Retail Investors Fire Back, Claiming Conspiracy in Short Squeeze Drama

The battle between retail investors and wealthy hedge funds is widening beyond Robinhood and GameStop to now include competing brokers and other Wall Street partners.  

A new class action lawsuit is targeting a laundry list of brokers, fund managers and clearinghouses claiming they were in on a massive conspiracy to “keep the market moving freely” in January when retail investors were blocked from buying shorted securities.

A clash of interests emerged as investors kept buying stocks of shorted companies like GameStop, alarming the hedge funds who were shorting selling it. 

Lead plaintiffs Sabrina Clapp and Denise Redfield claim Robinhood wasn’t the only one colluding to bring the stock prices down, but also other brokers and organizations that facilitate those trades.

Citadel, Melvin Capital and Sequoia, three of the hedge funds named as defendants in the lawsuit, all conspired to keep “from hemorrhaging losses as a result of their highly speculative short selling strategies,” according to the class action. 

The list of financial companies being sued includes Cash App, Ally Financial, Robinhood, Barclays and others as brokerage defendants; Melvin, Citadel and Sequoia as fund defendants; and Apex and The Depository Trust & Clearing Corporation as clearinghouse defendants. 

The resulting “short squeeze” that developed in January exposed these hedge funds to billions of dollars in losses. 

“Fund Defendants coordinated and planned increased short volumes in anticipation of short calls on January 28, 2021,” the lawsuit argues. 

GameStop wasn’t the only company whose shares were blocked from being traded in January.

Trades on AMC Theaters (AMC), American Airlines (AAL), Bed Bath & Beyond (BBBY), BlackBerry (BB), Express (EXPR), Koss (KOSS) Naked Brand Group (NAKD), Nokia (NOK), Sundial Growers Inc (SNDL), Tootsie Roll Industries (TR), and Trivago NV (TRVG) were restricted as well, according to the class action lawsuit. 

Clapp and Redfield were using Robinhood to buy their stocks and report reading posts on WallStreetBets, a Reddit page covering the topic of investing. 

The two investors cite an analysis of Reddit user “Roaring Kitty” posted to YouTube last summer. In addition to sharing his theory these companies were undervalued, he bought $50,000 worth of GameStop stock.

“Rather than use their financial acumen to compete … or paying the price for their highly speculative bad bets, Defendants instead hatched an anticompetitive scheme to limit trading in the Relevant Securities,” the lawsuit states. 

The class action lawsuit seeks all investors who were blocked from buying stocks in these companies from Jan. 1.

Formally the complaint accused the defendants of conspiracy in violation of both the Sherman Act and California business law. 

The defendants are also accused of unfair competition under California business code, negligence, breach of fiduciary duty and constructive fraud. 

The plaintiffs are seeking a permanent injunction as well as the formation of a trust to hold “ill-gotten property or assets” relevant to the class action lawsuit. 

Have you invested in any of these shorted stocks using any of the brokers listed in this class action lawsuit? Let us know in the comments below.

Counsel representing the plaintiffs in this class action lawsuit are Eric Lechtzin, Marc H. Edelson of Edelson Lechtzin LLP and Joshua Grabar of Grabar Law Office. 

The Short Squeeze Class Action Lawsuit 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. 

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• Robinhood Draws Multiple Class Actions Over GameStop Frenzy