In this photo illustration, the Robinhood logo is displayed on an iPhone on December 17, 2020 in San Anselmo, California.
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A Robinhood user filed a class action lawsuit Thursday after the app decided to restrict GameStop trading on its platform. This sparked a small investor revolt, which caused the company’s share price to soar.
The lawsuit, which was filed in federal court in Manhattan, claims Robinhood “purposefully and knowingly removed the video game retailer in order to manipulate the market.”
The lawsuit accuses Robinhood, a popular trading and individual brokerage app used by retail investors, of breaching its contract by failing to disclose “that it would accidentally pull a profitable stock off its platform.” She also accuses the company of negligence and violation of its fiduciary duties and its “implicit covenant of good faith and fair dealing”.
It calls on the U.S. District Court for the Southern District of New York to order the immediate reinstatement of GameStop on Robinhood’s platform, and moves an award yet to be determined.
The plaintiff, Brendon Nelson, is described in the complaint as a Robinhood customer who missed an opportunity to purchase GameStop when its stock rose.
His lawyer Alexander Cabeceiras said in a statement to CNBC that “hundreds of people” are “striving to be added to this suit”.
“Robinhood’s mission is to democratize finances for everyone.” They failed, “said Cabeceiras.” They purposely failed this mission and failed their clients in an attempt to appease their investors and / or potential investors.
Robinhood did not immediately respond to a request for comment.
The app’s recent meddling in the surge in “short squeeze” trading by small retail investors, many coordinated through social media forums such as Reddit’s WallStreetBets page, has sparked legal action from multiple users and the attention of others Law firms drawn on.
Another Robinhood user, attorney Richard Gatz, filed a separate lawsuit against Robinhood in northern Illinois Thursday, claiming his decision to stop trading in BlackBerry, Nokia and AMC theaters was made “to be institutional.” Protect investments to the detriment of retail customers “.
Gatz did not immediately respond to CNBC’s request for comment.
ChapmanAlbin LLC, a securities arbitration and class action company, announced Thursday that it is investigating user claims of losses as a result of Robinhood’s actions.
On Reddit, where users were discussing pumping the stock prices of short-heavy companies, a new forum called r / ClassActionRobinHood gained more than 20,000 members the same day it was created.
The suits come amid a handful of breathtaking short bruises. A short squeeze can occur when an increase in the price of the security forces those who bet against the stock, known as short sellers, to cover their positions to avoid further losses.
When this happens on a massive scale, it can create a feedback cycle and spike in the stock price.
That was the case at GameStop, which saw its stock rise more than 1,000% last month despite a 20% decline on Thursday. Short sellers were forced to cover their bets against the stock as a group of retail investors bought the equity directly or through options known as calls.
Stock shorts fell $ 91 billion in January alone, according to S3 Partners.
The hype, as well as the restrictions imposed by Robinhood and other trading platforms, have resulted in a rare glimmer of bipartisan condemnation from Congress.
“This is unacceptable,” Rep. Alexandria Ocasio-Cortez, DN.Y., said in a tweet. “We need to know more now about @ RobinhoodApp’s decision to prevent retail investors from buying stocks while hedge funds are free to trade the stocks at their own discretion.”
“As a member of Financial Services [Committee]I would support a hearing if necessary, “she added.
Senator Ted Cruz, R-Texas, a frequent critic of Ocasio-Cortez, replied to her tweet: “I totally agree.”
White House press secretary Jen Psaki said Wednesday Treasury Secretary Janet Yellen and other members of the Biden administration had been watching the volatility.
“Our economic team, including Secretary Yellen and others, is monitoring the situation,” said Psaki. “However, it is a good reminder that the stock market is not the only measure of the health of our economy.”
– CNBC’s Dan Mangan contributed to this report.
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