Robinhood Must Defend Against Market Manipulation Claims

Per a federal court ruling on August 11, 2022, Robinhood Markets Inc, the app-based online stock trading platform, must face market manipulation claims brought by a class of its investors. [1]

The ruling by Judge Cecilia Altonaga of the U.S. District Court for the Southern District of Florida denied Robinhood’s motion to dismiss shareholder allegations of market manipulation. The allegations stem from Robinhood’s actions in the wake of the meme stock frenzy of early 2021. [1] In the lawsuit, Robinhood shareholders allege that Robinhood engaged in tactics aimed at artificially lowering the prices of nine stocks at the center of the frenzy. These stocks included GameStop, Bed Bath & Beyond, and AMC. [1]

The meme stock frenzy took place in January 2021 when social media users stirred extraordinary investment interest in several unexpected stocks. The outpour of interest in these stocks was not founded on each stock’s actual performance, but rather on the prospect of triggering a short squeeze on the stocks.

Retail investors organized via social media to begin buying these stocks in droves, thus sending their prices skyward. As stock prices skyrocketed, the meme stock investors reasoned that hedge funds who had shorted the stocks stood to lose vast sums of money.

The meme stock investors were, in many cases, correct. One hedge fund, Melvin Capital Management, lost more than $1 billion per day during the height of the January 2021 frenzy as a result of its bets against stocks like Gamestop. [2]

While the meme stock frenzy posed clear challenges for hedge funds like Melvin, it also posed a thorny problem for Robinhood – that of maintaining required cash reserves as meme stock prices rose.

Robinhood’s online securities trading platform was one of the major vehicles through which retail investors purchased these so-called meme stocks. Further, as a securities broker, Robinhood is required by the National Securities Clearing Corporation to maintain a certain amount of cash available to clearinghouses. [1] During the height of the frenzy, Robinhood’s clearinghouse cash requirement rose to over $3 billion, an obligation which Robinhood struggled to meet. [1]

Thus, in an effort to meet its clearinghouse cash requirement, Robinhood temporarily froze its user’s ability to buy certain stocks, while placing limits on the number of shares users could purchase of other stocks. [1] Robinhood users allege that these actions and others, including cancellation of purchase orders and liquidation of some customers’ shares, amounted to market manipulation by Robinhood, as well as a violation of federal securities laws. [1]

While Robinhood continues to “vigorously defend” itself from these allegations, maintaining that their actions were “appropriate and necessary to protect and support [their] customers,” Judge Altonaga noted in her August 11 ruling that the case presents “interesting legal questions” which are only complicated by the infancy of the app-based securities trading industry. [3]

As a result, the eventual decision on the merits of this case will likely be foundational to the future of online securities trading regulation in the United States. As the case develops, important updates here can be found here on the Savage Villoch Securities Fraud Lawyers Blog.








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