Frustrated investors who sued after getting locked out of trading in frenzied shares like GameStop Corp. aren’t likely to have much luck in court either.
Online brokerage Robinhood Markets was named as a defendant Thursday in several federal suits demanding it reinstate trading of shares including GameStop, BlackBerry Ltd., Nokia Oyj and AMC Entertainment Holdings Inc. Just hours earlier, Robinhood, Interactive Brokers and others took steps to curtail activity in the high-flying stocks after several dizzying days of trading on their platforms whipped up volatility.
While users of the trading platforms claim in court filings that they suffered losses from the restrictions, legal experts say brokerages have broad powers to block or restrict transactions -- all of which is spelled out as part of customer agreements everyone signs to gain access to the services.
“I’m looking at the Robinhood contract, and it says in black and white they can block or restrict trades at any time,” said Jeff Erez, who runs a Miami-based law firm specializing in securities-fraud litigation and represents plaintiffs in a lawsuit filed last year against Robinhood related to service disruptions. “I’m not aware of any law that would guarantee you a right to purchase a certain security at a certain brokerage firm.”
Maverick Traders
The legal fight comes after a group of maverick, digitally oriented traders who gather in Reddit’s WallStreetBets forum sent shares of GameStop and other companies soaring, with the apparent goal of earning millions of dollars in profits and causing billions in losses to hedge funds that were shorting the stocks.
In a lawsuit filed in New York, Robinhood user Brendon Nelson of Massachusetts said the company removed GameStop from its trading platform in the midst of an “unprecedented stock rise,” depriving individual investors of the ability to invest and manipulating the market. The decision was a breach of its customer agreement and was in violation of financial industry rules, according to the complaint.
In a Chicago lawsuit, Robinhood user Richard Joseph Gatz of Naperville, Illinois, said the halt of trading in BlackBerry, Nokia and AMC “was to protect institutional investment at the detriment of retail customers” and is in “lockstep” with other trading platforms. “The halt of retail trading for these stocks has caused irreparable harm and will continue to do so,” Gatz said.
Robinhood Chief Executive Officer Vlad Tenev denied the company had been pressured to curtail trading in the stocks by institutions.
“We weren’t directed by a market maker, or any other market participant,” Tenev said in an interview with Bloomberg Television. “This was a technical and operational decision that we made.”
He said the company’s financial requirements, such as deposits to clearing houses, increase when there’s a lot of volatility in the market, so “to protect the firm and to protect our customers we temporarily disabled buying in these securities.”
Other client suits were filed in Florida, California and New Jersey. And New York Attorney General Letitia James said her office is “aware of concerns raised regarding activity on the Robinhood app, including trading related to the GameStop stock. We are reviewing this matter.”
Robinhood has faced criticism in the past for allowing relatively unsophisticated investors to engage in risky trades that resulted in massive losses, and some commentators have expressed concern about the losses that individual investors are likely to suffer when the Reddit-driven bubbles burst.