THE SHORT (SQUEEZE) STORY
Day trading has increased dramatically over the last few years. Large financial institutions, brokerages, and trading houses are no longer the only places people can actively trade in the stock market. Anyone with an internet connection or a smartphone can buy or sell securities. TD Ameritrade reported that online trading has nearly quadrupled since January while apps like Robinhood surged in popularity. In their initial public offering in July 2021, Robinhood indicated they had 18 million retail clients and over $80 billion in customer assets.
The GameStop Saga
In early 2021, a well-known video game retailer—GameStop (GME)—was at the center of a stock market frenzy and class-action lawsuit. Retail investors on the Reddit page r/wallstreetbets and elsewhere purchased GME and other securities, sending their prices up to unprecedented levels. Several hedge funds had taken aggressive short positions in these securities and were caught in a “short squeeze.” While “short squeezes” are not a new phenomenon, this event spotlighted retail investors in a way it hadn’t before.
On January 28, 2021, several retail trading platforms, including Robinhood, suddenly halted most transactions involving GameStop stock. They restricted retail investors from buying more stock—leaving them with no option but to sell these securities. Robinhood said the stoppage came because of their clearinghouse-mandated deposit requirements and their duty to meet them. The result was a volatile trading period with backlash from customers and lawmakers alike.
Questions remain about the legality of the actions taken by Robinhood and other brokerages.
What does this mean for you?
In January 2021, the Joseph Saveri Law Firm filed the first complaint entitled Cheng v. Ally Financial Inc., case number 1:21-cv-00781 in the U.S. District Court for the Northern District of California. On April 6, 2021, this case and several others from around the nation were consolidated into a class-action lawsuit. The suit was filed against several defendants on behalf of a retail investor class with shares in nine companies. The firm is co-lead counsel for this antitrust group of claims. See the complete timeline here.
The case is focused on the plaintiffs’ allegations that there is more at stake than their investments. The retail investors were stripped of their right to purchase securities in an open and fair market. Plaintiffs contend that the defendants conspired in an anticompetitive scheme to restrict retail investors’ access to the stock market to protect the interests of hedge funds, venture capitalists, and other financial investors. The plaintiffs contend that the defendants cooperated to prevent potentially massive losses due to their risky short-selling strategies.
The stock market industry is a tight-knit community that relies on preexisting relationships that can often exclude smaller investors. Recent communication revelations between executives at Robinhood and Citadel Securities bolster this claim.
“Rather than use their financial acumen to compete and invest in good opportunities in the market to recoup the losses in their short positions, or paying the price for their highly speculative bad bets, these defendants instead hatched an anticompetitive scheme to limit trading in the relevant securities,” said Joseph Saveri, counsel for the plaintiff retail investors. “It is unlikely that such a widespread ban among brokerages would have been achievable without a concerted effort in violation of antitrust laws.”
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