Robinhood Faces Civil Lawsuits Over Trading Restrictions
February 03 2021 - 4:02PM
Dow Jones News
By Mengqi Sun
Robinhood Markets Inc. is facing more than 30 civil lawsuits in
relation to trading restrictions imposed by the online brokerage
that temporarily limited purchases of certain securities last week,
according to court records.
Several groups of individual investors and users of the mobile
trading app have filed separate lawsuits in federal courts in New
Jersey, Florida, California, Texas and other states alleging that
Robinhood and its subsidiaries, by imposing restrictions on its
platform, violated various laws, including breach of contract and
fiduciary duty.
A spokeswoman for Menlo Park, Calif.-based Robinhood declined to
comment on the lawsuits. Robinhood has said the restrictions were
needed to meet clearinghouse requirements and regulatory
obligations.
Amid market volatility, Robinhood and other popular online
brokerages last week imposed restrictions on trading in highflying
stocks, including videogame retailer GameStop Corp. and
movie-theatre company AMC Entertainment Holdings Inc. Shares in
those companies had skyrocketed as individual investors used social
media to encourage each other to buy stocks and options. Shares of
GameStop, for instance, which had been trading below $20 early last
month, closed at $347.51 on Jan. 27.
The restrictions on the trading platforms left users with the
choice of holding their stocks or selling them. Shares of GameStop
and AMC fell Thursday after the restrictions and bounced back
Friday after Robinhood allowed limited purchases. GameStop shares
closed at $90 on Tuesday. The brokerage further loosened
restrictions Wednesday.
One of the lawsuits, filed Thursday in the Southern District of
New York by an individual investor, alleges that Robinhood
"deprived their customers of the ability to use their service" as
well as potential gains from trading for "no legitimate
reason."
Another lawsuit filed by a Robinhood user Thursday in the
Northern District of California alleges that Robinhood's removal of
the GameStop stock from its trading platform amid a stock rise
deprived individual investors of the ability to invest in the open
market and to manipulate the market for the benefit of individuals
and financial institutions that weren't Robinhood's customers.
Another complaint against Robinhood filed by customers Tuesday
in the Northern District of California, alleges that the
brokerage's explanation of its restrictions was false and
misleading, and that the company imposed the limits to drive down
the prices of the hot stocks and to benefit its institutional
partners.
"We look forward to seeking justice for consumers and holding
Robinhood to account for its conduct last week," Jason Rathod, a
lawyer at Migliaccio & Rathod LLP representing the plaintiffs
in the case, said in an email. "So far, Robinhood has deflected
responsibility, and acted as if external forces beyond its control
are responsible for suspending trading. These excuses ring hollow,"
Mr. Rathod said.
Attorneys representing the plaintiffs in the other cases didn't
immediately respond to requests for comment.
Robinhood, in recent blog posts, has said the restrictions
stemmed from regulatory requirements and risk management
considerations as a brokerage firm. That includes net capital
obligations required by the Securities and Exchange Commission and
deposits requirements from its clearinghouses, which process the
securities on the back end after a user executes a trade with their
brokerage.
Robinhood said in a post Friday that "the amount required by
clearinghouses to cover the settlement period of some securities
rose tremendously" last week. Its clearinghouse-mandated deposit
requirements related to equities increased 10-fold, according to
the post.
"To be the trusted and responsible platform you can rely on,
Robinhood has to operate within the existing regulatory
environment," the company said in a blog post Monday. "We have to
make progressive strides while simultaneously complying with laws
and regulations outside of our control."
Members of Congress have asked the SEC and other agencies to
step up regulations and have made calls for hearings into the
matter. Many individual investors have interpreted the trading
restrictions as the latest sign that financial markets are stacked
against individuals.
The SEC said Friday it planned to review the actions of some
brokerage firms that restricted investors' ability to trade
volatile stocks such as GameStop. And Treasury Secretary Janet
Yellen has called a meeting with top financial regulators to
discuss volatility in financial markets related to GameStop, the
Treasury Department said Tuesday.
Write to Mengqi Sun at mengqi.sun@wsj.com
(END) Dow Jones Newswires
February 03, 2021 15:47 ET (20:47 GMT)
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