[00:00:00] Speaker 04:
The final case on calendar for argument today is Sota versus Golubowski.

[00:00:10] Speaker 04:
Council, can you hear us?

[00:00:12] Speaker 03:
Yes, Your Honor.

[00:00:14] Speaker 04:
All right, Council for Appellate, please proceed.

[00:00:18] Speaker 03:
Thank you, Your Honor.

[00:00:19] Speaker 03:
May it please the Court.

[00:00:20] Speaker 03:
My name is Deborah Clark Weintraub and I represent the Appellants.

[00:00:25] Speaker 03:
With the Court's permission, I'd like to reserve three minutes for rebuttal.

[00:00:29] Speaker 03:
As this court has repeatedly explained in its authorities, offering documents are misleading if they affirmatively create an impression of a state of affairs that differ in a material way from the one that actually existed at the time of the IPO, including by touting positive information to the market while withholding adverse information that cuts against the positive.

[00:00:56] Speaker 03:
That is precisely what happened here, Your Honors.

[00:00:58] Speaker 03:
The offering documents here stated that Robinhood's Q2 2021 revenue was expected to be in the range of $546 to $574 million.

[00:01:13] Speaker 03:
However, the usual and customary details that Robinhood provided for revenue information with respect to every other financial period discussed in the offering documents

[00:01:25] Speaker 03:
was not disclosed with respect to this Q2 2021 revenue range.

[00:01:31] Speaker 03:
And this was significant, Your Honors, because in Q2 2021, which was the last completed quarter before the July 31, 2021 offering, each of the three components of Robinhood's transaction-based revenue, along with important key performance indicators that were correlated with revenue, were declining.

[00:01:54] Speaker 02:
Council, let me ask you this.

[00:01:55] Speaker 02:
I knew you have a lot you could tell us and lots of complicated facts here, but as I understand, Section 11, the misleading regarding omission, you only need to state interim results if they are, end quotes, an extreme departure from the previous ones.

[00:02:16] Speaker 02:
Do you agree that that is the standard under Section 11?

[00:02:19] Speaker 03:
We do not, Your Honor.

[00:02:20] Speaker 02:
You do not?

[00:02:21] Speaker 02:
Okay, and why is that?

[00:02:22] Speaker 03:
As we explained in the brief, we believe that the extreme departure standard is the incorrect standard because, first of all, with respect to our item 303 claims, the item 303 regulation itself sets forth the specific standard, and that is not an extreme departure.

[00:02:47] Speaker 03:
Item 303 specifies

[00:02:49] Speaker 03:
that no trends or uncertainties with respect to financial results that are reasonably likely to have a material effect, favorable or unfavorable, on the registrant's financial condition must be disclosed.

[00:03:05] Speaker 02:
Let me ask you this then.

[00:03:07] Speaker 02:
Do you believe that your 303 argument, in order to be successful under Rule 11, your 303 argument has to win, basically?

[00:03:17] Speaker 02:
Do you agree with that?

[00:03:18] Speaker 03:
No, Your Honor, we don't.

[00:03:20] Speaker 03:
Because in our view, the omissions here rendered the offering documents, the statements in the offering documents, materially false and misleading.

[00:03:30] Speaker 03:
And whether or not that interim information had to be disclosed in the offering documents should not be judged by this extraordinary departure standard.

[00:03:46] Speaker 01:
I want to make sure I understand this whole situation.

[00:03:49] Speaker 01:
Putting aside 303 for a moment, the court below adopted the extreme departure standard.

[00:04:01] Speaker 01:
But as far as I'm aware, there's no Ninth Circuit decision adopting that standard.

[00:04:07] Speaker 01:
It's a new question for the Ninth Circuit.

[00:04:10] Speaker 01:
The First Circuit adopted that standard.

[00:04:13] Speaker 01:
The Second Circuit rejected that standard.

[00:04:16] Speaker 01:
So it's a new question for us.

[00:04:20] Speaker 01:
Do I have that part right?

[00:04:21] Speaker 03:
Yes, Your Honor, that is correct.

[00:04:23] Speaker 03:
There are some lower courts in the Ninth Circuit, including the District Court here, that have applied the extreme departure standard, but this court, the Ninth Circuit, has not.

[00:04:35] Speaker 01:
And that was cited by the Court in those other decisions, but it therefore only cited District Court opinions.

[00:04:43] Speaker 01:
And then with respect to 303, there, correct me if I'm wrong, even the First Circuit has not said that the extreme departure standard applies there.

[00:05:02] Speaker 01:
But the district court here applied that standard without citing any case, I think.

[00:05:09] Speaker 01:
to support the use of that standard in the 303 context.

[00:05:15] Speaker 03:
Your Honor, I believe the latter statements you made is correct with respect to what the district court did here.

[00:05:21] Speaker 03:
Honestly, I cannot.

[00:05:23] Speaker 03:
I did not research the issue, so I don't know whether or not the First Circuit has applied the extreme departure standard to item 303.

[00:05:31] Speaker 03:
But this court, in the NVIDIA case, acknowledged that

[00:05:36] Speaker 03:
item 303 contains its own standard.

[00:05:40] Speaker 03:
So this court has already decided that issue.

[00:05:43] Speaker 03:
The extreme departure standard is not the standard that's in item 303, and therefore that was a clear error on the part of the district court applying that standard with respect to the item 303 claim.

[00:05:55] Speaker 01:
Now, if assuming for the sake of argument

[00:06:00] Speaker 01:
that we agree with you that the extreme departure standard should not govern in either context.

[00:06:12] Speaker 01:
Isn't the best thing for us to do is to send the case back to the district court to have the court reevaluate what was disclosed or not disclosed under what we would then say is the proper state.

[00:06:29] Speaker 03:
Your honor, that is certainly an option that is within this court's discretion.

[00:06:34] Speaker 03:
However, we do not believe that it's required because the decision below was on a purely legal issue, whether or not as a matter of law, there was a duty to disclose all of these omitted financial indicators in the offering documents.

[00:06:55] Speaker 03:
Since this court is deciding this

[00:06:58] Speaker 03:
there's no reason to send it back to the district court.

[00:07:03] Speaker 03:
And in this particular case, which, as your honor is aware, is a PSLRA case where there is a stay of discovery, we've already had two rounds of motion to dismiss briefing in front of the district board.

[00:07:16] Speaker 03:
We believe that the better course would be for this court to decide the issue, assuming it agrees with the plaintiff, with the appellants, excuse me.

[00:07:26] Speaker 03:
But again, Your Honor, that's within the court's discretion.

[00:07:30] Speaker 02:
But to Judge Rakoff's point, if we were to decide it the way you indicated, you still need to have it sent back to the district court, at least insofar as the item 303 approach, right?

[00:07:46] Speaker 03:
Well, in terms of whether or not the standard the district court applied here, extreme departure,

[00:07:53] Speaker 02:
No, I haven't.

[00:07:53] Speaker 02:
Forgive me.

[00:07:54] Speaker 02:
Perhaps I didn't state it right.

[00:07:55] Speaker 02:
Let's assume, arguing though, that we agree with you that the extreme departure standard doesn't apply, but under item 303 that you have stated a cause of action, you would still want us to send that back, reverse and send that back to the district court, would you not?

[00:08:09] Speaker 03:
Oh, yes.

[00:08:10] Speaker 03:
Of course, Your Honor.

[00:08:11] Speaker 02:
Okay.

[00:08:11] Speaker 02:
I just want to be sure I understood you correctly.

[00:08:13] Speaker 03:
Yes.

[00:08:14] Speaker 03:
I'm sorry.

[00:08:15] Speaker 03:
I misunderstood what Your Honor was saying.

[00:08:17] Speaker 02:
I didn't state it right, maybe.

[00:08:19] Speaker 03:
And Your Honors, in terms of the standard, as Judge Rakoff observed, the Second Circuit has rejected the extreme departure standard in a couple of decisions.

[00:08:35] Speaker 03:
And it has provided helpful, I think, analysis as to why the standard is not appropriate to apply in this context.

[00:08:45] Speaker 03:
And in fact, the Second Circuit referred to the standard as unsound for a number of reasons.

[00:08:51] Speaker 03:
First and foremost, the Second Circuit held that the standard is unsound because it fails to examine the omitted interim financial metrics together and as a whole in the context of the total mix of information, which is critical.

[00:09:07] Speaker 03:
And that is illustrated here in the district court's decision.

[00:09:10] Speaker 03:
The district court meticulously ticked through

[00:09:14] Speaker 03:
the omitted metrics one by one, finding that each one was not extraordinary in isolation, but failed to consider whether all of the omitted declines taken together and considered as a whole either reached that threshold or even rendered the offering documents not misleading.

[00:09:33] Speaker 03:
The second reason the Second Circuit found that the extraordinary departure test was unsound was because it said

[00:09:42] Speaker 03:
that it leaves far too many open questions, including the degree of change necessary to find an extreme departure and which metrics the court should look at in assessing whether or not that departure has occurred.

[00:09:56] Speaker 03:
And indeed, both of those open questions cited in the District Court, I'm sorry, the Second Circuit's decision, and that's in the Stadnick v. Vivens-Solar case, played a prominent role in this case

[00:10:08] Speaker 03:
in the district court's erroneous decision to dismiss this case and to find that as a matter of law, there was no duty to disclose.

[00:10:17] Speaker 03:
The district court held that the degree of change in the omitted metrics in this case, which were equivalent to or indeed sometimes far in excess of declines that other courts have found to satisfy the extraordinary departure standard

[00:10:34] Speaker 03:
were insufficient to give rise to a duty to disclose in this case.

[00:10:39] Speaker 03:
And it did so because it determined that Q1 and Q2 financial results were not an appropriate benchmark from which to measure whether or not the declines met the extraordinary departure standard because the meme stock event and the Dogecoin rally had occurred in those quarters.

[00:11:00] Speaker 03:
The district court found that when compared to periods before these events occurred, the omitted metrics were not so extraordinary as to warrant a disclosure because he found that they represented simply a fluctuation back to the mean in light of these two bubbles, as he called them.

[00:11:23] Speaker 03:
But that conclusion, that this was nothing more than a reversion to the mean, was flawed for a couple of reasons.

[00:11:30] Speaker 03:
Because the meme stock event began and ended in the first quarter of 2021, the decline in equities trading and trading revenue in Q2 2021 to a level below what it had been since Q1 2020, a full year before, cannot be explained as a reversion to the meme as the result of the disappearance of the meme stock event.

[00:11:56] Speaker 03:
Something else was afoot.

[00:11:58] Speaker 03:
And indeed, the Second Circuit Amendment, Second Circuit, I'm sorry, the Second Amended Complaint, forgive me, contains allegations based on accounts from several confidential witnesses that customers were leaving Robinhood's platform in 2021 due to issues with customer service, security issues, and also platform outages.

[00:12:20] Speaker 03:
The District Court never considered these allegations.

[00:12:24] Speaker 03:
And more importantly, the District Court's reversion to the mean analysis ignored the crucial issue of whether or not a reasonable investor could have been misled, nevertheless.

[00:12:37] Speaker 03:
As the 11th Circuit stated in Oxford Asset Management v. Jaharis, there can be a situation where booming sales, due to an event, carried an issuer for a couple of quarters, but then those sales disappear, and if

[00:12:54] Speaker 03:
interim declines are not disclosed, that can mislead investors.

[00:12:59] Speaker 03:
And that is the case here.

[00:13:01] Speaker 03:
It is more than plausible that including preliminary estimated top-line revenues for Q2 2021 in the offering documents without disclosing the precipitous declines in so many financial metrics in the months preceding the IPO could have misled a reasonable investor.

[00:13:21] Speaker 03:
I see I only have two minutes left, Your Honors, and unless you have questions, I'd like to reserve that time for rebuttal.

[00:13:27] Speaker 03:
All right.

[00:13:27] Speaker 03:
Thank you, Council.

[00:13:29] Speaker 00:
Mr. Rossini?

[00:13:31] Speaker 00:
Good morning, Your Honors, and may it please the Court.

[00:13:33] Speaker 00:
Kevin Rossini on behalf of the Robin Hood defendants, arguing on behalf of all defendants.

[00:13:38] Speaker 00:
I'd like to start with going to your question, Judge Rakoff, to Council, which is, isn't it the case that there is no Ninth Circuit decision adopting the extreme departure test?

[00:13:48] Speaker 00:
I completely agree with counsel.

[00:13:49] Speaker 00:
The answer to that is no, there is no Ninth Circuit case adopting that issue, adopting that standard.

[00:13:57] Speaker 00:
I also agree with counsel that the Second Circuit, which is closer to both your honor and me currently, has rejected that standard.

[00:14:05] Speaker 01:
But I think the critical point here, the critical point is- Well, the record should reflect that I frequently disagree with the Second Circuit.

[00:14:14] Speaker 02:
I am shocked.

[00:14:15] Speaker 02:
Let the records show that I am shocked.

[00:14:19] Speaker 00:
Let the records go.

[00:14:20] Speaker 00:
I refuse to comment.

[00:14:24] Speaker 00:
But Your Honor, I think, and all of Your Honors, I think the critical point here is, if you look at the various cases, the ones that adopt this extreme departure standard, as well as the ones that either don't talk about it or that reject it, in our view, we don't need the extreme departure test to prevail here.

[00:14:43] Speaker 00:
because all we put that out.

[00:14:46] Speaker 01:
So that comes to the follow-up question I put to your adversary.

[00:14:50] Speaker 01:
Yes, Your Honor.

[00:14:51] Speaker 01:
Assuming we think that the standard should be the Second Circuit standard, for lack of a better way to put it, should we then send it back to the district court because you make the argument that under either standard,

[00:15:10] Speaker 01:
there was still no violation of section 11.

[00:15:15] Speaker 01:
And there would be some benefit since the district court has detailed familiarity with this case of letting the district court take a look at that issue rather than us.

[00:15:31] Speaker 01:
Wouldn't that be the more sensible way to proceed?

[00:15:35] Speaker 00:
That's obviously one possible approach, Your Honor.

[00:15:38] Speaker 00:
Here, I actually agree with Ms.

[00:15:39] Speaker 00:
Weintraub that it's not necessary.

[00:15:42] Speaker 00:
Because if we look at what the district court did, and we look at the careful analysis that the district court set forth, and more importantly, we look at what's actually in the registration statement, I think it's clear as day and perfectly appropriate for this court to conclude that there is no Section 11 claim here.

[00:16:01] Speaker 00:
And why do I say that?

[00:16:03] Speaker 00:
I say that because we all know materiality alone is not enough.

[00:16:06] Speaker 00:
You don't have to disclose information just because someone would like to know.

[00:16:10] Speaker 00:
Section 11 provides the framework here in the statute itself where it says there's a cause of action in two scenarios.

[00:16:19] Speaker 00:
You have a freestanding duty to disclose and you don't meet it, such as item 303, or something you have affirmatively said has been rendered misleading by the omission.

[00:16:31] Speaker 00:
And in our view, if you look at the cases, the extreme departure standard is just a framework through which to analyze this or a lens through which to view that question.

[00:16:42] Speaker 00:
But if we look at the facts as pled in the complaint and we look at the registration statement, just dialing back to the macro level, there are two different tails here.

[00:16:54] Speaker 00:
The plaintiff's case turns by convincing either this court or the court below

[00:17:00] Speaker 00:
that a reasonable investor looking at Robinhood's IPO five and a half months into 2021 would believe that there's going to be unbridled growth from the performance in those first five months of the year.

[00:17:14] Speaker 00:
That's the plaintiff's case that people didn't fundamentally understand that it was a bubble, two bubbles that had burst and that the future trajectory of this company was not growing off that base.

[00:17:28] Speaker 00:
That's their claim.

[00:17:30] Speaker 00:
If you look at the registration statement itself, Your Honors, we said precisely the opposite.

[00:17:37] Speaker 00:
And at the end of the day, that's what the court below was really analyzing and what the court below really concluded.

[00:17:44] Speaker 00:
Because quite contrary to this idea of unbridled growth,

[00:17:48] Speaker 00:
We disclosed, and this is the key disclosures in our view, Your Honors, are on 123 and 124 of the excerpts of the record.

[00:17:56] Speaker 00:
We told our investors, we told our investors that in the third quarter, we expected revenues to decline from the ongoing second quarter when the IPO occurred.

[00:18:10] Speaker 00:
Why?

[00:18:11] Speaker 00:
We told investors why.

[00:18:14] Speaker 00:
We told them that there had been this extraordinary trading in the first quarter in the meme stock that's throughout the disclosures.

[00:18:22] Speaker 00:
And we told them that for the second quarter in particular, it was driven, the blowout performance in the second quarter was driven by this extraordinary frenzy in crypto trading.

[00:18:35] Speaker 00:
It's four years later, so it's not as fresh for all of us.

[00:18:38] Speaker 00:
But the biggest news stories of the year back then,

[00:18:41] Speaker 00:
were the meme stock event and the crypto boom.

[00:18:45] Speaker 00:
And they talk about there not being awareness of customer complaints.

[00:18:49] Speaker 00:
I'm not saying that we can rely entirely on what was in the public record.

[00:18:53] Speaker 00:
We can rely on what's in our disclosures.

[00:18:55] Speaker 00:
But what a reasonable investor knew is obviously relevant to this in case after case says that.

[00:19:00] Speaker 00:
And what a reasonable investor knew, including because of our disclosures, was that quarter one was an absolute black swan event.

[00:19:08] Speaker 00:
There were congressional hearings.

[00:19:09] Speaker 00:
There were dozens of lawsuits filed against Robinhood related to the trading stops in the meme stock event.

[00:19:15] Speaker 00:
Those are disclosing the prospectus.

[00:19:17] Speaker 00:
We even had both AOC and Ted Cruz simultaneously coming out against Robinhood.

[00:19:23] Speaker 00:
When you have the two of those individuals joining together to express dissatisfaction, the idea that a reasonable investor didn't understand that there was dissatisfaction, I think, blinks at reality.

[00:19:34] Speaker 00:
But what we disclosed, in particular, again on 123 and 124- By Mr. Cruz, you're referring to the well-done critic of Mr. Trump, is that right?

[00:19:46] Speaker 00:
When you look at what we disclosed on 123, Your Honors, we said, not on Brian L. Grove,

[00:19:51] Speaker 00:
Revenue will go down.

[00:19:54] Speaker 00:
The third quarter will go down.

[00:19:56] Speaker 00:
Now, did we give the granularity of options versus equities?

[00:20:01] Speaker 00:
Not in a chart, but we also said that if you looked at the second quarter of 2021, and again, this is on 123, if you look at that quarter, the results, the blowout results that we said would not be repeated, why did those occur?

[00:20:18] Speaker 00:
we say specifically because of increased trading in options and cryptocurrency and flat equity as compared to the prior year that tells a reasonable investor first of all they don't know the specific breakouts and they shouldn't expect to to understand those because we're not disclosing them and we're not required to so so so if i forgive me for interrupting but doesn't that make

[00:20:46] Speaker 01:
even more relevant the undisclosed interim results which show a further decline if I have that right and isn't it true that with respect to section 303 at least that

[00:21:13] Speaker 01:
that would have to be disclosed if it showed increased uncertainty.

[00:21:20] Speaker 00:
So, Your Honor, I think the answer to that question is none of the allegations here about the ongoing declines, which were not of long duration.

[00:21:29] Speaker 00:
We're talking a month and a half of a month, right, in the ongoing quarters.

[00:21:32] Speaker 00:
Those were not a trend

[00:21:35] Speaker 00:
that is required to be disclosed?

[00:21:39] Speaker 01:
But Trent is not the only thing that has to be disclosed.

[00:21:42] Speaker 01:
It's true.

[00:21:43] Speaker 01:
That's all that the district court analyzed.

[00:21:46] Speaker 01:
But the statute, the rule goes further, includes uncertainties, does it not?

[00:21:52] Speaker 01:
It does talk about uncertainties, Your Honor.

[00:21:54] Speaker 01:
But again, I think.

[00:21:55] Speaker 01:
So for example, if I, two days before I issued my

[00:22:05] Speaker 01:
IPO learned that my main customer was uncertain as to whether he wanted to remain my customer or go with one of my competitors even though that would not be a trend in any sense under 303 I would still have to disclose right

[00:22:32] Speaker 00:
Your Honor, the 303 cases I've seen do focus on the trends, not a specific uncertainty, but I think that the analogy, it does say known trends or uncertainties.

[00:22:43] Speaker 00:
The fundamental point of 303 is, and this also relates to this question of whether or not the omission rendered what we said misleading.

[00:22:52] Speaker 00:
Is the investor getting a fair picture of what the risk profile is of this company and the growth trajectory?

[00:22:59] Speaker 00:
And I think if you look at Judge Rakoff, your decision in Niani, I think that is a useful contrast for facts and is actually much more square on with your hypothetical than what we have here, which is the opposite.

[00:23:11] Speaker 00:
Because in Niani, and I always hesitate to talk to a judge about his or her decision, but I'm going to do it anyway, Your Honor.

[00:23:17] Speaker 00:
In Niani, my understanding and my read of your decision and the complaint

[00:23:20] Speaker 00:
was that the single important metric that was being touted by this issuer was that they had a higher than industry average physician retention rate.

[00:23:31] Speaker 00:
And this was like the critical investment thesis.

[00:23:34] Speaker 00:
And in fact, in the immediate run up to the IPO, that retention rate had dropped precipitously.

[00:23:41] Speaker 00:
When it's disclosed, the bottom falls out of the company and you've got a fundamentally different investment than you thought you did.

[00:23:47] Speaker 00:
Right here,

[00:23:49] Speaker 00:
The only way those facts would be analogous is if the registration statement could be reasonably read to tell a reasonable investor that the business you're buying is one that's continued to perform like Q1, and in particular, based on Ms.

[00:24:04] Speaker 00:
Weintraub's argument and their allegations, Q2.

[00:24:08] Speaker 00:
But we said the exact opposite.

[00:24:10] Speaker 00:
We said Q3 will be lower.

[00:24:14] Speaker 00:
We said that crypto was taking on a much, much higher share of our revenue and our trading than it ever had before.

[00:24:24] Speaker 00:
We disclosed.

[00:24:25] Speaker 00:
in the offering documents at 170 and 171 that crypto had been 4% at the end of the prior year in Q1 it was 17% and we did disclose that there was going to be there was even a higher historic was the word we used on 123 historic levels of crypto trading during the second quarter and we also told our investors in the offering documents that what happened

[00:24:52] Speaker 00:
was in the end of the second quarter, in the month of June, continuing into July, as this IPO goes live, those trading levels were coming down from historic highs.

[00:25:05] Speaker 00:
We then published our 2Q, 10Q for 2Q after the IPO.

[00:25:11] Speaker 00:
The numbers were spot on in the range we had told investors, which was the blowout numbers.

[00:25:15] Speaker 00:
based upon this crypto boom.

[00:25:17] Speaker 00:
And then when we get to the third quarter, we were also right, directionally, right?

[00:25:22] Speaker 00:
We didn't give them a number for third quarter, but directionally, we were right.

[00:25:26] Speaker 00:
It was down hundreds of millions of dollars from that black swan second quarter.

[00:25:32] Speaker 00:
And critically, again, this is what's different from Neyana, your honor.

[00:25:35] Speaker 00:
I think it's what's different from the Apple case they cite and every other case they rely on.

[00:25:40] Speaker 00:
Investors here were not buying a pig and a poke.

[00:25:44] Speaker 00:
They saw and they bought a company that they knew was going public at the moment of this frenzy.

[00:25:51] Speaker 00:
We told them the frenzy was already going away.

[00:25:54] Speaker 00:
We told them revenues would go down.

[00:25:56] Speaker 00:
And when we actually get to our third quarter, our third quarter results, they were lower than the second quarter, just as we said.

[00:26:03] Speaker 00:
They're still higher than before these two bubbles.

[00:26:07] Speaker 00:
And that's what the district court was focused on.

[00:26:09] Speaker 00:
You can't say that a reasonable investor reading these prospectus documents would conclude, I'm buying Robinhood because I love its first five months of 2021 performance.

[00:26:21] Speaker 00:
We told them you cannot do that.

[00:26:24] Speaker 00:
We told them it's going to go down.

[00:26:25] Speaker 00:
We told them crypto was fueling this.

[00:26:27] Speaker 00:
We told them equities was flat.

[00:26:30] Speaker 00:
And even still, by the time those bubbles were gone, they were getting a company that had grown, even compared to the pre-bubble levels that we disclosed in our perspectives.

[00:26:42] Speaker 00:
And so back to your question, Your Honor, Judge Rakoff, on 303, uncertainty.

[00:26:49] Speaker 00:
We disclosed the uncertainty.

[00:26:51] Speaker 00:
We did so qualitatively.

[00:26:54] Speaker 00:
We did so by telling our investors in 122, 123, 170, and 171, and various other places throughout the prospectus, do not expect us to be the company we were in the second quarter.

[00:27:09] Speaker 00:
Expect us to have lower revenue.

[00:27:10] Speaker 00:
expect the crypto trading to drop.

[00:27:14] Speaker 00:
Expect that our equities trading has been flat as compared to the entire year preceding quarter.

[00:27:21] Speaker 00:
And we believe, Your Honors, based upon the totality of those disclosures,

[00:27:26] Speaker 00:
Whether you call it extreme departure, which we think is a valid test and we think has validity and is a helpful framework.

[00:27:32] Speaker 00:
But again, you can disagree with me on that.

[00:27:35] Speaker 00:
You can disagree with Judge Chen on that.

[00:27:37] Speaker 00:
We believe that if you look through the carefully constructed opinion he had, it is dead right of our issue.

[00:27:45] Speaker 00:
What was misleading?

[00:27:47] Speaker 00:
Nothing.

[00:27:48] Speaker 00:
The story that we told investors was exactly the story that proved to be true.

[00:27:54] Speaker 00:
the risks were exactly the risks we disclosed.

[00:27:57] Speaker 00:
We explained in the prospectus that we had a ton of new customers.

[00:28:02] Speaker 00:
That mean stock bubble in January and February brought a whole clue of people driven by social media onto Robinhood's platform.

[00:28:11] Speaker 00:
We told our investors in the prospectus they were new customers

[00:28:15] Speaker 00:
We had no idea how they were going to trade going forward.

[00:28:19] Speaker 00:
And if they didn't trade as our historical customers did, that could affect our performance.

[00:28:25] Speaker 00:
And so I see I'm running out of time here.

[00:28:26] Speaker 00:
I'll just close.

[00:28:28] Speaker 00:
With the basic principle, we believe if you adopt extreme departure, it's clear we win.

[00:28:33] Speaker 00:
If you don't want to bring extreme departure into the ninth circuit, we still win.

[00:28:37] Speaker 00:
And we believe this panel ought to put this case to bed because the disclosures did provide a fair recitation, quantitatively and qualitatively, of what the investors ought to expect.

[00:28:49] Speaker 00:
And a reasonable investor, because of the disclosure regime, cannot and should not expect the disclosure of all of the nitty gritty of the ongoing periods.

[00:28:56] Speaker 01:
in a registration document certainly absent misleading information just one last question forgive me um uh on the extreme departure point i get your more basic point you think you went either whichever standard applies but uh one problem that the second circuit has with the extreme departure is that it's very difficult to define isn't that a valid criticism

[00:29:26] Speaker 00:
That's exactly what the Second Circuit did say in Stadnick, Your Honor.

[00:29:30] Speaker 00:
The securities laws, there are a lot of different standards that are a little bit difficult to define at times, but I think what the Second Circuit was saying there is I understood the Stadnick decision.

[00:29:40] Speaker 00:
What they were saying there is like, we don't want to be cabined in on this idea of it being an extreme departure.

[00:29:45] Speaker 00:
What does extreme mean, right?

[00:29:47] Speaker 00:
And if it's a one-time event, like Your Honor posited the hypothetical of losing that key customer, or what Your Honor saw in deciding the motion to dismiss a Neoni, is that going to be too narrow of a lens through which we should view?

[00:29:59] Speaker 00:
What is the fundamental question we all agree on?

[00:30:02] Speaker 00:
Because it comes from section 11.

[00:30:03] Speaker 00:
And that is, is something we said misleading because of something we didn't say?

[00:30:09] Speaker 00:
And I read the Second Circuit as saying, you know, that's something judges understand, or at least it's something judges have more experience with, especially at the district court level, because it's a standard writ large, you know, including in 10B.

[00:30:21] Speaker 01:
Yeah, it's been around for a long time.

[00:30:23] Speaker 00:
Precisely, Your Honor.

[00:30:24] Speaker 00:
And so, you know, again, I think I understand that criticism.

[00:30:28] Speaker 00:
I nonetheless think in the context of interim financial results, because of the reporting requirements that's been set up by the SEC or not required,

[00:30:37] Speaker 00:
more directly, which you don't have to disclose interim results.

[00:30:40] Speaker 00:
The extreme departure test really just gives teeth to the idea of, you know, the reasonable investor knows they're not getting instantaneous dashboards into the company, but again, am I buying the pig in the poke?

[00:30:53] Speaker 00:
Is there something going on here that's so fundamentally different from what I expect that I'm making a misleading financial decision in investing in this company?

[00:31:02] Speaker 00:
That's Niani, that's Apple, that's not Dishonor.

[00:31:09] Speaker 04:
All right, Rebuttal.

[00:31:11] Speaker 04:
Thank you.

[00:31:12] Speaker 03:
Thank you, Your Honor.

[00:31:13] Speaker 03:
I'd just like to use the time I have remaining to address the specific statements that Mr. Orsini is relying on as giving these warnings to investors.

[00:31:25] Speaker 03:
But let me first say the notion that these offering documents somehow warned investors that Q1 and Q2 results were complete aberrations not to be relied on.

[00:31:37] Speaker 03:
cannot be reconciled with what is said in the offering documents.

[00:31:42] Speaker 03:
And I think it's important to look at the specific statements Mr. Orsini is talking about.

[00:31:46] Speaker 03:
So the first one, he discussed the fact that Robin Hood said that revenue would be lower in Q3.

[00:31:55] Speaker 03:
I think it's important to read that statement in its entirety.

[00:31:58] Speaker 03:
And what it says is that Robin Hood expected revenues for Q3 2021 to be lower as compared to Q2 2021

[00:32:07] Speaker 03:
as a result of decreased levels of trading activity relative to the record highs in trading activity, particularly in cryptocurrencies during Q2 2021 and expected seasonality.

[00:32:21] Speaker 03:
So Robinhood didn't say it's all about this Dogecoin rally, don't rely on that.

[00:32:30] Speaker 03:
All of that revenue is going away in Q3.

[00:32:34] Speaker 03:
It also threw in the notion of seasonality

[00:32:37] Speaker 03:
as somehow impacting their expected results in Q3, even though there was no disclosure in any of their offering documents with respect to a seasonality impact on the business.

[00:32:51] Speaker 03:
But perhaps more importantly, a reasonable investor reading that statement, which all it says is that they expect revenue will be lower, a reasonable investor who's not aware

[00:33:03] Speaker 03:
of all of the declines in the financial metrics that had occurred in Q2 would interpret that statement differently than a reasonable investor who was aware of those declines.

[00:33:15] Speaker 03:
And indeed, this was borne out in the market.

[00:33:19] Speaker 03:
Securities analysts who read the offering documents and issued consensus estimates were not expecting a reversion to the mean of what had happened in 2020.

[00:33:32] Speaker 03:
which was essentially what the district court found here.

[00:33:36] Speaker 03:
What these securities analysts expected was something, you know, acknowledging the cryptocurrency trading rally in the second quarter.

[00:33:44] Speaker 03:
They came forward with consensus estimates that were between Q1 and Q2 2021 revenues.

[00:33:54] Speaker 03:
So a reasonable investor who knew that equities trading had declined to a five-quarter low in the second quarter

[00:34:01] Speaker 03:
that options trading had fallen 17%, that cryptocurrency trading volume, which had become Robinhood's primary source of revenue by Q2, had declined 90% from May to July, would have reviewed these statements and interpret them differently if they had known all of those facts.

[00:34:24] Speaker 03:
And with respect to item 303,

[00:34:27] Speaker 03:
We agree that there's an obligation to disclose both uncertainties and trends, but the notion here that there weren't sufficiently long trends to invoke the item 303 disclosure obligation, we disagree with that.

[00:34:43] Speaker 03:
With respect to equities trading revenue, there was an entire quarter where equity trading revenue dropped to a five-quarter low, and then equity trading volume going into the July,

[00:34:58] Speaker 03:
the month in which the offering occurred, that continued to be down and significantly down below second quarter levels.

[00:35:06] Speaker 03:
And also cryptocurrency trading revenue, that was down 90% across two months going into the month when the offering occurred.

[00:35:16] Speaker 03:
So there was a clear item 303 violation here, but there was also a failure to disclose that rendered

[00:35:26] Speaker 03:
the offering documents misleading.

[00:35:28] Speaker 03:
And where that occurred is with respect to this projected amount of revenue for Q2 2021.

[00:35:35] Speaker 03:
Again, they did not disclose the usual breakdown they provided for every other period, financial period discussed in the offering documents for that number, even though they had the information and even though it would have shown

[00:35:55] Speaker 03:
significant downward trends and a significant shift in the mix of revenue away from equities and options, which had been the traditional basis for Robinhood's business toward speculative cryptocurrencies.

[00:36:09] Speaker 03:
And one last point, Your Honors, is that, yes, Robinhood did disclose that cryptocurrency trading volume and revenue did increase in Q1, but those numbers skyrocketed in Q2.

[00:36:23] Speaker 03:
And in fact, cryptocurrency trading revenue became the majority of the transaction-based revenue that Robinhood had during that quarter.

[00:36:35] Speaker 03:
So for all of these things in Toronto, we believe the district court's opinion should be reversed.

[00:36:39] Speaker 04:
All right.

[00:36:40] Speaker 04:
Thank you, counsel.

[00:36:41] Speaker 04:
Thank you to both counsel for your helpful arguments.

[00:36:43] Speaker 04:
The case just argued is submitted for a decision by the court.

[00:36:47] Speaker 04:
That completes our calendar for today.

[00:36:48] Speaker 04:
We are in recess until 9.30 a.m.

[00:36:51] Speaker 04:
tomorrow morning.

[00:36:54] Speaker 04:
This court for this session stands adjourned.