Robinhood Sued by Furious GameStop Stockholders

Robinhood Sued by Furious GameStop Stockholders
Photo: JIM WATSON / AFP, Getty Images
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Stock-trading app Robinhood now faces a class-action lawsuit after it blocked stock purchases of GameStop and other companies favoured by Reddit’s WallStreetBets community on Thursday morning.

The complaint alleges Robinhood violated its customer agreement when it failed to disclose that it would “randomly pull a profitable stock from its platform.” It claims Robinhood’s explanation for the decision was inadequate and that the company disadvantaged the plaintiffs by banning them from trades that were accessible on other platforms.

The complaint accuses Robinhood of failing to execute orders requested by its customers even prior to prohibiting trades on specific stocks, including GameStop ($GME). Users on WallStreetBets have complained, for instance, that Robinhood cancelled limit orders — orders instructing the platform to conduct certain trades automatically when a stock reaches a set price — even though Robinhood accepted those orders hours before the restrictions.

Additionally, the traders bringing the suit accuse Robinhood of acting in bad faith and failing to inform customers “in a timely manner” of the drastic changes it executed on Thursday — and of negligence that caused “losses and damages that would not have occurred but for Robinhood’s gross breach of its duty of due care.”

“Robinhood essentially abandoned its customers altogether by pulling GME, a standard of care so far below what is required for a business engaging in time sensitive trading services that it amounts to a complete abandonment of its duties,” the complaint states.

The plaintiff is named as Brendon Nelson of Massachusetts and the suit is brought on behalf of all Robinhood customers within the United States.

One of the top posts on WallStreetBets is currently an open call to join in a class action against Robinhood. “Everyone comment here if you have/had shares or calls in GME held in Robinhood at market open today,” user Shrubber wrote, “Let’s show these guys the system can’t fuck with us!” It’s not clear if Shrubber and Nelson are the same party; there is however, a high likelihood that this incident results in several related class-action suits which may or may not be consolidated down the line.

Citing extreme market volatility, Robinhood claimed in a blog post that it prevented users from buying stocks from more than a dozen companies, including GameStop, AMC Entertainment, Bed Bath and Beyond, and American Airlines. The move threw WallStreetBets users into a rage, as they scrambled to find other ways to trade. Some called for users to file complaints against Robinhood with the Securities and Exchange Commission.

Robinhood did not immediately respond to a request for comment.

The lawsuit ups the stakes in a rapidly evolving war playing out in the financial markets. On one side is are the retail investors of WallStreetBets (as well as a number of extremely wealthy major financial players), who are actively investing money in companies like GameStop — stocks of which were shorted by hedge funds. The influx of trades raised GameStop’s stock by hundreds of dollars, resulting in at least one hedge fund, Melvin Capital, eating a “huge loss” on its bet that GameStop’s stock price would drop. This early victory for WallStreetBets has since moved investors to throw cash at other struggling companies.

The uproar over Robinhood’s decision to block its users from buying these stocks extended well beyond Reddit, with members of Congress are now getting involved.

“This is unacceptable. We now need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit,” Rep. Alexandria Ocasio-Cortez tweeted Thursday. “As a member of the Financial Services [Committee], I’d support a hearing if necessary.”

In response to the New York congresswoman, Sen. Ted Cruz — the political and spiritual opposite of Ocasio-Cortez — said: “Fully agree.” Ocasio-Cortez declined Cruz’s invitation to bipartisanship, however, on the grounds that the Texas senator “almost had me murdered 3 weeks ago” by lending credence to bogus claims of voter fraud that resulted in pro-Trump rioters ransacking the Capitol building on Jan. 6.