Pulaski County father, son sue over stock losses

Class action sought for investors in GameStop turmoil

The logo for the Robinhood app is shown on a smartphone in New York in this Dec. 17, 2020, file photo.
The logo for the Robinhood app is shown on a smartphone in New York in this Dec. 17, 2020, file photo.

Two Pulaski County football coaches called foul in federal court Thursday over a decision by the Robinhood stock trading app to halt its customers' trades in shares of GameStop and other stocks that they said cost them -- and millions of other retail investors around the country -- huge losses when they wound up stuck with rapidly devaluing stocks and stock options.

Kevin Kelley, the head coach and athletic director at Pulaski Academy, and his son Zackary Kelley, who coaches football and basketball, are named as the plaintiffs in a class action lawsuit filed Thursday in federal court in Little Rock by the Thrash Law Firm seeking unspecified damages from Robinhood Markets Inc.; Robinhood Financial LLC; Robinhood Securities LLC; TD Ameritrade Inc.; and E Trade Financial Corporation.

The class action lawsuit was filed on behalf of the Kelleys and investors similarly situated in the U.S. and, alternatively, in Arkansas who were harmed by the actions of the defendants.

The introduction to the lawsuit says that it seeks class certification and damages for the "Defendants' scheme to stop retail trading customers from buying stocks and selling their option contracts, when these securities hit dramatic highs," alleging that those actions harmed their customers in an effort to benefit "hedge funds with substantial short positions in the same stocks."

The lawsuit alleged that during January, stocks in GameStop were being heavily shorted by hedge funds betting that the company's stock would decline in price.

Shorting a stock is an investment strategy in which an investor speculates on the decline of a stock or other security's price by borrowing stocks that are likely to decrease in value by a set date, selling those stocks at the market price and buying them back before the expiration date, presumably at a lower price, then returning the stocks to the lender.

If the stocks lose value, the investor pockets the difference. If the stocks increase in value, however, the investor must make up the difference.

When millions of amateur investors, called "retail investors," began buying GameStop and a handful of other stocks that were being shorted, those prices rose dramatically, putting hedge funds holding those options at risk for billions of dollars in losses.

The lawsuit alleged that Melvin Capital Management lost 53% of its investments in January and on Jan. 25, received a $2.75 billion emergency influx of cash from Citadel LLC and Point72 Asset Management.

The lawsuit said that GameStop stock prices opened at $19 a share on Jan. 4 and closed on Jan. 27 at over $347.51 per share. While not as meteoric, other stocks also had sharp increases in the price per share in the same time period, with AMC increasing from $2.20 per share to $19.90, BlackBerry increasing from $6.70 to $25.10, and Bed Bath and Beyond increasing from $17.97 to $53.90.

But then, on Jan. 28, the lawsuit alleged that the defendants stopped retail investors from purchasing GameStop, BlackBerry, AMC and other stocks, only allowing them to sell those stocks, and prevented those investors from selling option contracts on those same stocks.

The lawsuit said the ban, which did not apply to institutional investors, caused the stocks to drop rapidly in value. GameStop stocks, the lawsuit said, closed at $347.51 on Jan. 27 and closed at $193.60 on Jan. 28, a loss of $153.91 in 24 hours. In that same 24 hours, the lawsuit said, AMC closed at $8.63 for a loss of $11.27 per share, Bed Bath & Beyond lost $20.23 per share to close at $33.64, and BlackBerry dropped from $25.10 to close at $14.65.

At close of trade Thursday, GameStop closed at $53.50, BlackBerry closed at $12.15, Bed Bath &Beyond closed at $27.01, and AMC closed at $7.09.

Kevin Kelley, in an interview Thursday with the Arkansas Democrat-Gazette, said he has been involved in stock trading for years, and over time educated his son in stock trading as well.

"He just graduated college and is about to get married so I was teaching him some of the ins and the outs," Kelley said. "Then, lo and behold, last week happened."

What happened, Kelley said, was that retail investors from all around the country converged on various social media forums and, having discovered that a number of stocks were being shorted by hedge funds, made a decision to purchase those stocks and drive the share prices back up.

"They got on chat rooms and Twitter and everything else and somehow, for the first time in American history, got people from all walks of life to come together and want to screw those hedge funds and drive this price up," he said. "Now, what do GameStop and BlackBerry and AMC and those other stocks have in common? What they did was they found stocks the hedge funds had bet on to go down in value."

As the buzz mounted and more people began to get involved, Kelley said, the stock prices continued to climb and momentum continued to build. That momentum, Kelley said, was largely fueled by a desire among retail investors to exact retribution against the institutional investors which he said many people believed had spent years gaming the system.

"If you just say, 'Hey, let's go buy this stock,' nobody's going to do it," he said. "But if you say, 'Hey, let's go screw the hedge funds,' a lot of people think that's a fun idea."

As the idea caught on and gained momentum, Kelley said, the stock prices just kept climbing.

"People were going out there and buying one share just to be a part of history," he said. "That's how much momentum this had."

But on Jan. 28, Kelley said, Robinhood, TD Ameritrade and E Trade pulled the plug without warning, leaving their customers holding stocks they could only sell and stock options they could only watch drop in value.

"GameStop is the one everyone knows about but they also did it on AMC, Nokia, BlackBerry," he said. By restricting sales of those stocks for a time, Kelley said, the defendants illegally manipulated the stock prices.

The lawsuit filed Thursday alleges that the defendants' actions violated the Sherman Antitrust Act, constituted breach of contract, demonstrated negligence on the part of the defendants toward their customers, unjustly enriched the defendants at the expense of their customers, and that the defendants conspired to harm the plaintiffs and classes.

Ultimately, Kelley said, he wants to see someone held responsible for the actions of the defendants.

"I have no fantasies about getting all my money back," he said. I really don't. I hope I get some of it back and that these other people get their money back, but I really want them to nail somebody. If they get off easy, it sets a precedent that it's OK to do this and it's not OK."

Upcoming Events