Stockbroker service Robinhood hit with lawsuit over market manipulation

by Peter Heck · Jan 28th, 2021 4:04 pm

Last Updated Jan 29th, 2021 at 7:25 pm

Online stock trading app Robinhood is being hit with a class action lawsuit for its recent effort to block the buying of stocks that have been publicized on web forum Reddit.

The financial world has been in a state of great agitation since Wednesday after a group of non-professional "retail" investors coordinated with each other on the website Reddit to buy a large amount of stock in video game retailer GameStop. The plan materialized because the Reddit group became aware of wealthy hedge fund operators intending to short the GameStop stock.

The hedge fund investors that were planning on shorting GameStop stock ended up losing more than $5 billion because of the effort.

On Thursday, stockbroker services angered the Reddit crowd by restricting the trading of GameStop, as well as other targets like AMC Entertainment and Nokia. The "retail" investors retaliated on social media, accusing stockbroker service Robinhood of "manipulating the market."

Robinhood responded to the accusations by saying the changes it made were "necessary."

"We continuously monitor the markets and make changes where necessary," it said in a statement. "In light of recent volatility, we are restricting transactions for certain securities to position closing only, including $AMC, $BB, $BBBY, $EXPR, $GME, $KOSS, $NAKD and $NOK. We also raised margin requirements for certain securities."

Margin is the amount of money an investor must have in their account in order to be allowed to purchase stock. By raising those requirements, small Reddit-driven "retail" investors are unable to participate. That raised more than a few eyebrows.

Robinhood's move has resulted in calls from many customers to bring class action lawsuits against the company. Even high-profile U.S. senators like Ted Cruz (R-TX) took notice of the company's questionable behavior:

By Thursday afternoon, a class action lawsuit had formed and was delivered to a Manhattan federal court. The suit says Robinhood violated the Financial Industry Regulatory Authority by blocking access to purchasing particular stocks for "no legitimate reason."


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