Robinhood Sued for Blocking Users from Trading GameStop Stock During Short Squeeze

On Thursday, a Robinhood user filed a class-action complaint in the Southern District of New York against online brokerage firm Robinhood Financial LLC, Robinhood Securities LLC, and Robinhood Markets Inc. (collectively Robinhood) for preventing users of the popular investing and stock trading app from buying retailer GameStop’s stock “in the midst of an unprecedented stock rise,” which purportedly “deprived retail investors of the ability to invest in the open-market and manipulate(ed) the open-market.”

The complaint noted that on or around Jan. 11, GameStop (GME) stock began to rise, at which time “Robinhood allowed retail investors to trade GME on the open market.” However, on or about Jan. 27, “Robinhood, in order to slow the growth of GME and deprive( ) their customers of the ability to use their service, abruptly, purposefully, willfully, and knowingly pulled GME from their app. Meaning, retail investors could no longer buy or even search for GME on Robinhood’s app,” the complaint said.

According to NPR and Vice, GME stock went from $4 in December to $40 last week to as much as $350 at one point. This comes after Wall Street research reports stated that the GME stock price was higher than it should be; as a result, day traders bet against the stock, known as a short. However, users of social media platform Reddit felt that the stock was undervalued, and a large group of users decided to buy GME stock, dramatically increasing the price of GME stock. Consequently, this large increase in stock price has harmed short-sellers, placing them in a short squeeze, which Investopedia defines as “when a stock or other asset jumps sharply higher, forcing traders who had bet that its price would fall, to buy it in order to forestall even greater losses. Their scramble to buy only adds to the upward pressure on the stock’s price.”

The plaintiff averred that Robinhood’s conduct was purposefully and knowingly designed to “manipulate the market for the benefit of people and financial in(s)titutions who were not Robinhood’s customers.” Removing GME stock from its platform was designed to “slow growth and help benefit individuals and institutions who are not Robinhood customers but are Robinhood large institutional investors or potential investors,” the plaintiff argued.

Additionally, the plaintiff contended that if GME stock prices decrease, Robinhood has prevented its investors of the opportunity to short GME themselves. Consequently, the plaintiff asserted that Robinhood has barred retail investors from purchasing GME stock for “no legitimate reason,” thus “depriving retailer investors from the benefits of Robinhood’s services.”

The plaintiff claimed that he opened the Robinhood app in the morning of Jan. 28, “searched for GME on Robinhood’s app, and found it was unavailable.” The plaintiff noted that the GME stock did not appear on the app, despite the fact that GME is a “publicly traded company available on all other platforms.” At the time of publication, GME stock has been restricted on other platforms.

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

The plaintiff argued that Robinhood has violated the Financial Industry Regulatory Authority’s (FINRA) rule 5310, which requires Robinhood to “make every effort to execute a marketable customer order that it receives promptly and fully.” The plaintiff added that “Robinhood continues to randomly pull other securities from its app for no legitimate reason.”

The putative class consists of “(a)ll Robinhood customers within the United States.” There is a subclass consisting of “(a)ll Robinhood customers within the United States who were not able to execute trades on GME after Robinhood knowingly, willfully, and purposefully removed it completely from their platform.”

Robinhood is accused of breach of contract, breach of the implied covenant of good faith and fair dealing, negligence, and breach of fiduciary duty.

Meanwhile, Rep. Alexandria Ocasio-Cortez, D-N.Y., tweeted, “This is unacceptable. We 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 added that she would support a hearing on the matter. 

The plaintiff has sought an immediate injunction against Robinhood requiring it to restore GME on the platform; an award for the putative class to be determined; an award for damages, costs, and fees; and other relief. The plaintiff is represented by Derek Smith Law Group PLLC.

This is not the first time that customers have not been happy with Robinhood. In March 2020, Robinhood faced several lawsuits about its outage on a record-setting trading day, while the company purportedly tried to offer credit to potential class members.