Finance

Class Action Against Robinhood Over Gamestop Trading Arrives. Will Depart Very Soon.

What's this 'mandatory arbitration' thing mean?

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(Photo by Michael M. Santiago/Getty Images)

This morning, as Redditors woke up to contemplate the next anachronistic company from the early-aughts to resuscitate, they were rudely met with the news that they had been locked out of buying key stocks — for instance Gamestop and AMC — by Robinhood, purportedly the broker-dealer for the common person.

It turns out that after watching the “common person” drive hedge funds to the brink, Robinhood woke up, looked over at the scruffy badboy Redditors that it drunkenly hooked up with over the last couple months and decided it really preferred the finance bros that it used to date. Shutting down the upward pressure on the stocks dealt a massive blow to the run on these companies and gave short-sellers an opportunity to cut their losses as Gamestock tumbled from $469 to $126 and AMC lost a bit over half its value. Maybe Chad will take Robinhood back now!

The investors riding a rising tide — the “Big Long” if you will — fueled in large part by the recognition that hedge funds had shorted more shares than actually exist for Gamestop were understandably peeved that the funds got a time out to exit the field before things got too rough. So a lawsuit was inevitable.

And it didn’t take long.

Will this bring justice for the aggrieved traders? NOPE!

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Because Robinhood is not run by complete idiots, there’s a mandatory arbitration clause and the Supreme Court has made it abundantly clear that the courts are unavailable if you’re the David on the wrong side of Goliath’s boilerplate language. Robinhood’s in-house team is heavily WilmerHale dependent and whether they maintained good relations with the old firm or not, some Biglaw lawyers are about to draft a slam dunk of a motion to dismiss.

And it is undeniably wrong but here we are. Despite its protests, Robinhood didn’t cut off these stocks to protect their investors, but to stop being bad mouthed in the more reputable boiler rooms on the Street. While the institutional narrative is that these retail investors are flying blind in pumping up these stocks, they did articulate a strategy for making money based on sound research.

In fact, as this thread — armed with a snippet taken from a Matt Levine article on Bloomberg — points out, the Redditors have actually done the job that the stock market is designed to perform.

Someday, we’ll all go back to the movies. AMC’s revenue stream from overcharging us for popcorn will still amount to a sound business model. And these investors may well have saved that company from collapsing.

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All Robinhood has done is throw its thumb on the scale to the detriment of its own customers. Can those customers win a class action suit? Probably not with this language. But class actions aren’t always about winning. The suit gets the story out there and feeds a public relations nightmare for a company that claims to be all for retail trading… until retail investors start outperforming the sharps. Not to mention that the attorney who filed this is now seeing his name slapped on every story attaching the complaint and customers know he’s ready and open to work with them whether there’s a class action or a series of arbitrations. That’s not the reason he filed, but it’s certainly an advantage to him and customers lining up to bring claims.

But, yeah, this case will very likely be kicked to the curb very soon. However, Robinhood’s troubles after enraging its customer base are likely just beginning.

(Full complaint on the next page.)

HeadshotJoe Patrice is a senior editor at Above the Law and co-host of Thinking Like A Lawyer. Feel free to email any tips, questions, or comments. Follow him on Twitter if you’re interested in law, politics, and a healthy dose of college sports news. Joe also serves as a Managing Director at RPN Executive Search.

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