Lawsuits against Robinhood expected in its home state

After retail investors were barred from buying stocks via the Menlo Park-based online trading app Robinhood, lawsuits were quickly filed throughout the nation Thursday, alleging the company purposefully blocked trades of companies such as GameStop, AMC, BlackBerry and others made popular on the Reddit forum r/WallStreetBets, to help hedge funds that had been negatively affected.

After the Reddit forum set the U.S. stock market ablaze Wednesday, causing short-selling hedge funds to lose billions of dollars by organizing a buying frenzy of struggling businesses, certain stocks were suddenly unavailable for purchase on Robinhood and other online trading platforms.

According to lawsuits filed in New York and Illinois federal courts Thursday morning, Robinhood, Ally Financial, TD Ameritrade "abruptly, purposefully, willfully, and knowingly pulled GME (GameStop Corp.) from their app ... in order to slow the growth of GME and deprive their customers of the ability to use their service," The New York lawsuit stated.

"Meaning, retail investors could no longer buy or even search for GME on Robinhood's app," the complaint added. "Upon information and belief, Robinhood's actions were done purposely and knowingly to manipulate the market for the benefit of people and financial intuitions who were not Robinhood's customers." Brendon Nelson v. Robinhood Financial Services, 21-CV00777 (S.D. N.Y., filed Jan 28, 2021).

Robinhood said in a statement Thursday the decision to limit certain securities was a "risk-management decision," not made at the behest of "the market makers we route to."

"Amid this week's extraordinary circumstances in the market, we made a tough decision today to temporarily limit buying for certain securities," the statement reads. "Starting tomorrow, we plan to allow limited buys of these securities."

Robinhood allegedly halted trading on its securities exchange platform of BlackBerry (BB), Nokia (NOK), and AMC Theatres (AMC) for retail investors.

However, Robinhood has continued to allow trading for institutional investors, the Illinois lawsuit alleges. Richard Joseph Gatz v. Robinhood Financial Services, 21-CV00490 (N.D. Il., filed Jan., 28, 2021)

The name plaintiff, Richard Joseph Gatz, said he owned two options contracts for BlackBerry at the time of the trading halt. The value of these options decreased by almost 200% and the BlackBerry stock price fell over $10 from the previous day's close, the complaint stated.

"On information and belief, the halting of trading of these stocks was to protect institutional investment at the detriment of retail customers," Gatz wrote. "Furthermore, this appears to be in lock-step with other securities trading platforms, such as Ally Financial, TD Ameritrade and potentially others."

Despite Robinhood being headquartered in California, plaintiffs' attorneys had not filed litigation in the state by day's end Thursday. However lawsuits will almost certainly be filed in the company's home state, attorneys said.

"Since Robinhood is headquartered in Menlo Park, odds are high that there will be litigation filed in the San Mateo Superior Court," said Boris Feldman, head of U.S. technology disputes at Freshfields Bruckhaus Deringer LLP.

Considering multiple federal actions have already been filed, the Judicial Panel on Multidistrict Litigation in Washington, D.C. might be summoned to decide whether consolidating these potential suits will be appropriate, attorneys said. If that were to happen, California could be a likely venue to host the litigation.

Kaplan Fox & Kilsheimer LLP and Cotchett Pitre & McCarthy LLP may be likely candidates to file actions against Robinhood. The two firms spearheaded a potential securities class action against Robinhood in June alleging the company's online trading service outage in March prevented customers from trading, causing them to suffer losses. Neither firms responded to requests for comment Thursday.

Several Californians tried to stage a protest Thursday, posting to Twitter the address to Robinhood's headquarters in Menlo Park. Others called for the California Attorney General Xavier Becerra to launch an investigation into whether Robinhood had broken the law by precluding retailer consumers from purchasing certain securities.

Responding to a request for comment Thursday, Becerra's office wrote:

"The California Department of Justice is aware of the current stock market volatility and the activities of market participants, including actions taken by certain trading platforms. The Attorney General is committed to protecting investors and fairly administering the law. To protect their integrity, we cannot comment on potential or ongoing investigations."