Robinhood, which bills itself as a “free-trading” app that is used by millions, has come under heavy fire for its decision to halt trading on certain heavily shorted stocks.
“We continuously monitor the markets and make changes where necessary,” Robinhood said in a statement defending its actions. “In light of recent volatility, we are restricting transactions for certain securities to position closing only, including $AMC, $BB, $BBBY, $EXPR, $GME, $KOSS, $NAKD and $NOK. We also raised margin requirements for certain securities.”
The move incited the fury of retail investors who had moved in on heavily shorted stocks that hedge funds had targeted. Most of these companies, like AMC, Blackberry and Gamestop, were being routed amid state lockdown decrees and digital commerce competition. Robinhood’s action is seen by many as a massive betrayal.
Now, Robinhood is being targeted for a major class action lawsuit. The New York Post reported:
The online stock trading app Robinhood was hit with a class action lawsuit Thursday after it restricted buying of stocks that were popularized on a Reddit web forum.
In the Manhattan federal court suit, Massachusetts resident Brendon Nelson claimed the app blocked users from its service by pulling the GameStop stock from its trading.
The New York lawsuit states as follows:
Robinhood purposefully, willfully, and knowingly removing the stock “GME” from its trading platform in the midst of an unprecedented stock rise thereby deprived retail investors of the ability to invest in the open-market and manipulating the open-market. […]
On or about March 23, 2016, Robinhood’s official Twitter account stated: “Let the people trade.” They have since disregarded their mantra and have blocked access for millions of its customers to trade particular securities.
This is the major legal bone of contention:
“The Financial Industry Regulatory Authority (“FINRA”), which governs brokers like Robinhood, espouses rule 5310 regarding “Best Execution and Interpositioning.” Rule 5310.01 requires that Robinhood “must make every effort to execute a marketable customer order that it receives promptly and fully.” By failing to respond at all to customers’ placing timely trades—and outright blocking customers from trading a security—Robinhood has breached these, among other, obligations and caused its customers substantial losses due solely to its own negligence and failure to maintain adequate infrastructure.
Robinhood continues to randomly pull other securities from its app for no legitimate reason.
Furthermore, the class action lawsuit is seeking compensatory damages:
Robinhood’s failure to perform and its breaches of the Customer Agreement resulted in damages and losses to Plaintiff and Class members and continues to expose them to harm because Robinhood continues to fail to perform under the Customer Agreement. These losses reflect damages to Plaintiff and Class members in an amount to be determined at trial or separate proceedings as necessary.
As reported by The Independent, a similar class action suit was also filed against Robinhood in Chicago.
“The irony of Robinhood App being named Robinhood when very clearly their entire agenda is to steal from poor and give more to the rich is not lost on me,” Dave Portnoy of Barstool Sports, who has been spearheading reaction against the app tweeted out.
“It’s very clear that Robinhood App and Hedge Funds like Citadel are saying we’ll take our chances with class action lawsuits and white collar crimes and paying people off to stay out of prison rather than their firms going bankrupt,” he added.
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