What executives said internally during GameStop short squeeze

Vlad Tenev, CEO and co-founder of Robinhood, in his office on July 15, 2021 in Menlo Park, California.

Kimberly White | Getty Images Entertainment | Getty Images

Robinhood executives have been talking a lot about the week Reddit users drove a short history squeeze in GameStop.

New documents in a lawsuit would show internal conversations between panicked executives about how to meet financial demands, debating the seriousness of a Reddit-induced short squeeze and contradicting the CEO’s public statements.

The plaintiffs in the claim, which was filed in the U.S. District Court for the Southern District of Florida, allege they suffered damage when Robinhood passed trade restrictions on January 28 amid volatile activity in GameStop and other actions memes. They sue for damages, interest and legal fees. The plaintiffs are also asking for class action status.

“As a brokerage firm, we have many financial requirements, including SEC net capital obligations and clearing house deposits,” the brokerage said. in a January 28 blog post discussing trade restrictions. “Some of these requirements fluctuate with market volatility and can be substantial in today’s environment.”

According to the lawsuit, in one case Robinhood’s COO, Gretchen Howard, indicated internally that the start-up was facing a “major liquidity crisis.” Publicly, the CEO of the company has said otherwise.

“There was no problem with liquidity,” CEO Vlad Tenev told CNBC’s Andrew Ross Sorkin a day later on Jan. 29.

Strong increase in transaction volume

Robinhood and other brokerage firms recorded unprecedented trading volume in January around heavily shorted stocks, including GameStop and AMC. The brokerage start-up, which must deposit money in a clearinghouse based on the volume of transactions, said it was limiting the purchase of certain securities because the company was unable to meet the demands. filing requirements. These requirements increase as volatility increases in the event of large losses from options trading.

“This offsetting transaction looks pretty scary to me – I’d say it’s our biggest fire right now,” Robinhood’s engineering director reportedly said in a Slack post, adding that the company could see a margin call. hundreds of millions of dollars. “In the worst case scenario, we put our credit lines to the max and they liquidate our positions.”

According to the lawsuit, David Dusseault, chief operating officer of the Robinhood Financial subsidiary, said the company “should [sic] great for them to shut us down, ”referring to the National Securities Clearing Corp., a provider of centralized clearing services. In the same conversation, another executive, whose name is redacted, said “we are going to be crucified” for stopping the exchanges, according to the complaint.

“A tidal wave of volume and volatility”

The talks were part of the discovery process in a lawsuit against Robinhood. An attorney for the plaintiffs argued that Robinhood knew the chaos caused by Reddit was coming and had not done enough.

“Robinhood and his superiors were well aware of this tidal wave of volume and volatility heading in their direction,” Maurice Pessah, founder of Pessah Law Group, told CNBC. “In our opinion and as we claim in the lawsuit, they did not do their job and what they are required to do in terms of risk analysis and risk management as a broker.”

In response, Robinhood said it disputes the complainant’s allegations and stands by public statements regarding January 28. A company spokesperson said that “the communications are consistent with Robinhood’s goal of taking appropriate and incremental action to mitigate risk.”

In another snippet, data scientists and Tenev debated the intensity of Reddit’s frenzy, according to the lawsuit.

“Maybe I’m alarmist, but I think we should look at a situation all the time on the bridge and mix up some priorities to cope with increasing volumes,” Robinhood’s engineering director reportedly wrote. The company’s data science chief responded “you may not be alarmist” after seeing a chart showing the volume spike, complainants say.

“Today was a huge day. There are some internal things that start to warp under pressure,” said another software engineer, according to the lawsuit.

Tenev reportedly replied that “only the paranoid survive”. His response to a comment that “whoever panics best first” was “joy.”

In another post, the company acknowledged that “the backlash from this situation is going to be exponentially worse over time” and that it “was concerned about the long term effects. [sic] of that ”, depending on the costume.

In the months following those conversations, the CEO of Robinhood as well as the CEOs of Citadel and Melville Capital testified before Congress. Tenev told representatives that the GameStop mania was one in 3.5 million events, which he called “unmodellable” and that Robinhood’s risk management processes started as they were meant to. In order to meet capital requirements and consolidate its balance sheet, Robinhood raised over $ 3.4 billion in a matter of days.

The company was listed on the stock exchange in August.

Securities and Exchange Commission Chairman Gary Gensler is expected to release a report on the GameStop saga in the coming weeks, along with recommendations on what changes, if any, should be made to the U.S. trading system as a result.

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