Several lawsuits have been filed against Robinhood Financial after the company restricted certain trades on a number of ’90s-era tech stocks such as GameStop and BlackBerry, companies whose stock prices have exploded in recent days due to coordinated action from an investing thread on Reddit.
Brendon Nelson, a retail investor from Massachusetts, filed a suit in the Southern District of New York, alleging, among other things, that Robinhood breached “the implied covenant of good faith and fair dealing” with its customers when it failed to announce that it was imposing restrictions on GameStop transactions that would bar some customers from making certain transactions.
“On or about January 27, 2021 Robinhood, in order to slow the growth of GME and deprived their customers of the ability to use their service, abruptly, purposefully, willfully, and knowingly pulled GME from their app,” the lawsuit reads. “Meaning, retail investors could no longer buy or even search for GME on Robinhood’s app.”
Nelson alleged that Robinhood’s actions “were done purposefully and knowingly to manipulate the market for the benefit of people and financial intuitions who were not Robinhood’s customers.”
A second lawsuit, filed by Richard Gatz, an Illinois attorney and Robinhood customer, alleged that the online broker “continued to allow trading for institutional investors” after barring retail investors from making certain transactions not only on GameStop but also BlackBerry, AMC, and Nokia.
“The halting of trading of these stocks was to protect institutional investment at the detriment of retail customers,” Gatz wrote. “Furthermore, this appears to be in lock-step with other securities trading platforms, such as Ally Financial, TD Ameritrade and potentially others.”
GameStop’s price surge has been devastating to institutional investors who relied on shorting GameStop for profit. GameStop is one of the most shorted stocks on any stock exchange, with technically more shorts sold than total shares available. When its stock shot up, firms that rely on risky bets for big payoffs, including Melvin Capital Management, tanked — MCM’s value slid 15% in the first three weeks of the year.
Robinhood, TD Ameritrade, and Charles Schwab, which purchased Ameritrade in 2020, all placed restrictions on certain trades regarding GameStop, with some restrictions having been in place since Jan. 13. Retail investors on Robinhood were temporarily barred from completing certain transactions involving GameStop at all on Thursday.
Looks like Robinhood just stopped supporting GameStop, AMC, Blackberry, and Nokia. Users can close out positions but can’t buy more pic.twitter.com/ZOE8NJuVum
— Josh Billinson (@jbillinson) January 28, 2021
Robinhood issued a statement on its blog emphasizing its goal of “democratiz[ing] finance for all” but cautioned that “recent volatility” prompted the broker to introduce certain restrictions.
“We continuously monitor the markets and make changes where necessary,” the company wrote. “In light of recent volatility, we are restricting transactions for certain securities to position closing only. … We also raised margin requirements for certain securities.”
As more restrictions were placed on trades involving GameStop, the price plummeted. After hitting an intra-day high of $468, the share price slumped to just $126 before stabilizing around $225, indicating that the measures taken by brokerages to mitigate risk and address volatility ended up introducing more volatility than before.
The Washington Examiner reached out to Nelson’s lawyer and Robinhood for comment.
