Frustrated investors who sued after being shut out of trading frenzied stocks like GameStop Corp. They don’t have much luck in court either.
Online brokerage Robinhood Markets was named a defendant Thursday in several federal lawsuits demanding it reinstate stock trading, including GameStop, BlackBerry Ltd., Nokia Oyj and AMC Entertainment Holdings Inc. Hours earlier, Robinhood, Interactive Brokers and others have taken steps to reduce activity. in high-flying stocks after several dizzying days of trading on their platforms caused volatility.
While users of trading platforms claim in court documents that they have suffered losses as a result of the restrictions, legal experts claim that brokerages have broad powers to block or restrict transactions – all of this is stated as part of the customer agreements that everyone signs to access the services. .
“I’m looking at the Robinhood contract, and it says in black and white that they can block or restrict transactions at any time,” said Jeff Erez, who runs a Miami-based law firm specializing in securities fraud litigation. movers and represents plaintiffs in a lawsuit filed last year against Robinhood over service disruptions. “I don’t know of any law that would guarantee you the right to buy a certain security in a certain brokerage firm.”
The legal fight comes after a group of maverick, digitally-oriented traders, who congregate in Reddit’s WallStreetBets forum, sent in shares of GameStop and other booming companies, with the apparent aim of earning millions of dollars in profits and causing billions in losses to hedge funds that were overdrawn. stocks.
In a lawsuit in New York City, Robinhood user Brendon Nelson of Massachusetts said the company pulled GameStop from its trading platform amid an “unprecedented rise in shares,” depriving individual investors of the ability to invest and manipulate the market. The decision was in violation of its client agreement and was in violation of financial industry rules, according to the complaint.
In a trial in Chicago, Robinhood user Richard Joseph Gatz of Naperville, Illinois, said halting transactions on BlackBerry, Nokia and AMC “was to protect institutional investments at the expense of retail customers.” and is “in sync” with other trading platforms. “Shutting down retail for these actions has caused irreparable harm and will continue to do so,” Gatz said.
Other customer complaints have been filed in Florida, California and New Jersey. And New York Attorney General Letitia James said her office was “aware of concerns raised about activity on the Robinhood app, including transactions related to the GameStop share. We are looking into this issue. “
Robinhood did not immediately respond to a request for comment on the costumes. The company has been criticized in the past for allowing relatively unsophisticated investors to engage in risky trades that have resulted in massive losses, and some commentators have expressed concern about the losses individual investors are likely to incur when the bubbles caused by Reddit burst.
Robinhood said it plans to allow the limited purchase of some of the titles from Friday. In a blog post Thursday, the company said its financial requirements as a brokerage firm “exist to protect investors and the markets, and we take our responsibilities to comply with them seriously, including through the actions we have taken. today.
Brokers have wide discretion to limit trades to provide flexibility in handling unusual situations such as technical issues, mechanical errors and errors, or to preserve an orderly market, said Joshua Mitts, professor at Columbia Law School, specializing in corporate law.
“There is no obligation for a broker-dealer to unconditionally accept orders to buy, sell or short sell securities,” said Cam Funkhouser, former executive with the Financial Industry Regulatory Authority, a regulation backed by Wall Street which oversees brokers. dealers. “If they accept orders, the expectation is that the transaction will be executed and settled according to the applicable rules,” said Funkhouser, who worked at Finra for 35 years and oversaw its national fraud detection office.
The lawsuits “are subject to dismissal based on the language of the customer agreement,” said Elliott Stein, senior litigation analyst at Bloomberg Industries.
“It’s understandable that many investors are upset by the sudden restrictions on trading certain stocks,” especially if they haven’t read the user agreements very carefully, said Tom Lin, professor of law at the Beasley School. of Law from Temple University, whose specialties include securities. regulation. “The question of whether brokerage firms should exercise this power under the current circumstances is a legitimate debate. There is probably so much more to this story than we currently know.
Depends on the situation
Yet while user agreements “tend to be broad enough” to allow brokerage firms to refuse to work with anyone, they are not always absolute protection against aggrieved clients, said Timothy Blood. , partner of Blood Hurts & O’Reardon in San Diego, who has represented investors in disputes with brokerage firms.
“It will depend on the particular situation that arises,” Blood said.
There could be liability if a brokerage allows trades from some clients but not others, especially if the denied one needs market access to complement a longer term strategy with additional trades Blood said.
“If a long-term plan is cut off halfway, the clause helps Robinhood but won’t be the last word on it,” he said.
“I think it’s extremely rare for brokers to stop this trade” without regulators determining that it was necessary, said Adam Gana of the national securities arbitration law firm Gana Weinstein.
The stock price surge was the result of “a group of investors coming together to buy a security”, not “insider collusion driving the price up,” he said. The lawsuit filing “tells me that brokers who have quit trading on their own are potentially going to have a lot of problems – both at the regulatory level and at the civil litigation level,” he said.
While Robinhood’s customer agreement makes it clear that it can suspend transactions at any time, it does raise questions as to whether the platform has treated some users differently from others, especially after cases over the course of the last decade of market manipulation by short sellers that has put retail investors at a disadvantage, said Mitts, a professor at Columbia Law School.
“When hedge funds are going to lose from a trading halt, they don’t face a blockage like this, no suspension, no retail stoppage,” Mitts said. “But when retail investors find themselves locked in, they find themselves unable to exit the trade.”