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Robinhood Faces a Big Court Case

by WOOWinvest
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Robinhood Faces a Big Court Case

robinhood (HEAD) the beleaguered brokerage that has been slashing jobs as its business shifts is facing a new problem.

The company lost in its efforts to face a court challenge over its behavior during the so-called meme-stock craze in early 2021.

US District Court Judge Cecilia Altonaga in Miami said on Aug. 11 that investors who owned shares of AMC Entertainment AMC and GameStop (GME) plus seven other stocks can go forward with a proposed class action lawsuit.

The lawsuit alleges that the restrictions set by Robinhood artificially pushed down share prices when it banned investors from buying shares of stocks that were trading heavily in January 2021 such as AMC and GameStop.

The stocks rallied in early 2021 when social media generated massive interest in the companies as potential short-squeeze targets, sending shares to new all-time highs. Retail investors were restricted from trading some of these stocks by brokerages such as Robinhood while some hedge funds faced large losses when they bet against the so-called meme stocks.

The one-day period when Robinhood halted the ability of its customers to buy certain stocks occurred when its clearinghouse sought $3 billion in cash. The requirement was set by the National Securities Clearing Corporation.

Robinhood also limited the number of shares investors could purchase in some heavily traded stocks for a temporary period of time.

The judge denied a motion by the brokerage to dismiss other allegations that it participated in market manipulation by pushing down the prices of certain stocks when it canceled purchase orders, liquidated customers’ shares and closed out options.

The restrictions by themselves would not have sufficed to support a claim of market manipulation, but along with “opaque and conflicting statements made to hide its lack of capital” they “evince an intent on the part of Robinhood to artificially depress share prices for its personal benefit,” Altonaga wrote.

Altonaga dismissed a claim that Robinhood engaged in alleged market manipulation to encourage investors to sell their shares.

Robinhood’s actions were “appropriate and necessary to support our customers,” said the brokerage’s associate general counsel of litigation and regulatory enforcement, Cheryl Crumpton in a statement.

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“The court has not yet made any findings of fact or ruled on the merits — and we will continue to vigorously defend ourselves in this matter,” Crumpton said.

Altonaga dismissed other prior investor claims against Robinhood and other brokerages that claimed the companies conspired to stop a “short squeeze.”

Some hedge funds that were short the meme stocks lost millions when prices surged and they had to buy at higher levels to prevent further losses.

Altonaga has overseen several lawsuits claiming that Robinhood and other brokerages violated US laws due to their reaction to the rally that was encouraged by users on social media.

She also dismissed claims from retail investors that alleged Robinhood breached its duty to customers and was negligent.

Robinhood’s Other Fines

Robinhood agreed to pay $9.9 million in cash to its customers for its repeated service outages, according to Aug. 8 documents filed in federal court.

The brokerage was also fined $30 million by New York’s Department of Financial Services and was accused of violating anti-money laundering and cybersecurity regulations. The New York State Department of Financial Services announced on Aug. 2 it issued its first enforcement in the crypto sector.

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Robinhood has been under the scrutiny of various regulators during the past couple of years and paid another $135 million in fines already. In 2020, the brokerage paid $65 million when the SEC said it misled customers. Robinhood also paid a $70 million fine in 2021 when the industry’s regulator, the Financial Industry Regulatory Authority, said it misled customers and was responsible for outages.

Shares of Robinhood have fallen by 78.15% during the past year as the Gen Z investors it attracted to use its trading platform appear to have received significant losses when cryptocurrency prices plummeted while the stock market tanked on concerns of high inflation and fears of recession as the Federal Reserve continues to raise rates.

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