Securities Fraud Lawyers Blog

On the heels of the Financial Industry Regulatory Authority’s (“FINRA”) record-breaking financial penalty against app-based investing platform Robinhood, it’s a fitting time to consider recent trends within FINRA’s industry-wide arbitration process.

As an organization, FINRA’s main function is to protect investors by upholding the integrity of the market through careful oversight of brokers in the United States. In doing so, FINRA operates a dispute resolution forum for arbitration and/or mediation of both intra-industry and customer-industry disputes. FINRA is also authorized by the United States government to protect investor interests through diligent screening and analysis of the billions of market transactions that occur each day. [1]

Whether a dispute arises between industry actors or between customer(s) and an industry actor, FINRA facilitates a neutral dispute resolution process by providing unbiased, trained arbitrators or mediators to guide cases through to completion. While the FINRA dispute resolution process proceeds similarly to a case within the court system, FINRA cases typically resolve more quickly and efficiently than traditional cases do, and appeals on FINRA outcomes are generally not accepted.

In light of the ever-expanding role of digital technology in daily life, along with a string of recent high-profile cyberattacks, it is fitting that the Securities and Exchange Commission (“SEC”) has included cybersecurity risks on their 2021 regulatory agenda. The SEC last provided cybersecurity guidance in 2018, though critics argue that the 2018 Guidance was insufficient and merely reiterated the SEC’s formal guidance from 2011. [1] However, given recent executive-branch interest in cybersecurity issues, it is predicted that cybersecurity rules set forth in 2021 will offer more actionable and concrete protective measures for investors.  [1]

As a vast swath of sensitive, personal data is shared in the digital space, and as businesses and the government rely increasingly on complex computing systems to maintain their operations, cyber risks have multiplied exponentially. Cyber attackers target sensitive personal data in an effort to compromise a business, a business’s clients, or the public at large, often while demanding a ransom.

So far in 2021, numerous cyberattacks have taken place. Most notably, the Colonial Pipeline was hacked in May, resulting in gasoline shortages across the Southern United States, and in June, a cyberattack on a large meat manufacturer halted a quarter of all beef operations in the United States for two days. [2] Countless other large- and small-scale cyberattacks occur regularly, amplifying the need for investor protection from such future occurrences.

The Supreme Court of the United States dealt a blow – at least for now – to plaintiff shareholders as part of its long-awaited June 21, 2021 decision in Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System.

The Plaintiffs, all Goldman shareholders, filed this securities fraud class-action suit against Goldman in Federal court back in 2011. They alleged that Goldman had misrepresented itself in violation of Section 10(b) of the Securities Exchange Act of 1934, leading to an inflated stock price. [1] The Plaintiffs asserted that Goldman’s misrepresented itself by stating “[o]ur clients’ interests always come first” and touting their “extensive procedures and controls that are designed to identify and address conflicts of interest.” [2]

The Plaintiffs alleged that these statements were false or misleading to shareholders, since Goldman was engaged in conflicted transactions at the time the statements were made. [2] Once the public was made aware of these conflicts following a government enforcement action, Goldman’s price dropped, which the Plaintiffs allege caused them to lose a combined $13 billion. [3]

Regulation of cryptocurrency remains broadly uncharted in the United States, even as its popularity has exploded. The uncertainty shrouding crypto regulation stems largely from complexities within the blockchain on which it is based and from difficulties with its classification – is it a commodity? Is it a security? Is it property? Experts, agencies, and blockchain companies all disagree.

Currently, the United States has neither comprehensive legislation nor a comprehensive regulatory scheme to govern the classification, usage, and taxation of cryptocurrency. As it stands, the sale of crypto is regulated by the U.S. Securities and Exchange Commission only if the crypto in question is considered a security.[1]

This can present some thorny issues, particularly when tokens represent themselves as “utility tokens” with value beyond equity or a share in a company. Such tokens do not fall under the purview of the SEC and can thus result in a lack of investor protections. [1]

In light of the recent market volatility brought on by social media and the meme stock frenzy, the Securities and Exchange Commission (SEC) is beginning to investigate whether rule changes are in order for the market structures which foster these situations. During a speech on June 9^th, 2021, newly appointed SEC chairman Gary Gensler spoke of the SEC’s role in protecting individual investors who trade securities via brokerages like Robinhood, which utilize high-speed trading platforms called wholesalers to execute these trades.

In the wake of chairman Gensler’s remarks, shares of Virtu Financial, Inc., the second largest wholesaler by volume in the United States, fell 7.7% on the heels of a surge in share price during the meme stock craze of 2021. [1]

One system which the SEC has pointed to as in need of review is that of payment for order flow. Payment for order flow has ushered in market volatility in meme stocks like GameStop and AMC, because this system powers a good deal of app-based securities trading. It allows individual investors to trade at the current market price without paying commission on their orders. A familiar example exists within the app-based platform, Robinhood.

With the recent rise of meme stocks– both in the market and in the media – there has been plenty of talk about short squeezes and their impact. While short squeezes themselves are not a new concept, the unique market characteristics of 2021 have ushered them into the mainstream. Given the current market landscape, a sound understanding of short squeezes is critical in making informed investment decisions.

The COVID-19 pandemic lockdowns resulted in working from home and the distribution of stimulus checks, which when mixed with Reddit as a communications platform for retail investors, helped to fuel the meme stock phenomenon. A meme stock the term being used to describe any publicly traded company whose popularity stems from the use of social media platforms which draw everyday investors to purchase shares. [1] Classic examples from this year include GameStop and AMC, both of which have showed tremendous and at times ludicrous growth fueled by retail investors.

A short squeeze occurs when a stock’s price is rapidly driven up not because of any fundamental addition of value, but instead because of an excess of short selling. A short sale occurs when an investor makes an investment betting that the price of a stock will fall. This can take many forms, but commonly occurs when an institutional investor like a hedge fund believes a stock is overvalued and will soon fall, allowing them to turn a profit. The hedge fund will sell stock it ‘borrowed’ hoping that when they have to deliver the stock, its price will have fallen and they can purchase the stock that they have to deliver at a lower price.