Judge won’t dismiss suit against Robinhood over earlier outages

As Congress members grilled the chief executive of online trading platform Robinhood for abruptly halting the purchases of the hottest stocks on Wall Street to the detriment of retail investors, a federal judge in San Francisco refused Thursday to dismiss a proposed class action against the company over unrelated service disruptions last spring because users could have "missed opportunities to profit from trades during the outages."

U.S. District Judge James Donato called on both sides to settle after calling the case unusual since Robinhood already admitted fault and apologized for the outages.

"That's 80% of the battle in most cases," he said. "You have a big head start."

Asked by Donato whether it's willing to negotiate, Robinhood's attorney clarified that the company hasn't conceded liability and was optimistic about its prospects fighting the lawsuit.

"The case will face a number of challenges," said defense attorney Maeve O'Connor of Debevoise & Plimpton LLP. "I do think that the parties are very far apart."

The dispute stems from the platform's trading systems crashing on March 2, preventing users from making advantageous trades. The outage lasted for more than a day as the stock market posted historic gains. Beckman v. Robinhood Financial, LLC, 20-cv-01626 (N.D. Cal., filed March 5, 2020).

Afterward, Robinhood apologized and offered users a $75 "goodwill credit" to release it from liability.

"We'd like to start with the apology you deserve: We're sorry for the recent outage on our platform," the company said in a statement at the time. "Your support is what helps us democratize finance for all, and we know we owe it to you to do better."

During the Zoom hearing on whether the class action can proceed, Robinhood's counsel emphasized that the plaintiffs don't have standing to sue because they cannot identify specific trades they attempted to make during the outages and if they would have translated to profits. O'Connor maintained that the alleged losses are speculative.

Merely alleging an inability to make a trade, O'Connor said, is "not the same thing as alleging an injury because not all trades are profitable."

Plaintiffs' attorney Anne Murphy of Cotchett, Pitre & McCarthy LLP countered that the claims don't arise from the inherently risky nature of the stock market but rather Robinhood's failure to timely execute trades during the outages when it left users unable to access their accounts with no contingency plan. She said a federal appeals court already rejected the company's standing argument in another lawsuit between investors and broker-dealers. Fleming v. Charles Schwab Corp., 16-15179 (9th Cir. 2017).

In that case, Charles Schwab, the brokerage defendant, also argued that there was no injury because customers did not identify particular trades that caused them losses. The 9th U.S. Circuit Court of Appeals disagreed, finding that they can do so at a later stage in the litigation.

Donato sided with the plaintiffs, finding that general allegations of losing money as a result of being unable to place trades is currently sufficient.

But the judge was skeptical that plaintiffs will be able to preserve a purported class of all Robinhood users in the lawsuit.

"I'll be curious to see how a class of all users ... will be viable," he said.

Robinhood's counsel has maintained that the lawsuit should not be able to proceed as a class action because damages are highly specific to each plaintiff.

O'Connor pointed to the issue as a substantial roadblock to reaching a settlement. The outage, she noted, might have saved some users from making a bad transaction, while others might not even have been aware and didn't try to trade that day.

"The nature of this proof will be so highly individualized that it's challenging to see that it's actually a class action," she said. "It may be that a little more litigation is required before we can be positioned to have productive conversations."

Hopeful that the unique circumstances of the case present favorable conditions to reach a settlement, Donato ordered both sides to choose a mediator within two weeks.

"I'll just tell you, from having seen thousands of cases, that this one is unusual because you're farther down the road on key facts, and you should take advantage of that and save some time and save some money," he said.

In a hearing of the House Financial Services Committee over circumstances that led to Robinhood restricting the purchase of Gamestop shares in January, company chief executive Vlad Tenev insisted that the platform "played this by the books" and did not favor institutional investors over retail investors.

"We don't answer to hedge funds," he said.

Robinhood was forced to block the trading of certain companies, Tenev explained, because it was "the only way we could remain in compliance with deposit requirements" after the clearinghouses that execute the trades increased the threshold for the amount of money the company had to give them as collateral.

Lawsuits filed against Robinhood have advanced antitrust allegations, naming Citadel Enterprise Americas LLC and Melvin Capital, among others, as defendants. The complaints accused the companies of conspiring to bar purchases of certain stocks "to increase [their] market share within the stock market."

Robinhood's largest customer is Citadel Securities, which tried to bail out Melvin Capital after it shorted GameStop to the tune of billions of dollars.