Here’s What Robinhood’s User Agreement Says About Restricting Trades
Robinhood is no novice when it comes to class-action lawsuits. Its debilitating outages had caused traders many losses in the past. With negligence already under its belt, will the GameStop scandal finally become Robinhood’s breaking point?
Robinhood Shatters its Reputation
There are few starker examples of companies going against their raison d’être than Robinhood’s conduct during the height of the GameStop (GME) short squeeze. Styling itself after the mythical class-fighter taking the side of the poor, Robinhood broke that illusion when push came to shove. When retail traders, mobilized by Reddit’s WallStreetBets, tried to turn the tables on GME short-selling hedge funds, the Robinhood brokerage broke that momentum by restricting the stock.
Even worse, thousands of retail traders reported their positions being sold without their consent. Although Robinhood justified this stock trading sabotage with “market volatility”, its shady context soon coalesced into view. Citadel, the hedge fund that pays Robinhood for its order flows, is the same one that poured billions into Melvin Capital – one of the main hedge funds short-selling the GME stock, eventually suffering a 53% loss in January.
On the face of it, this seems like a clear-cut conflict of interest. However, it remains to be seen if this perception can be translated into a legal framework that can win in a court of law. Therefore, let’s take an overview of the most prominent legal angles retail traders have adopted to bring Robinhood to justice.
Class-Action Lawsuits Against Robinhood Explained
In the financial arena, the success of a lawsuit often depends on the liability shielding the sued company had established. In the case of Robinhood, every trader signed up for this lengthy customer agreement when creating an account. Among many stipulations, retail traders had agreed to Robinhood’s right to restrict trading:
“I understand Robinhood may at any time, in its sole discretion and without prior notice to Me, prohibit or restrict My ability to trade securities.”
Furthermore, Robinhood had given itself the right to sell users’ positions:
“Robinhood may, at its option and without notice to Me, i) charge a reasonable rate of interest, ii) liquidate the Property subject of the buy order, or iii) sell other Property owned by Me and held in any of My Accounts.”
Accordingly, to succeed, class-action lawsuits need to reflect the shielding power of Robinhood’s customer agreement. Thus far, there are around 34 class-action lawsuits/complaints against Robinhood, representing individuals and groups across multiple states – 11 currently. The first one had been filed in Massachusetts by Brendon Nelson, outlying points in which Robinhood intentionally deceived and deprived its customers:
“In sum, Robinhood has completely blocked retailer investors from purchasing GME for no legitimate reason, thereby depriving retailer investors from the benefits of Robinhood’s services.”
A similar but more extensive legal angle had been adopted in California’s complaint, adding other brokerages besides Robinhood into the mix:
“Defendants and their co-conspirators conspired to prevent the Retail investors from buying further stock in order to mitigate the Fund Defendants’ exposure in their short positions. By forcing the Retail Investors to sell their Relevant Securities at lower prices than they otherwise would have, Defendants artiﬁcially reduced the value of the Relevant Securities that Retail Investors either sold or held on to.”
Alongside state-based complaints, three federal lawsuits against Robinhood are in the works. These are the ones to look after, among them in Tampa, Florida, by the law firm Shumaker, Loop & Kendrick. This is the same law firm that had previously filed a class-action lawsuit against Robinhood, due to its crippling outages. As last time, they have adopted the negligence angle:
“Robinhood had, all along the way, all the warning signs that they were going to run into these issues, and they didn’t act until it damaged all of their clients,”
With so many lawsuits and different angles facing Robinhood, law firms are vying to be the ones representing the most clients, among them Varnell and Warwick, having also filed a complaint in Florida. In the meantime, Robinhood’s CEO is set to appear before the House Committee on Financial Services’ virtual hearing on February 18th.
Can Robinhood Traders Expect Proper Compensation?
In the aftermath of last year’s outages, negatively affecting the trades of hundreds of thousands of users, Robinhood offered some of them a $75 compensation agreement with a catch:
“Robinhood has sent out a Goodwill credit for $75 to a large group of users. If you accept this they send you a Docu-sign agreement to not sue them.”
Due to liability issues, alongside its customer agreement shielding, it doesn’t seem likely that the same goodwill credit will be forthcoming this time. Given the variety of the lawsuits, and the states’ specific laws, it is difficult to say which ones will end up succeeding. However, even if some of them manage to bring some measure of accountability, Robinhood users may not receive much in return, as noted by the billionaire entrepreneur Mark Cuban:
“Yes. There will be class action suits. And you will win. And after legal feeds you will get your $4.00 settlement check.”
One thing is for certain, Robinhood’s reputation will be irreparably damaged. The company itself is making it easier to do so with its tone-deaf buying of a $5.5 million Super Bowl ad, titled “We are all investors”. Incidentally, this is higher than the $5 million Tampa’s Shumaker law firm is suing for.
In the end, this is not about Robinhood, but about the practice of paying for order flows, double standards and collusion with market makers. Other companies are already stepping up in the form of optional tipping as an alternative. In the meantime, Decentralized Finance (DeFi) continues to grow and innovate, already surpassing $30 billion in locked value, making it a viable alternative to stock trading itself.
With short-squeezing gameplay revealed, do you think hedge funds will weaponize other brokerages in the future against WallStreetBets’ moves? Let us know in the comments below.
Disclosure: Tim Fries has no positions in any of the stocks mentioned, and has no plans to initiate any positions within the 72 hours following the publishing of this article. This article expresses the opinions of Tim Fries. Tokenist Media LLC has no position in any of the stocks mentioned, and does not plan to initiate any positions within 72 hours of the publishing of this article. Please consult our website policy for more information.