Robinhood Hit With Class Action Suit—but Here’s Why It’s Likely to Fail

Michael M. Santiago/Getty
Michael M. Santiago/Getty

The financial trading app Robinhood has been hit with a federal class-action lawsuit after it restricted trades to stocks popular on the Reddit forum r/WallStreetBets, sending Redditors and app users into a meltdown.

The lawsuit, filed in the Southern District of New York on Thursday, alleges that the app “purposefully, willfully, and knowingly removing the stock ‘GME’ from its trading platform in the midst of an unprecedented stock rise, thereby deprived [sic] retail investors of the ability to invest in the open-market and manipulating the open-market.”

Robinhood, which describes itself as “democratizing finance for all,” allows users to buy and sell stock without a commission fee. A Robinhood spokesperson declined to comment on the lawsuit on Thursday, instead pointing to a Thursday blog post on its website.

“We continuously monitor the markets and make changes where necessary. In light of recent volatility,” the statement read, “we are restricting transactions for certain securities to position closing only.”

Alexander G. Cabeceiras, the attorney who filed the suit, tweeted shortly after: “‘Robinhood’s mission is to democratize finance for all.’ This is simply not true.”

The lawsuit is seeking reinstatement of $GME trading to the platform, as well as a class action fee for plaintiffs, attorneys' fees, and punitive damages.

In a subsequent statement on Thursday, after the lawsuit was filed, Robinhood said it would “allow limited buys” of restricted securities, beginning Friday. The statement didn’t specify what those restrictions would be.

In an interview with CNBC on Thursday night, Robinhood cofounder Vlad Tenev said the company did not act at the behest of any other firms in deciding to halt trading of the stocks.

“I know how Clorox and Windex felt at the pandemic, when they were running out of hand sanitizer and supplies,” Tenev said. “We just haven’t seen this level of concentrated interest, marketwide, in a small number of names before.”

Another law firm, ChapmanAlbin, said in a statement Thursday that it was “investigating claims on behalf of Robinhood users that were affected and suffered losses as a result of investing in Gamestop or AMC.”

“Robinhood appears to be up to the same old tricks, recruiting social media influencers to encourage individuals to sign up and fund a Robinhood account and beginning purchasing shares of securities such as Gamestop and AMC, with no consideration as to the suitability of the purchases,” ChapmanAlbin attorney Philip Vujanov said in the statement. The firm didn’t immediately respond to The Daily Beast’s request for comment.

However, with Robinhood's user agreement, a class action lawsuit is unlikely to be successful, said Remington Gregg, counsel for civil justice and consumer rights at the advocacy group Public Citizen.

He Joined the GameStop Uprising to Screw the Big Guys—and Save His Dog’s Life

Under the user agreement, Robinhood investors waive their right to sue the company. Instead, claims must be litigated via arbitration—individually—in the state of California.

“Arbitration is a privatized system of justice, meaning that the person, the consumer investor, generally doesn’t have the choice of either the arbitrator or the arbitration system,” Gregg told The Daily Beast. “In the context of FINRA, the arbitrators are the people who know the industry, and they’re generally the people who want to protect corporate dealers.”

In 2019, FINRA fined Robinhood over $1 million for “execution violations related to its customers’ equity orders and related supervisory failures.” Earlier this month, Robinhood hired two FINRA officials, according to Bloomberg News.

Users of r/WallStreetBets had helped pump up the stock prices of struggling companies, most famously GameStop, as a counter to short-selling investment strategies. Through the subreddit’s campaign, which users have framed as a David and Goliath battle, GameStop’s stock ($GME) went from under $4 a share in early 2020 to well over $400 earlier on Thursday.

However, on Thursday morning, Robinhood restricted further trading of $GME—along with other stocks popular in the Reddit forum, such as BlackBerry, Nokia, and AMC—only allowing users to close out of their positions.

Redditors responded with rage. Users of r/WallStreetBets created a separate forum, r/ClassActionRobinHood, to coordinate a possible lawsuit against the app. The subreddit had racked up over 30,000 subscribers as of Thursday night. It is unclear whether this lawsuit is linked to the subreddit. The creator of the forum did not immediately respond to The Daily Beast’s request for comment.

Phillip DeFranco, a YouTuber with over 6 million subscribers, said he’d be dropping his partnership with the company.

“Robinhood is never getting a fucking spot on my show again regardless of the offer. Fucking ridiculous,” DeFranco wrote. “I’m transferring all my stocks/money off RH ASAP. I’ve used them for years and am furious.”

Rep. Alexandria Ocasio-Cortez (D-NY), a member of the House Financial Services Committee, said she would “support a hearing if necessary” into Robinhood’s actions.

“We now need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit,” she wrote on Twitter.

Sen. Ted Cruz (R-TX) responded, “Fully agree.”

And Letitia James, the Democratic attorney general of New York, said her office was “actively reviewing concerns about activity” on Robinhood, including GameStop stock trading.

“We are reviewing this matter,” a statement from her office read.

Nathan, a 35-year-old welder, was one of the Reddit users locked out of further GameStop stock trades on Thursday. But he said he didn’t join in on the craze just to make money.

“I’ve never owned stocks in my life. I don’t really care about it too much,” he told The Daily Beast.

“Back in 2008, when the big financial crash happened, my family lost everything. Literally, a police officer escorted a moving company into our house,” he said. “I kind of had a chip on my shoulder about it. And it just felt like a way that I could get back at them.”

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