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Balanced Bridge Blog
Robinhood Class Action Lawsuit
April 29, 2021
Piggy bank on a floor of money

The popular app, Robinhood, is in the crosshairs of many people recently due to a class action lawsuit filed against the company and its creators for their actions restricting the trading of several securities like GameStop and AMC.

Robinhood was founded in 2013 and launched as an app in 2015. It charges no commissions on trades executed through its platform and has rapidly become popular with smaller investors and younger people just getting interested in investing. The app is often marketed as bringing investing to everyone and not just for the elite Wall Street professionals.

The issues with Robinhood started with various Reddit discussion groups, like WallStreetBets and others focused on the stock market. Those discussions revolved around stocks like GameStop, a video-game retail company that has struggled financially as gaming has moved away from physical game sales to streaming and downloads.

GameStop is a stock heavily shorted by Wall Street professionals. In essence, hedge funds and others have sold the stock without owning it. They borrow shares of the stock in the hope that the price will decrease so they can then buy it back at a lower price and make a profit. Such plays are made by professional investors on struggling companies as a bet that their stock price will continue to fall.

Amateur traders on WallStreetBets recently began to identify such heavily shorted companies like GameStop and band together to buy enough of the stock to raise the price and force these Wall Street professionals to cover losses and buy back their shares as well. Predominantly through Robinhood, these small traders were able to effectively squeeze out the shorts and cause a dramatic increase in price for GameStop and other similarly identified short targets.

That’s where problems began for Robinhood, as the central Wall Street clearinghouse for trades required an increase in the firm’s deposit requirements in order to ensure smooth settlement in trades with securities like GameStop that were experiencing such large volatility.

Robinhood thus put trading restrictions on GameStop and other popular squeeze targets for the Reddit community, including Blackberry and Bed, Bath & Beyond.

The backlash was almost immediate. The smaller traders that are part of the Reddit community claimed the company was manipulating the market, restricting and punishing the amateur investors for something that Wall Street firms and hedge funds would do all the time.

Rare bi-partisan criticism also came from Congress, where politicians at both ends of the political spectrum spoke out against the actions taken involving GameStop and other stocks.

According to various news stories, there are almost 50 lawsuits as a result of the whole Robinhood fiasco. Dozens of law firms are advertising their services and reaching out to people who were affected by the company’s actions. There is even an app called Do Not Pay that will automatically sign-up people to be part of the class action lawsuit. According to CNBC, almost 26,000 people joined the lawsuit.

The class action lawsuits are still in the beginning stages and attorneys are looking for claimants to represent in court.

This will certainly be an interesting case to track going forward. Please visit our blog often for the latest news pertaining to the legal funding and specialty finance industries.

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