Lawsuits Against Robinhood – Likely To Miss The Target!

Business Law

A LEGAL PERSPECTIVE – By Eugene Bilmes, Associate, Hecht Schondorf

GameStop has been in the news cycle recently and not because they got a new shipment of PlayStation 5s. A group of investors from Reddit’s r/wallstreetbets board used collective action to buy shares of the struggling brick and mortar company to the chagrin of many hedge funds holding large short positions. If you do not understand what that means, here is a good explainer: GameStop’s short squeeze, explained.

In response to the drastic jump in the stock’s price, the investing app Robinhood halted trades of the stock, preventing customers from buying additional shares but still allowing them to sell the shares they already owned. Angry investors have now filed several lawsuits across the country in various federal courts against Robinhood arguing that Robinhood’s response was arbitrary and harmed its customers. One lawsuit filed in the Northern District of Illinois alleges that while Robinhood stopped retail investors (i.e., individual, non-professional traders who buy and sell securities through brokerage firms) from trading GameStop stock, among others, while still allowing institutional investors (i.e., larger scale investors like hedge fund managers) to freely trade said stocks.

How will these lawsuits fare? It is impossible to give a definitive answer, but they are likely to fail and fail spectacularly. For context, it is important to begin with Robinhood’s terms of service. Section 16 of the terms of service, titled “Restrictions on Trading” explicitly gives Robinhood the right to, “in its discretion, prohibit or restrict the trading of securities, or the substitution of securities, in any of My Accounts.”

It is clear from the terms of service that Robinhood is allowed to stop the trading of certain stocks on its platform. But what about the plaintiff’s assertion that Robinhood halted trading for retail investors while still allowing institutional investors to freely trade the stock? Nothing in the Robinhood terms of service seems to mandate that they have to restrict trading for all users across the board or none at all—it simply states that Robinhood may broadly “in its discretion, prohibit or restrict the trading of securities.” It is also important to note that the plaintiff’s complaint does not offer any specific facts as to why he believes Robinhood allowed institutional investors to continue trading the restricted stocks, only that he alleges this based on “information and belief.” These types of broad allegations are common in lawsuits because often a plaintiff does not have sufficient evidence or a “smoking gun” to offer as proof until they have been allowed by the court to conduct discovery, something they are not entitled to before filing a lawsuit. It is possible that the plaintiff in the Illinois case is at this early stage just hoping to survive a motion to dismiss for failing to file a complaint with enough specificity to show that he is entitled to relief. If he gets past a motion to dismiss, he will be allowed to ask for documents from Robinhood and take depositions of its employees in the hopes of finding his “smoking gun.” But that is still a big if.

I am not in the prediction business, but I do feel confident in saying that this lawsuit, and every class-action lawsuit filed against Robinhood related to the GameStop rally and fallout will fail spectacularly. I think that at a minimum, Robinhood will be able to present compelling evidence that it halted trades for a legitimate business purpose and not to favor institutional investors over retail ones. As always, time will tell.

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