Federal court dismisses lawsuit against Robinhood for restricting 'meme stock' trades

A federal judge dismissed a multi-district lawsuit this week that was filed against the online trading platform Robinhood for restricting trades of certain stocks in the midst of the "meme stock" short squeeze that took place last January.

Chief U.S. District Judge Cecilia Altonaga for the Southern District of Florida wrote in her 66-page motion to dismiss that the duty plaintiffs were seeking to impose on Robinhood was "remarkably broad" and found that they had offered "virtually no limiting principle to this theory of duty."

Last January, the stock prices of certain companies like GameStop, AMC and BlackBerry skyrocketed after retail traders from the popular subreddit r/WallStreetBets worked together to drive up the price. Shortly after the stock prices rose, Robinhood, through which many retail traders had bought their shares, restricted users' ability to buy certain stocks, citing "recent volatility."

The decision drew outrage from many users, leading some to file lawsuits against the company alleging that it was guilty of negligence and had breached fiduciary duties. These suits were consolidated into a Multi-District Litigation case against the tech company. The plaintiffs argued that Robinhood had a duty to allow trading even during times of heightened volatility.

In her ruling, the judge pointed out that all traders who use Robinhood consent to a a customer agreement that states the app can restrict trading. She also noted that the Securities and Exchange Commission recognizes brokers' rights to do so.

Altonaga wrote that it was "understandable" that plaintiffs would want Robinhood to expand its obligations beyond what is in the customer agreement, but said it was "misguided."

"Here, Plaintiffs repackage their dissatisfaction with the PCO restrictions as negligence claims. In doing so, they seek to obtain precisely what the Customer Agreement that they freely entered denied: a right to unrestricted trading," she wrote.

In a statement provided to The Hill, Robinhood said, "We are pleased to see that the court has found the claims in this case to be meritless, dismissing them and refusing to give plaintiffs a chance to try to state the claims again. Once more, this confirms that the unfounded allegations against Robinhood have no basis."

Natalia Salas, an attorney representing the plaintiffs in the case, said in a statement to The Hill that they planned on appealing Altonaga's ruling.

"Our case brought to light Robinhood's own internal documents, which show they allowed sales and not purchases to cover their liquidity issue at the expense of customers. Personnel even traded ahead of their public decision to tamper with trading volume," Salas said.

"This conduct is flagrantly at odds with industry standards, and harmed not only customers like Plaintiffs, but an entire class of non-Robinhood customers not bound by the Customer Agreement."