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Antitrust Class Action Against Robinhood And Hedge Funds

Edelson Lechtzin LLP has filed an antitrust class action lawsuit on behalf of a class of individual investors against more than 30 defendants, including Robinhood, Citadel, E*TRADE, TD Ameritrade, and others. Plaintiffs allege they were victims of conspiracy among defendants to stop them from buying stocks in order to protect hedge funds and other institutional investors from huge losses due to highly speculative short selling strategies. Plaintiffs and the proposed class bought stock in GameStop (GME), AMC Theaters (AMC), American Airlines (AAL), Bed, Bath and Beyond (BBBY), Blackberry (BB), Express (EXPR), Koss (KOSS), Naked Brand Group (NAKD), Nokia (NOK), Sundial Growers Inc. (SNDL), Tootsie Roll Industries (TR), and Trivago N.V. (TRVG).

Defendants Citadel and Melvin Capital and other large hedge funds held massive “short” positions in these securities. In other words, they borrowed shares in these stocks and bet that prices of the stocks would decline. If the stock prices had dropped, these short sellers would have been in a position to make profits. However, retail investors bet that these stocks were undervalued. It turns out that they were correct.

Plaintiffs allege that the hedge funds had over-leveraged their short positions and were unable to close them out. When retail investors continued to acquire shares and drive prices even higher, the hedge funds and others faced potentially disastrous exposure when required to cover their short positions – a situation known as a “short squeeze.”

On January 28, a number of online brokerages halted purchase orders of the relevant stocks from their trading platforms. Some investors who had placed orders overnight so that they would be executed when the markets opened, awakened to find out that their orders had been cancelled without their consent. Plaintiffs allege that Defendants engaged in a scheme to prevent retail investors from buying shares in hopes that it would trigger a sell-off and drive share prices down. While retail investors were unable to buy the relevant stocks, the hedge funds were able to buy the stocks at artificially reduced prices and close out their short positions.

Plaintiffs seek monetary damages, as well as injunctive relief, on behalf of themselves and the proposed class. The case is Clapp, et al. v. Ally Financial Inc. et. al., Case No. 3:21-cv-00896, in the U.S. District Court for the Northern District of California. A copy of the Complaint is available here.

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