Frustrated investors who sued after getting locked out of trading in frenzied shares like GameStop Corp. are unlikely to have much luck in court either.
Online brokerage Robinhood Markets was named as a defendant Thursday in at least two federal suits demanding it reinstate trading of shares including GameStop, BlackBerry Ltd., Nokia Oyj and AMC Entertainment Holdings Inc. Just hours earlier, Robinhood, Interactive Brokers and others took steps to curtail activity in the high-flying stocks after several dizzying days of trading on their apps whipped up volatility.
While users of the trading platforms claim in court filings that they suffered losses from the restrictions, legal experts say brokerages have broad powers to block or restrict transactions -- all of which is spelled out as part of customer agreements everyone signs to gain access to the services.
“I’m looking at the Robinhood contract, and it says in black-and-white they can block or restrict trades at any time,” said Jeff Erez, who runs a Miami-based law firm specializing in securities-fraud litigation. “I’m not aware of any law that would guarantee you a right to purchase a certain security at a certain brokerage firm,” said Erez, who represents plaintiffs in a lawsuit filed last year against Robinhood in California related to service disruptions.
The legal fight comes after a group of maverick, digitally oriented traders who gather in Reddit’s WallStreetBets forum sent shares of GameStop and other companies soaring, with the apparent goal of causing losses to hedge funds that were shorting the stocks.
In a lawsuit filed in New York, Robinhood user Brendon Nelson of Massachusetts said the company removed GameStop from its trading platform in the midst of an “unprecedented stock rise,” depriving individual investors of the ability to invest and manipulating the market. The decision was a breach of its customer agreement and was in violation of financial industry rules, according to the complaint.
In a Chicago lawsuit, Robinhood user Richard Joseph Gatz of Naperville, Illinois, said the halt of trading in BlackBerry, Nokia and AMC “was to protect institutional investment at the detriment of retail customers” and is in “lockstep” with other trading platforms. “The halt of retail trading for these stocks has caused irreparable harm and will continue to do so,” Gatz said.
Robinhood didn’t immediately respond to a request for comment on the suits. The company has faced criticism in the past for allowing relatively unsophisticated investors to engage in risky trades that resulted in massive losses, and some commentators have expressed concern about the losses that individual investors are likely to suffer when the Reddit-driven bubbles burst.