could if you were coordinating with

the other side. UM both you know, both litiganst both spouses wanting to move forward with the resolution of the case and agreeing to utilize UH, you know, somebody that you would pay privately to assist in the adjudication of your case. And that's what I was referring to, a private judge to be somebody that you agree upon with the others, I too, basically appoint as an arbiter of the issues in their case. And there's different considerations that go into that choice as well as to that process.

And but I have certainly seen a move to that UH in the litigation that I'm involved in. UM. I think that, you know, touching back to the point of the economic UM considerations, people who are in a more affluent and wealthy family, I think, have the ability to choose to hire somebody like that, whereas somebody in a lower socio economic class or a lower income family might

not have that choice. Um, And so there has been a move in some cases to choosing to have your matter resolved by uh, somebody that both sides has confidence in and connect with the judge. Did they used to before COVID have sort of divorce clinics where people who have a low income can go and have their divorce hashed out. Yes, through the court systems. They they do that. Um. There's certainly I think then, UM some delay in those UM clinics as they get up to virtual speed um.

And used to simply be able to go to a courthouse or for example, I used to participate in something called Monday Night Law, which was a program through the New York City Bar where you would spend the evening UM.

Whether it was judges or or referees are lawyers, and people would be able to come and meet with, you know, a professional that would help assist them or give them some advice, um for free, how to approach a divorce, how to deal with certain issues that might arise, and that that has not been as quickly off the ground or continuing like awards pre pandemic. Thanks for being on the Bloomberg Launch Show. That's Dan lip Schultz of Aaronson, Maajevski and Sloane And that's it for the edition of

the Bloomberg Lawn Podcast. I'm June Grasso. Thanks so much for listening, and remember you can always get the latest legal news on our Bloomberg Launch podcast. You can find them on Apple Podcasts, Spotify and wherever you get your favorite podcasts. You're listening to Bloomberg h