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(Reuters) - Facing a sweeping prospective class action by millions of customers as it heads for a multibillion-dollar IPO, the online trading platform Robinhood is attempting a tactic I’ve never seen before in a securities class action.
On Wednesday, the company filed a preemptive motion to deny class certification for its customers’ Exchange Act claims.
Plaintiffs' lawyers only filed their amended class action complaint against Robinhood in May, alleging that customers overpaid for their trades to be executed. The judge overseeing the case, U.S. District Judge Yvonne Gonzalez Rogers of Oakland, California, hasn’t yet ruled on the parameters of the securities class action. In fact, as my Reuters colleague Jody Godoy reported on Wednesday, Robinhood filed a motion to dismiss its customers’ state and federal securities claims alongside the preemptive opposition to class certification.
The company’s lawyers from Debevoise & Plimpton, in other words, are trying to defeat class certification before anyone has even asked to certify a class – and before anyone even knows whether plaintiffs have adequately stated a claim.
Debevoise partner Maeve O’Connor didn’t respond to my email query, but Robinhood seems to be making a gamble that the potential benefit of this preemptive motion -- effectively squelching the class action without the time and expense of ordinary class certification litigation -- outweighs the cost of a brief that could be obsolete after the judge’s dismissal decision.
So why doesn’t every securities class action defendant try the same strategy?
There’s a two-part answer to that question, as I’ll explain. The bottom line, though, is that the Robinhood case is an unusual securities class action, which is probably why other defendants haven’t tried similar maneuvers. (I checked with Kevin LaCroix of the D&O Diary, who tracks every securities class action in federal court, and he said he’d never before heard of a defendant bringing a preemptive motion to deny class certification.)
“It’s a perfect storm of unique facts,” said shareholder lawyer Joel Fleming of Block & Leviton. “I don’t see this as the start of a new wave.”
The plaintiffs' firms in the Robinhood case, Liddle & Dubin, Ahdoot & Wolfson and Bursor & Fisher, did not respond to an email query on the company’s preemptive class opposition motion.
The filing itself acknowledges that it’s rare for a court to deny class certification at the beginning of a case. But the 9th U.S. Circuit Court of Appeals explicitly held in 2009’s Vinole v. Countrywide that defendants can move preemptively to avert class certification. Since the Vinole decision, at least two trial judges in the 9th Circuit have granted preemptive motions to deny class certification in consumer cases, a 2014 ruling for Philips Oral Healthcare and a 2017 decision for Johnson & Johnson. Robinhood’s motion argued that under the 9th Circuit’s Vinole precedent, its case is an exception to the general rule that class certification determinations require discovery.
That 9th Circuit precedent is one piece of the explanation for Robinhood’s preemptive motion. But, of course, lots of securities class actions are filed in the 9th Circuit. It’s the second piece – the nature of this class action – that enabled Robinhood to attempt this novel strategy.
Crucially, the plaintiffs suing Robinhood are not investors claiming that they lost money in a stock drop. They are Robinhood customers who allege that the company breached its duty under federal securities law to execute customers’ trades on the best terms reasonably possible.
Their theory is that the company’s business model during the 2016-2020 class period depended on revenue from principal trading firms that paid for the right to execute Robinhood customers’ trades. In turn, those firms allegedly executed trades by Robinhood customers on suboptimal terms that allowed the intermediaries to fund their payments to Robinhood. Robinhood billed itself as a no-commission platform, but these “inferior execution prices,” according to the class complaint, amounted to “backdoor commission fees.” Customers are seeking damages for that alleged overpayment to execute their trades. (Robinhood resolved “best execution” cases by the Financial Industry Regulatory Authority in 2019 and the Securitiesand Exchange Commission in 2020.)
What’s important for the purposes of the early class opposition motion is that plaintiffs can’t use efficient market theory to establish classwide reliance. The U.S. Supreme Court, as you know, has relieved shareholders in most securities class actions of the burden of proving that they relied on a company’s misrepresentations, ruling that when shares trade in an efficient market, the market price presumptively reflects any distortion attributable to corporate fraud.
There’s no share price at issue in the Robinhood case, though, as the company explained in its class opposition motion. “A breach of the duty of best execution does not affect the market price of any securities,” the motion said. “Instead, each class member must show that she directly relied on the alleged misrepresentations.” The class can’t be certified, Robinhood said, if every class member must prove reliance and damages individually.
That’s why, according to Robinhood, no securities class has ever been certified in a case alleging a breach of the duty of best execution. Just in April, the brief noted, the 8th Circuit rejected class certification in a similar case against TD Ameritrade. No amount of discovery, Robinhood argued, can solve the essential class certification obstacle: Plaintiffs can’t show classwide reliance or offer a damages model that applies to all of the millions of trades at issue in the case.
Like I said, these circumstances of the Robinhood case are so unusual that it’s no wonder other securities class action defendants haven’t tried the preemptive class opposition gambit. But this is a company juggling a lot of legal problems, as you can see from the record-breaking $70 million FINRA penalty it agreed to pay on Wednesday and from the extensive disclosures in the registration statement it filed on Thursday in anticipation of its IPO. Robinhood seems to be hoping that its preemptive motion will provide a quick cure for one of its headaches.
(By Alison Frankel)
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