(Westlaw) A divided federal appeals court has partially reinstated a proposed class action alleging that Robinhood Markets Inc.’s initial public offering documents concealed declines in its business after the “meme stocks” frenzy of 2021.
Sodha et al. v. Robinhood Markets Inc. et al., No. 24-1036, 2025 WL 2487954 (9th Cir. Aug. 29, 2025).
A California federal judge applied the wrong standard in considering whether Robinhood had a duty to disclose interim financial results during the run-up to the IPO, the 9th U.S. Circuit Court of Appeals ruled in a 2-1 decision Aug. 29.
The majority vacated a lower court’s dismissal of some claims in the suit without expressing an opinion as to whether they satisfied pleading standards.
‘Fad trading’ ends
The lawsuit, filed in the U.S. District Court for the Northern District of California, alleges that Robinhood’s IPO documents concealed its dependence upon “fad trading” of stocks such as GameStop and the cryptocurrency Dogecoin as a source of revenue.
The registration statement and prospectus filed in July 2021 contained historical data showing that Robinhood’s focus on small and nontraditional investors fueled enormous growth from 2019 to early 2021, the second amended complaint says.
But the documents omitted preliminary results for the second quarter of 2021 that showed significant declines in trading volumes and revenues, according to the complaint.
The plaintiffs allege that Robinhood had a duty to disclose “highly unusual” declines pursuant to Item 303 of Securities and Exchange Commission Regulation S-K, 17 C.F.R. A7 229.303(b)(2)(ii).
The regulation requires disclosure of known trends, uncertainties and events that are reasonably likely to impact a registrant’s sales, revenue or income from continuing operations.
The IPO documents also failed to disclose significant factors that made the offering risky or speculative, as required by Item 105 of Regulation S-K, 17 C.F.R. A7 229.105, the suit says.
The complaint asserts strict liability for misstatements and omissions in the offering documents under Sections 11 and 12(a)(2) of the Securities Act of 1933, 15 U.S.C.A. A7A7 77k and 77l(a)(2).
The District Court dismissed the suit in January 2024. U.S. District Judge Edward M. Chen said the Securities Act does not require disclosure of interim financial results or statements for a quarter that ended less than 45 days before the offering, unless they are extraordinary and indicative of larger future trends. Golubowski v. Robinhood Markets Inc., No. 21-cv-9767, 2024 WL 269507 (N.D. Cal. Jan. 24, 2024).
Wrong standard applied
Lead plaintiffs Vinod and Amee Sodha argued in a May 2024 opening brief to the 9th Circuit that the District Court applied the wrong standard for determining whether disclosure is required.
Instead of asking whether the omitted information was an extraordinary departure from past results, the court should have determined whether it was material, meaning that a reasonable investor would view the information as significantly altering the total mix of information available, the brief said.
The two-judge majority agreed. They rejected the approach of the District Court and the 1st Circuit that intra-quarter disclosures are required only when they represent an “extreme departure” from historical results.
According to the majority, the 2nd Circuit persuasively ruled in Stadnick v. Vivint Solar Inc., 861 F.3d 31 (2017), that the better standard was whether the information was material to investors.
The District Court also applied the wrong standard to claims under Item 303, which imposes a broader duty of disclosure than the materiality standard, the judges said.
However, the majority upheld the dismissal of claims based on Item 105, saying that the regulation did not require Robinhood to break down its revenue sources or quantify future risks.
U.S. Circuit Judge Johnnie B. Rawlinson partially dissented from the majority’s ruling, saying there was “simply no basis” for the case to proceed.
Deborah Clark-Weintraub of Scott + Scott Attorneys at Law LLP argued the case for the appellants.
Kevin Orsini of Cravath Swaine & Moore LLP argued for the appellees.
By Nicole Banas