Take from Rich, Give to the Rich?

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In light of the trade restrictions imposed by Robinhood last week, numerous Robinhood customers have joined class actions against the Company, asserting that such conduct amounted to illegal market manipulation. The lawsuits, which have been filed in Federal District Courts nationwide, all have a common theme – that “Robinhood’s trade restrictions were done purposefully and knowingly to manipulate the market for the benefit of people and financial institutions who were not Robinhood’s customers.”

Robinhood took the action in response to a grassroots effort by investors to inflate the value of stocks which, otherwise, weren’t worthy of Blue Chip status. This effort resulted in huge gains to holders of certain stocks, including GameStop. Robinhood published a blog post that indicated that it would only allow users to close out their positions in a number of stocks, including GameStop (GME), AMC (AMC), Bed Bath & Beyond (BBBY), and Nokia (NOK). The lawsuit claims Robinhood’s decision deprived retail investors of potential gains they could have made by buying when the stock was low and selling when its price rose.

While Robinhood had the contractual right to take this action, the Courts will have to decide whether such action was legal.

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