Earlier today, the documents of a class action lawsuit against Robinhood Markets (NASDAQ: HOOD) were forced into the limelight. One Twitter user, @unusual_whales, made public certain aspects of the document that don’t particularly cast the company in a positive light – leading to the equity selling off 3.49% by the end of the trading session.
The lawsuit itself surrounds the actions of Robinhood as it relates to several so-called meme-stocks earlier this year. Specifically, it relates to how the company handled itself in late January when it elected to implement what is referred to as a PCO, or a post closing only policy. Effectively, it made it so that positions in certain suspended stocks – the meme stocks – could only see their position closed out, rather than expanded i.e. they could only be sold, not purchased.
In particular the Twitter user highlighted the actions surrounding the firms President and COO at the time of the events, James (Jim) Swartwout.
It appears that not only was Robinhood aware of their operations being pushed to the absolute limit by the swarm of new traders, but certain execs were involved in the trading as well. In particular, Swartwout was trading the securities along with the thousands of users on the firms platform. The difference, is that he was effectively trading on material nonpublic information.
You see, the firms CEO, Vlad Tenev, credits Swartwout with giving the directive to move to implement the PCO policy previously mentioned. On the 26th of January, an interim memo was obtained that highlights Swartwout stating, “I sold my AMC today. FYI – tomorrow morning we are moving GME to 100% – so you are aware.”
The reference related to “moving GME to 100%” appears to be in reference to margin trading, effectively eliminating the ability of investors to trade the name on margin. This is important, as he effectively tipped -someone- off to the notion that the equity will likely not rise as fast, because investors will only be able to trade with their actual dollars versus loaned dollars.
Two days after Swartwout’s sale of AMC Entertainment, the equity, along with others, was moved to PCO – meaning that the feverish buying was all but halted, enabling the equity to tumble as positions were forcefully closed.
Another item to be highlighted here is that the PCO was implemented despite the firms COO, David Dusseault, claiming within an internal memo that they believe Robinhood was “to [sic] big for them to actually shut us down.” The “them” refers to the NSCC, or the National Securities Clearing Corporation – the firm tasked with managing the clearing of trades.
The implication here, is that Robinhood’s President, whom somehow is permitted to day-trade stocks despite his position at a retail brokerage house, effectively traded on material non-public information, while also tipping others off to this information.
As has been the trend as of late – just look at recent actions by certain members of the Federal Reserve – it appears that those in certain positions are immune to the rules forced upon the rest of us.
As Ben Hunt of Epsilon Theory states, “If this doesn’t matter, nothing matters.”
Information for this briefing was found via Twitter, Court Documents and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
