A federal judge has tentatively declined a Robinhood app user’s bid to block the online brokerage firm from restricting purchases of certain stocks and from manipulating the price of shares.
Los Angeles County resident Levi Cobos, a user of the Robinhood app which provides an online platform for smaller securities transactions, claims in a lawsuit the company swindled him and other individual investors, also called retail traders.
The scheme commenced, Cobos says, on Jan. 28, when Robinhood and other online trading platforms restricted trading in stocks for companies such as BlackBerry, AMC Theatres, and video game retailer GameStop.
Stock shares for those and other companies had been ravenously snatched up days before in an unprecedented wave of investment by retail traders who organized themselves in online forums and social media sites.
The smaller investors funnelled their investments to GameStop, BlackBerry, Nokia and other companies, triggering a share price surge that then forced Wall Street hedge funds and other major market actors to cover their bets that GameStop shares would fall.
But the run on GameStop shares, which led to turbulence across markets, was cut short by Robinhood, Cobos says in his 17-page federal class action.
On Jan. 28, the Menlo Park, California-based brokerage stripped app users of their ability to buy shares of the popularized stocks and only permitted customers to sell shares through Feb. 4, 2021.
That morning, Cobos says he attempted to purchase BlackBerry stock but was denied access to do so.
“Robinhood’s actions were done purposefully and knowingly to manipulate, or with reason to know, that its customers would be harmed and without employing any reasonable protections for its retail investor customers affected, even Robinhood knew them to be typically younger or inexperienced and poorer than institutional investors and Robinhood’s backers, who were typically rich or wealthy,” Cobos says in his complaint.
The lawsuit filed in the Central District of California seeks a temporary restraining order prohibiting Robinhood from restricting any of their customers’ future trades. U.S. District Judge Virginia A. Phillips tentatively denied the request in a virtual hearing Wednesday.
Phillips didn’t make the tentative ruling public and did not share its details.
In the hearing, Cobos’ attorney Joseph Kar told Phillips Robinhood took advantage of its relatively young and inexperienced client base and knowingly manipulated stock prices for its own benefit.
“The problem is Robinhood knew that leaving the ‘sell’ feature on and turning off the ‘buy’ feature would cause the price to go down,” Kar argued.
“Robinhood turned against its customers instead of following regulations to secure outside capital. They created an improper marketplace in their ecosystem which later affected the entire marketplace.”
Robinhood’s roughly 13 million users were also prevented from moving their money freely since it takes time to liquidate funds from their Robinhood app accounts, Kar said.
“Robinhood says it’s acting to democratize investing but it’s actually acting socialistically,” Kar said.
“When it becomes a medium to champion the cause of one stock or the other, and Robinhood blocks that — they decline trades — yes, that is financial injury.”
Kevin J. Orsini, an attorney representing Robinhood Markets, Inc. and two subsidiaries, said in the hearing the company acted to protect its users and didn’t put limitations on any stock price.
As the volume of high volatility stock trades increased during the GameStop “short squeeze,” clients were exposed to more and more risk, said Orsini, who is with the firm Cravath Swaine & Moore.
“We’re allowed by the Securities and Exchange Commission and trade contracts to restrict certain trades,” Orsini said.
“But if we only restrict one piece, it somehow runs afoul? There’s no rule, law or case that comes close to suggesting that.”
In court papers, Robinhood said Cobos and other users agreed to terms when they opened their accounts that explain the company’s ability to restrict trades to shield from legal damage, to minimize risk or other reasons.
A large part of the risk involved the huge spike in capital requirements Robinhood was legally obligated to take on to cover trades as stock prices surged.
“RHS is obligated to pay deposits to centralized clearinghouses to cover Robinhood customers’ trades during a two-day settlement period in which the clearinghouse processes the transactions,” the company said in its brief.
“The purpose of the deposits — which RHS covers with its own capital — is to cover potential risk to the firm. Clearinghouses require these deposits to protect the integrity and stability of the stock market as a whole.”
When asked by Phillips how the court should consider the risks Robinhood was facing, Kar said capital requirements are issues Robinhood executives should manage, not customers.
“Capital requirements have nothing to do with customers,” Kar said. “It’s internal business imposing on customers.”
Phillips took the matter under submission but did not say when she would issue her final ruling.