Robinhood Blocked Buy Trades of Certain Stocks California Class Action

A number of class actions have been filed on the subject of restricted trading in GameStop and other popular securities in January of 2021, blaming it on a desire among certain short-sellers to stop the rise of those securities. This class action centers on the same blocking of trading in those same stocks, but blames it on Robinhood Financial, LLC and its inability to handle the trading volume and a call from the Depository Trust & Clearing Corporation (DTCC) that required it to put up additional collateral against the trades it was making.

The class for this action is all California residents who are or were Robinhood customers from January 2021 through the present who placed a Buy order for a Blocked Stock where the order was not fulfilled.

Robinhood has become “wildly popular,” the complaint says, because it permits the general public to make commission-free trades in stock, options, and cryptocurrency.

“Unfortunately, however,” the complaint alleges, “Robinhood was too successful for itself and did not have the capital, operational technology and capabilities to appropriately handle trades for all of its customers. When trading volumes increased, it purposefully, willfully, and knowingly restricted trading in certain stocks…”

These included certain stocks that had suddenly begun to rise around January 22, 2021. They including GameStop, AMC Entertainment, Blackberry, Express, and others. These are known in this case as the Blocked Stocks.

Robinhood has grown quickly, going from 6 million subscribers in 2018 to 13 million in May 2020. The complaint alleges that Robinhood should have known that its model of business wouldn’t work under certain market conditions.

The complaint claims that Robinhood expanded its clientele “without regard as to whether it could adequately service its clientele.” It even permitted clients to open accounts to trade options, even though they lacked an appropriate level of experience.

The DTCC is the main clearinghouse for Wall Street’s stock trades, and on January 28, 2021, it informed Robinhood that it had to add $3 billion to its collateral as a hedge against its clients’ trades. A co-founder of Robinhood claimed this was “an order of magnitude more” than was normally required.

Robinhood did not have the money to do this, and it negotiated to be allowed to put up only $700 million. In exchange, it agreed to limit trading, permitting clients to buy but not sell the above group of stocks.

The complaint alleges that other broker-dealers limited trading in these stocks, but did it in a more nuanced way, for example, by requiring clients have cash in their accounts to pay for purchases, to reduce the margin to zero for on stocks bought on margin, or to have on account 300% of the value of shorted stocks.

The complaint claims that Robinhood’s blanket rejection of buy trades on certain stocks violated the Financial Industry Regulatory Authority’s Best Execution rule for broker-dealers.

Article Type: Lawsuit
Topic: Consumer
Tags: Breach of Fiduciary Duty, Breach of the Covenant of Good Faith and Fair Dealing, Securities