Robinhood Narrows Payment for Order Flow Suit

Judge Yvonne Gonzalez Rogers issued an order narrowing Ji Kwon’s suit against Robinhood. The suit alleges that Robinhood fraudulently concealed the extent to which payment for order flow (PFOF) makes up their revenue. While Judge Rogers ruled that some of the plaintiff’s claims lacked particularity, the core of the suit and the question of class action status have enough merit to proceed.

As stated in the complaint, Robinhood is a mobile application and website that allows users to engage in ““self-directed securities brokerage service,” that gained massive popularity by allegedly not charging trading commissions. Since at least late 2016, Robinhood earns the lion’s share of their revenue from PFOF, which is when market makers pay brokers, like Robinhood, to send trade requests their way. Per Rule 606, the complaint says, the Securities and Exchanges Commission permits PFOF so long as it does not interfere with the firm’s other duties and they disclose these agreements with customers and in their quarterly reports.

The complaint added that retail brokers like Robinhood are further required to execute their orders at the most favorable terms for their customers. While not required to examine every single order, brokers must regularly conduct rigorous reviews of its deal executions. In 2016, Robinhood formed a committee to conduct these reviews and in 2017, the company developed an algorithm to route customers’ orders to the ostensibly most favorable deal maker to execute the trade.

Prior to their public launch, Robinhood purportedly included a section on the FAQ page of their website that explained they anticipated receiving a significant portion of their revenue from PFOF. However, when public scrutiny came down upon PFOF, this section was rewritten to downplay and later exclude mention of this practice.

In 2020, plaintiffs filed a suit alleging that this omission as well as other related actions constitute securities fraud, further arguing that PFOF leads to customers paying a backdoor commission fee. In May 2022, Robinhood filed dual motions to dismiss the suit on grounds that plaintiffs did not specify with particularity the statements that constitute fraud, that plaintiffs failed to argue scienter, that plaintiffs failed to argue reliance, and that “elements of economic loss and reliance cannot be presumed or established based on common evidence on a classwide basis.”

The judge granted the motion to dismiss with reference to plaintiff’s allegations that Robinhood failed to disclose their PFOF as higher than competitors and that their training materials for customer service instructed them not to discuss PFOF due to lacking particularity. The allegations regarding the FAQ page on Robinhood’s website and that Robinhood’s PFOF constituted an indirect commission fee were found to be meritorious enough to proceed. The judge further found that evidence presented to date did provide sufficient inference of scienter and that reliance could be inferred under the Affiliated Ute presumption, since the alleged fraud was of omission.

The judge found the motion to deny class certification premature and that a declaration of such cannot proceed until after disclosure.

The case is proceeding in the Northern District of California, where Robinhood is headquartered. The plaintiffs are represented by Ahdoot Wolfson, PC, Liddle Sheets Coulson, PC, and Bursor & Fisher, PA. Robinhood is represented by Farella Braun + Martel LLP and Debevoise & Plimpton, LLP.