On January 28, 2021, Brendon Nelson filed a four-count class action lawsuit in (the United States District Court for the Southern District of New York) against Robinhood Financial, LLC, Robinhood Securities, LLC and Robinhood Markets, Inc., for Breach of Contract, Breach of the Implied Covenant of Good Faith and Fair Dealing, Negligence, and Breach of Fiduciary Duty. This class action comes after a market frenzy fueled by traders who utilize Reddit’s WallStreetBets forum to discuss stocks, sent shares of GameStop soaring which caused losses (in the billion-dollar range) to hedge funds that were shorting the stocks.
More specifically, the plaintiff alleges that Robinhood “purposefully, willfully, and knowingly” removed the GameStop stock from its trading platform “in the midst of an unprecedented stock rise thereby depriv[ing] retail investors of the ability to invest in the open-market and manipulating the open-market.” The suit requests relief in the form of an injunction reinstating GameStock on Robinhood’s trading platform as well as for compensatory and punitive damages. The class action complaint seeks to hold applications like Robinhood accountable in that it must remain in compliance with the governing FINRA rules. Specifically, the class action complaint alleges that Robinhood failed to comply with FINRA Rule 5310.01 requiring that it “must make every effort to execute a marketable customer order that it receives promptly and fully”, and that it failed to do so.
It is unclear if this class action will be able to survive a likely motion to dismiss, as Robinhood’s customer agreement purportedly states that it can suspend the trading of stocks at any time. Additionally, Robinhood’s Customer Agreement contains a mandatory and binding arbitration clause requiring the parties to settle disputes out of court. The Agreement goes one step further in limiting class action suits rendering the present class-action all but dead-on-arrival. Regardless of the outcome, this case will likely raise questions and policy considerations for discussion related to market manipulation by hedge funds and whether these types of stock trading applications are effectively allowing ordinary people to freely trade and engage in the financial market.