Robinhood Faces Multiple Lawsuits Over Trading Restrictions

Robinhood Faces Multiple Lawsuits Over Trading Restrictions

Note: Due to recent events we no longer recommend Robinhood and have removed their link from our free stock offers roundup page. 

The popular no-fee stock trading app Robinhood is currently not very popular. The company was hit with several class-action lawsuits Thursday almost immediately after restricting the trading of stocks popularized by Reddit, setting off outrage among customers. Multiple Robinhood users filed separate lawsuits against the brokerage app.

The first lawsuit filed in the Southern District Court of New York alleges that Robinhood “purposefully, willingly, and knowingly” restricted certain securities transactions, including GameStop. The other filed in the Northern District Court of Illinois alleges that the app manipulated its platform. Other client suits were filed in Florida, California and New Jersey. This is not the first time that Robinhood faces lawsuits.

Under the limits announced by Robinhood Thursday, users were allowed to close out existing positions, but weren’t able to acquire new shares of stocks in companies including GameStop, AMC and BlackBerry. The company imposed the stock-trading restrictions citing “recent volatility.”

This whole thing started with WallStreetBets. The subreddit “r/wallstreetbets”, on the popular website Reddit, is a group of people who talk about investing and often, speculative investing. There are close to 6 million members in the group now, with more than half joining in the last few days. One Wall Street Bets user made the case for the GameStop stock (GME) as a value investment, which means that this user viewed the stock as being more valuable than the current stock price. Many people agreed and they started buying it. The price of the stock quickly surged from $10-$20 to up to $500 at one point this week. That huge spike has caused hedge fund short-sellers to lose billions of dollars.

On the other hand, many day traders or even beginners took advantage of Robinhood’s free trades, buying GameStop and other stocks that the Reddit group promoted.

Following the backlash and the lawsuits, Robinhood said in a blog post that it would allow limited buys of these securities.” The post claimed that “this was a risk-management decision, and was not made on the direction of the market makers [they] route to. Then today, trading was allowed as promised, with with very low limits.

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