The Robinhood trading app, which hypes itself as a pioneer on a mission to “democratize finance for all,” was hit Thursday with a federal class-action lawsuit after restricting trades on stocks made popular with the help of rookie traders on Reddit.
The lawsuit, filed Thursday in the Southern District of New York, alleges that the app “purposefully, willfully, and knowingly removing the stock ‘GME’ (GameStop) from its trading platform in the midst of an unprecedented stock rise, thereby deprived retail investors of the ability to invest in the open-market and manipulating the open-market,” Arya Hodjat reported for The Daily Beast.
The lawsuit asks for GameStop to be reinstated on the trading platform, a class action fee for plaintiffs, attorney’s fees, and punitive damages.
Rookie retail investors in Reddit chat rooms are trying to stick it to Wall Street pros, CNBC reported. They piled into names heavily shorted by hedge funds and are squeezing stocks higher as institutions rush to cover their losses in what some say is pushback against the Wall Street establishment.
Users of the Reddit board r/WallStreetBets are credited with helping raise stock prices of struggling companies such as GameStop to counter established short-selling investment strategies.
Shares of GameStop skyrocketed more than 400 percent this week and 1,750 percent this year thanks to their activity. Shares of AMC Entertainment are up nearly 300 percent this week. American Airlines rose as much as 33 percent today in the short-squeeze rally.
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On Thursday, Robinhood and other brokers restricted trading of Gamestop and other stocks popular in the Reddit forum, such as AMC, BlackBerry, Nokia, and American Airlines. In some cases, investors can only sell their stock and options positions but not open new ones.
Newly empowered Redditors responded with rage. Users of r/WallStreetBets created a separate forum, r/ClassActionRobinHood, to coordinate a possible lawsuit against the app, The Daily Beast reported. By Thursday afternoon, the subreddit had more than 10,000 subscribers.
On social media, the anger was tangible. Hip-hop mogul and artist Ja Rule tweeted, “Yo this is a fucking CRIME what @RobinhoodApp is doing DO NOT SELL!!! HOLD THE LINE… WTF”.
“You’re going to be holding the line alright, the authorities are about to PULL THE RUG,” The Moguldom Nation CEO Jamarlin Martin tweeted.
“Just wondering how it is possible to force you to sell (basically force). How is that legal?” a Twitter user asked.
Sam Altman, the CEO of OpenAI and former president of Y Combinator whose Twitter profile says, “Humbled to be an investor in GME and AMC,” tweeted, “fuck robinhood” then added, “must change name imo.”
This provoked responses that Robinhood was stealing from millennials to give to the rich.
Congress needs to know more about Robinhood’s decision “to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit,” Ocasio-Cortez said, according to Reuters.
A House Financial Services Committee investigation shouldn’t be limited to Robinhood but “should examine any retail services freezing stock purchases in the course of potential investigations – especially those allowing sales, but freezing purchases,” Ocasio-Cortez added.
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TD Ameritrade and Interactive Brokers also imposed unprecedented restrictions on trading in GME, AMC and other huge short squeezes on Wednesday. Charles Schwab raised margin requirements.
In a blog post, Robinhood framed its decision as a way to “help our customers navigate this uncertainty,” The Week reported. Meanwhile, hedge fund Melvin Capital Management, which suffered over the GameStop surge, has since been bailed out by Citadel, another hedge fund, according to The Verge. Citadel founder Ken Griffin also founded Citadel Securities, a big investor in Robinhood that also works with TD Ameritrade and Charles Schwab.
“Just to be clear, Citadel, one of the largest clients of RobinHood, bailed out Melvin. Days later, RobinHood shut down purchases of $GME and other volatile names. Yes, the game is still rigged”, Nate Anderson tweeted.
“Citadel made the call to Robinhood to cancel all buys. Clear market manipulation,” a Twitter user responded.