Lawsuit Filed Against Robinhood for Trade Restrictions on GME, AMC and Other Stocks

January 31, 2021

Lawsuit Filed Against Robinhood for Trade Restrictions

Update (Jan. 31, 2021) – In a blog post late Friday, Robinhood said the trading limitation placed the previous days “was not because we wanted to stop people from buying these stocks.” The online broker said that it put temporary buying restrictions on a small number of securities because central Wall Street clearinghouse-mandated deposit requirements for equities increased tenfold.

Original article (Jan. 28, 2021) – The no-fee stock trading app Robinhood was hit with class-action lawsuits Thursday almost immediately after restricting the trading of stocks popularized by a Reddit forum and setting off outrage among customers. Several 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 a lawsuit.

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

If you haven’t been reading the news in the last few days, this all has to do with WallStreetBets. The subreddit “r/wallstreetbets”, on the popular website Reddit, is a group of people who talk about investing and usually, speculative investing. There are close to 3 million members in the group, which isn’t very organized and doesn’t have a leader. 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 points in the last few days. 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. One redditor who bought GameStop shares back in April has already made several million dollars. Most members of the group have vowed to hold on to their shares.

Following the backlash and the lawsuits, Robinhood said in a blog post that “starting tomorrow, we plan to 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.

Bloomberg says that Robinhood has tapped at least several hundred million dollars from its credit lines with banks. This is a sign that that the recent market turbulence is putting a strain on the company’s finances.

Update (Jan. 29, 2021) – Robinhood now lets you trade limited quantities of the stocks listed above and several others. The table below shows the maximum number of shares and options contracts to which you can increase your positions. Please note that these are aggregate limits for each security and not per-order limits, and include shares and options contracts that you already hold. These limits may be subject to change throughout the day.