Robinhood set to face class action suit over meme stock trading

• The judge refers to some interesting questions raised in the investors’ suit.
• The company is adamant that it took the best action for that period.

Robinhood markets inc. must face allegations of market manipulation leveled against it by retail investors, according to a US Judge ruling on Thursday. In January 2021, the meme stock trading firm paused purchases of meme stocks, including GameStop Corp shares, during a trading period fueled by social media.

In the ruling, Judge Cecilia Altonaga, a judge from Miami district court, said investors in nine stocks, especially GameStop corp and AMC entertainment holdings, can continue with their proposed class action lawsuit. They claim that Robinhood’s restrictions caused an artificial depression in the prices of the stocks mentioned above.

Several other lawsuits were filed against the trading platform following its decision to suspend transactions on some hot stocks (such as AMC and GameStop). A social media-induced rally caused the shares of these companies to rise to new all-time highs. Thus, forcing Robinhood and other trading platforms to stop trading on these securities.

However, their decision angered retail investors and shook market confidence. Some hedge funds suffered huge losses from the volatility since they’ve bet against the meme stocks. Robinhood claimed it had to remove its users’ capability of buying specific stocks for 24 hours because its clearinghouse requirements spiked to a $3 billion request for cash.

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That amount is the limit set by the national securities clearing corporation. The trading platform also put a temporal restriction on the amount of certain hot stocks its users could purchase.

However, Judge Altonaga has been going through various lawsuits accusing Robinhood and some other platforms of violating us securities laws in their reaction to these stocks’ social media-fueled price movement. She discarded the claims that the brokerage and a few others deliberately connived to stop a “short squeeze.” thus, resulting in billions of dollars of losses for hedge funds that bet against the declining share prices.

Another claim dismissed by the judge was that Robinhood was negligent and violated its customer policy agreement. However, the judge allowed the allegation that Robinhood was involved in market manipulation to force a decline in the share prices of GameStop, AMC, and seven other stocks by closing out options, canceling purchase orders, and liquidating its customers’ shares.

The judge wrote that the restrictions alone might not support claims of market manipulation because there were unclear and conflicting statements that proved that the company hid capital. However, it shows the intent of Robinhood to deliberately cause a drop in share prices for its selfish interests.

The ruling also said that the firm must face traders’ claims that this so-called manipulation violates a federal policy against securities fraud. Nevertheless, the judge dismissed the claims that the trading platform used this practice to force investors into selling their shares.

Robinhood remains adamant

In a press release, Cheryl Crumpton, Robinhood’s associate general counsel on litigation and regulatory enforcement, stated that the firm is sticking to its decision. The company deems its actions at that time to be the best for its customers. Crumpton added that the court hasn’t provided any proof against the facts or ruled on current grounds. Hence, the trading platform will keep defending its decision on the matter.