What executives said internally during GameStop short squeeze
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Vlad Tenev, CEO and Co-Founder of Robinhood, in his office on July 15, 2021 in Menlo Park, California.
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Robinhood executives had a lot to talk about the week Reddit users were driving a historic short squeeze in GameStop.
According to new documents, executives were caught having internal discussions about how they would meet their financial obligations. They also discussed the severeness of the Reddit-driven shortsqueeze and contradicted the statements made by the CEO.
Plaintiffs in the claim, which was filed in the U.S. District Court in the Southern District of Florida, allege they suffered damages when Robinhood enacted trading restrictions on Jan. 28 amid volatile activity in GameStop and other meme stocks. Plaintiffs are seeking damages, attorneys’ fees and interest. The plaintiffs also seek class action status.
“As a brokerage firm, we have many financial requirements, including SEC net capital obligations and clearinghouse deposits,” the brokerage said in a Jan. 28 blog post addressing the trading restrictions. Some of these requirements are subject to market volatility and may be significant in today’s environment.
The suit claims that Gretchen Howard, Robinhood’s Chief Operating Officer, sent an internal message stating that there was a major liquidity crisis at the company. The company’s chief operating officer stated the contrary.
“There was no liquidity problem,” CEO Vlad Tenev told CNBC’s Andrew Ross Sorkin a day later, on Jan. 29.
Sharp rise in trading volume
Robinhood and other brokerage firms saw unprecedented trading volume in January around heavily shorted stocks, including GameStop and AMC. Based on volume of trades, the brokerage company must deposit money to clearinghouses. This means that it has restricted purchases of some securities as the company was not able to fulfill deposit requirements. This is because volatility increases in cases of option trades losing large amounts.
Robinhood’s engineering director allegedly stated in an Slack message that “This clearing thing appears pretty frightening to me” and added that it could lead to a margin call worth hundreds of millions. In the worst-case scenario, they close our accounts and liquidate our assets.
According to the suit, David Dusseault, chief operating officer of subsidiary Robinhood Financial, said the company was “to [sic] big for them to actually shut us down,” referring to the National Securities Clearing Corp., a provider of centralized clearing services. According to the complaint, another executive spoke out saying that “we’re going be crucified for stopping trades.”
‘A tidal wave of volume and volatility’
The chats were part of the discovery process in a lawsuit against Robinhood. The plaintiffs’ attorney argued that Robinhood was aware of the Reddit-driven chaos coming, but didn’t take enough action.
“Robinhood and its higher-ups were well aware of this tidal wave of volume and volatility that was heading in their direction,” Maurice Pessah, founder of Pessah Law Group, told CNBC. We believe that they failed to perform their duties and did not do the job as required in order to analyze risks and manage risks as brokers.
Robinhood responded by denying the claims of plaintiffs. It stands behind its statements concerning Jan. 28. Robinhood spokesperson stated that the communications were consistent with Robinhood’s intent to implement appropriate and incremental steps to reduce risk.
Another excerpt shows Tenev and data scientists discussing how heated the Reddit frenzy might get.
“Maybe I am being alarmist but I think we should consider all-hands on deck kind of situation and shuffle some priorities to deal with increasing volumes,” Robinhood’s director of engineering allegedly wrote. After plaintiffs claimed that he had seen a graph showing the increase in volume, Robinhood’s director of engineering said “you might not be an alarmist”.
Today was an incredible day. Another software engineer claimed that internal parts are already buckled under stress, as per the suit.
Tenev claimed that only paranoid survivors can live. Tenev’s response to the comment “one who panics most panics worst” was “joy.”
In another message, the company acknowledged “blowback from this is going to be exponentially worse as time goes on” and they “were worried about the long term affects [sic] of this,” according to the suit.
In Congress, Robinhood’s CEO and Melville Capital CEOs testified before Congress in the months following these discussions. Representatives were told by Tenev that GameStopmania is a one in 3.5million event. He called it “unmodelable”, and said that Robinhood’s risk management procedures worked as intended. In order to meet capital requirements and shore up its balance sheet, Robinhood raised more than $3.4 billion in a matter of days.
It was then listed publicly in a hugely successful market.
Securities and Exchange Commission Chair Gary Gensler is expected to publish a report on the GameStop saga in the coming weeks, as well as recommendations on what, if any, changes should be made to the U.S. trading system as a result.
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