Robinhood Sued for Breaching Duty of Best Execution and Other Practices

On Tuesday, two Robinhood users filed a class-action complaint in the Northern District of California against Robinhood Financial LLC, Robinhood Securities LLC, and Robinhood Markets LLC,  operating the mobile trading app Robinhood, for the defendants’ purported failure to perform its duty of best execution and for misleading customers.

According to the complaint, the plaintiffs bring the putative class action “on behalf of all clients of Robinhood who placed trade orders with Robinhood between September 1, 2016, and June 30, 2019, (the ‘Class Period’) which were not executed in accordance with Defendant’s duty to secure the best execution available.”

The plaintiffs stated that Robinhood promises its customers “‘commission-free investing’ and offering ‘unlimited commission-free trades in stocks, fund, and options.’” However, the plaintiffs alleged that “Robinhood’s customers pay a hidden cost on each trade…one which often exceeds the cost (of) Robinhood’s competitors’ commissions.” Robinhood purportedly accomplished this via “undisclosed arrangements” from which Robinhood profited. The plaintiffs averred that Robinhood “omitted, misrepresented, and concealed material facts from its customers and the public” in an effort to hide “these arrangements, the sizeable revenue resulting therefrom, and their impact on customer trade execution prices.”

The plaintiffs proffered that as a broker-dealer, Robinhood “owes its customers the duty of best execution. Pursuant to the Financial Industry Regulation Authority and SEC rules, this duty mandates Robinhood to conduct “reasonable diligence to ascertain the best market for the subject security and buy or sell in such markets so that the resultant price to the customer is as favorable as possible under prevailing market conditions.” Specifically, the plaintiffs claimed that during the Class Period, Robinhood “conceal(ed) its practice of routing customer orders to a group of outside trading firms … in exchange for compensation. This compensation is remitted to Robinhood either as ‘liquidity rebates’ or ‘payment for order flow’ (together, ‘PFOF’) (i.e., revenue to the Company) or ‘price improvement’ (i.e., improved prices for customer trade executions).” For example, Robinhood allegedly “negotiated a compensation split that reduced price-improvement for its customers in order to boost its own revenues”; specifically, only about 20% of the order flow compensation went to price improvement and nearly 80% went to Robinhood. Reportedly, “(t)his inverted the industry standard, generating 400 per cent more revenue than the typical PFOF split, and reducing price improvement by 75 per cent.” As a result, these PFOF payments made up a significant portion of Robinhood’s revenue during the Class Period, according to the plaintiffs.

The plaintiffs claimed that Robinhood continued to conceal this conduct and deceive consumers, while claiming to be performing its duty of best execution, among other obligations, however, it was allegedly not until late 2018 when the media raised concerns about its practices that “Robinhood acknowledged that it relied on PFOF revenue(,) while maintaining that its order execution quality was equal to or better than its competitors.” According to the plaintiffs, this statement was false and misleading; these statements were on its website until the end of June 2019. Reportedly, the Securities and Exchange Commission (SEC) concluded that the purported scheme cost Robinhood customers approximately $34.1 million “‘even after netting the approximately $5 per-order commission costs’ charged by Robinhood’s competitors.”

The plaintiff contended that Robinhood “omitted, concealed, and misrepresented its order flow practices and its execution quality to continue growing its customer base and encourage its customers to continue trading.” The plaintiffs argued that they and the putative class relied on these misrepresentations when using Robinhood. Consequently, the plaintiffs claimed that they have been harmed by this alleged conduct, via “higher prices for purchase orders, lower prices for sale orders, slower executions, lesser fill rates, and exposure to a greater risk of adverse selection than they could have obtained by using a broker” that fulfilled its duty of best execution.

Robinhood is accused of violating Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 promulgated thereunder, California Unfair Competition Law, and Maine Unfair Trade Practices Act, as well as breach of fiduciary duty, breach of the implied covenant of good faith and fair dealing, negligence, and unjust enrichment.

The plaintiffs seek class and subclass certification and to appoint the plaintiffs and their counsel to represent the class, an award for damages, restitution, disgorgement, declaratory and injunctive relief, pre- and post-judgment interest, an award for costs and fees, and other relief.

The plaintiffs are represented by Migliaccio & Rathod LLP.