Robinhood is facing nearly 50 lawsuits over GameStop frenzy

https://www.nytimes.com/2021/02/26/business/robinhood-gamestop.html

by pedro-guimaraes • 5 years ago

218 131 5 years ago

nytimes.com

say_it_as_it_is• 5 years ago

.. and almost ten ongoing movie, television and documentary projects about the GameStop fiasco

victords• 5 years ago

Why fiasco?

VoodooJuJu• 5 years ago

I'm pretty skeptical of the negative attention Robinhood is receiving. It seems like the entities who actually acted in bad faith, the ones who attempted illegal shorts, are trying to divert attention. Like someone else said, Robinhood is just the fall guy here.

omgJustTest• 5 years ago

Hard to hear.

Robinhood has normalized pay for flow, a service that is literally shaving cash off each order in exchange for “free trading”. Pff can only generate net revenue by making traders pay more per trade than actual best execution, which Robinhood is suppose to be legally required to deliver. The SEC in the 90s and 2000s thought the practice amounted to middle manning traders and should be illegal.

Basically: Robinhood gives stock purchases to a third party, who pays Robinhood for each transaction in “rebates”. If you have a free trading account other than fidelity, you are paying insane transaction fees that are hidden from you by the pff. It’s middle manning, and Robinhood is paid to enable it.

Not a fall guy, just not all the guys that need to fall.

croon• 5 years ago

Isn't the not-so-secret secret that every other brokerage also sells flow [0], but still charges the end user?

Making Robinhood just less bad than the rest.

[0] https://piper2.bluematrix.com/sellside/EmailDocViewer?encryp...

astura• 5 years ago

Isn't this something almost all brokerages do?

https://efipm.medium.com/zero-commission-brokers-selling-ord...

mlrtime3• 5 years ago

When RH sells to a internalizer for payment (PFOF) it is always inside the NBBO (National Best Bid and Offer) which is always going to be a better price than what you would receive on a public exchange AND there are 0 commissions.

bidirectional2• 5 years ago

What illegal shorts? Short interest being above 100% of floatation can happen perfectly naturally without anything illegal being done.

rob742• 5 years ago

Yeah, about as "perfectly natural" as the stock market soaring while the economy is in crisis (i.e. logical, but completely perverted).

Railsify2• 5 years ago

Were the shorts illegal? I keep seeing the accusation but I don't think it's possible to short sell a stock that you have not borrowed.

ceejayoz4• 5 years ago

It's definitely possible.

https://en.wikipedia.org/wiki/Naked_short_selling

fractionalhare5• 5 years ago

It's possible; it's called naked short selling. The only reason people actually think it might have happened is because of widespread accusations on reddit. These accusations are financially illiterate and deluded conjecture, but they're stated with utter conviction so a lot of people find them convincing.

There isn't actually any evidence the named hedge funds were engaged in naked short selling. For the most part, people seem to misinterpret short interest and failure to deliver data as an indication naked short selling occurred.

pjc50• 5 years ago

the ones who attempted illegal shorts

[citation needed]; is this actually true or is this just part of the WSB sales pitch?

BunsanSpace• 5 years ago

Melvin capital and several other hedge funds engaged in naked short selling, and many backbone clearing houses enabled it via share counter fitting. (naked short selling is illegal)

The deeper issue is the SEC not cracking down on the fail to delivers and naked short selling.

I think Robinhood and other brokerages are the scape goats here. Their hands where tied when the companies that processed their orders refused to process trades for those stocks.

The whole debacle has exposed a lot of corrupt, fraud and other nasties while showing the SEC is completely unwilling to do their job.

ericmay3• 5 years ago

My issue isn’t the shorts, it’s when the shorts (or others) start messing with the game board. You should be able to short a stock, no doubt about it. But you shouldn’t be able to coordinate “short attacks” or use other tactics.

I wonder if it may be a good idea to remove computers from trading except for execution enacted by humans because of human research. Should Bloomberg terminals be legal? Should everyone effectively have the same hardware? I wonder how someone in Oklahoma can compete with a large bank. Should they be able to?

gruez4• 5 years ago

But you shouldn’t be able to coordinate “short attacks” or use other tactics.

https://www.institutionalinvestor.com/article/b1qdq0y5b79rzb...

fractionalhare5• 5 years ago

Which firms attempted illegal short selling, and what is your specific evidence to support that they did?

SkyBelow• 5 years ago

Is this needed to make a claim?

If I say that someone stole the Declaration of Independence, then I would only need to provide evidence it was stolen, not evidence that shows some particular person stole it.

In this case, evidence of illegal shorts is what one would need to provide to back their claim, not evidence that a specific firm engaged in illegal shorts.

gitdown42• 5 years ago

Robinhood deserves negative attention, but not for restricting trades to closing-ony. That appears to not have been much of a choice.

They do deserve a lot of negative attention for running a brokerage in a way that invited a lot of risk-ignorant retail traders to instantly trade into leveraged positions for which they should never have been qualified in the first place. Robinhood has the valuation it does because it brought leveraged day trading to the masses. As someone who worked at a brokerage and designed trading tools, leveraged day trading isn't for the masses.

Mauricebranagh• 5 years ago

And add these adverts plugging "factional" shares at naive first time investors to the list, tbh I think the SEC should encourage share splits once a share gets to Tesla levels.

Your first investments should never be in individual shares - start with an tracker ETF for a few years before branching out to active management or even individual shares.

unethical_ban3• 5 years ago

I'm not a big fan of "RH should protect people more"

They clearly did not have the finances available to provide the service they offer. Regardless of whether that was forced on them, the outcome was RH's failures manipulating a market.

RH should be fined and sued out of existence.

I also don't see the value in short selling. Seems like a way to gamble legally in all 50 states.

SilasX2• 5 years ago

I don't think the inviting was where it went wrong, but in having a criminally bad UX that deceives those same naive users. Like executing your purchase as a margin buy without making clear it is a margin buy that can be sold out from under you:

https://news.ycombinator.com/item?id=25962906

Or the suicide from the kid who didn't understand his position wasn't actually extremely negative.

Chris2048• 5 years ago

the entities who actually acted in bad faith

Then RH can sue them. As the consumer interface, the buck either stops with them, or they pass it along.

pwnguin2• 5 years ago

I'm not even sure Robinhood is falling. Yes they had to take out a billion dollar bridge loan, but that means their assets under management just shot up massively. And now that the frenzy is over, they repay the loan and keep the assets under management.

AlwaysRock• 5 years ago

You think Robinhood did nothing wrong in the eyes of the law? Or that they did not treat their customers (users of the app not the purchasers of their data) poorly? Or that their app did not disable users from trading shares of stocks?

I'd genuinely shocked to see someone say they think Robinhood didnt do anything wrong. Unless I'm misunderstanding you.

diehunde• 5 years ago

What they did wrong was not having the resources to handle that volatile environment. I know other companies also halted trading, but many didn't. They are bitting off more than they can chew.

totalZero• 5 years ago

The hedge fund shorts were irresponsible but I don't think there exists any credible argument that they were illegal.

wilde• 5 years ago

Robinhood created this problem for themselves by not clearly communicating what was going on as it was happening. Plenty of other brokers ran into capital requirements issues and explained what was happening in real time. Robinhood didn’t and so they let internet conspiracies fill the void.

cwhiz3• 5 years ago

I don’t really care what the rules are. Arbitrarily preventing people from buying, but not selling, is market manipulation. Any company that took part in this should be dismantled. If you need to halt trading because of liquidity requirements, halt all trading.

cortesoft• 5 years ago

It wasn't arbitrary. There is huge risk for brokers when very volatile stocks are bought at heavy volume. The risk is not there when selling stock. The companies backing the risk RH was taking rightfully asked for more collateral, and RH wasn't able to come up with it.

It was in no way arbitrary.

OJFord3• 5 years ago

Better, it's reduced.

cwhiz3• 5 years ago

Those rules are arbitrary, and arbitrarily enforced.

OJFord3• 5 years ago

No, not allowing people to close open positions would be way more of a shit show, and way more likely to look bad (on the broker) in court.

cwhiz3• 5 years ago

Halting all trading is the only way to prevent market manipulation.

ojnabieoot• 5 years ago

Everything about this story is just so frustrating.

- While the GameStop thing should be investigated and the lack of transparency criticized, Robinhood’s stated reason for halting the trades is plausible and corroborated by other people. I suspect their shadiness was because their internal finances are worse than they are letting on. The idea that they were acting as the foot soldiers of hedge funds (who were hardly overexposed to GME anyway) is preposterous.

- Robinhood absolutely deserves to get in legal trouble (like “send the CEO to prison”) for its horrendously predatory “appification” of retail investment[1]. I had a poor opinion of Robinhood and I was still shocked by how horrible their behavior was[2]:

In 2019, Robinhood rolled out a new cash management feature with an early access waitlist and utilized gamification to reward customers who interacted daily with the application by improving their position on the waitlist. Customers who did not interact daily watched their position on the waitlist precipitously decline, while those who succumbed to the effects of Robinhood's gamification soared up and up the waitlist.
In an effort to encourage trading, Robinhood provides lists of securities on its application, including lists of the most-traded securities on Robinhood's platform and the most popular securities traded by Robinhood customers. This is no different than a broker-dealer agent handing a list of securities to a customer, pretending to be surprised when the customer purchases securities from that list, and then proclaiming that he made no recommendations to that customer.
Robinhood advertisements use young actors and illustrate Robinhood's attempt to lure young, inexperienced investors into using its platform...[f]or example, one such advertisement contains a clip of a young adult saying "I'm a broke college student and investments might help my future tremendously."

Sincerely rotten folks at that company.

[1] https://www.cnbc.com/2020/12/16/robinhood-reportedly-facing-...

[2] https://www.sec.state.ma.us/sct/current/sctrobinhood/MSD-Rob...

criddell• 5 years ago

Does the Robinhood TOS not require arbitration to settle disputes with users?

MH15• 5 years ago

Currently Robinhood won't send me my tax forms from 2020. I have a trivial amount of money in the account but it's the only thing preventing me from filing taxes yet. Everything else has been ready since early March.

mtrovo• 5 years ago

So ready for only 2 days?

ry4nolson• 5 years ago

did you check under your Account->Documents? They posted my 1099 mid-February.

dlgeek• 5 years ago

That's not a Robinhood thing, that's based on the investments you had in it. A lot of those have a March 1st or March 15th deadline (depending on type) to get their tax reporting done and reported back, and your broker is blocked on finalizing their forms until they finish those.

TameAntelope2• 5 years ago

Another great example of Robinhood getting blamed for things it can’t control.

Being the retail face of a complex industry apparently results in you getting blamed for the complexity.

CydeWeys8• 5 years ago

I've had this problem going back two decades now with a variety of brokerages. The final deadline for all the forms to get out is March 15th, so generally I don't even bother doing taxes until early April.

What's even worse is not what Robinhood is doing, but what other brokerages are doing, which is that they trick you by sending out provisional 1099s in January or February even though the companies/funds whose stock you own aren't finalized yet, you file your taxes, and then you get an amended 1099 in March that requires you to file an amended state and federal tax return at extra hassle and extra cost.

For the 90 day span of January through March I just collect all the tax forms in a drawer, and then in April I get them all out and do taxes. You don't have all the information in before then, not if you trade stocks anyway. If you only have W2 income, then you can file earlier, as the deadline for that is much earlier.

minsc__and__boo• 5 years ago

My SO and I pulled everything out of Robinhood two weeks ago in part because of this reason.

The other part was we think Robinhood would go insolvent if their users made a run on their money, and we wanted to get out before that ever happened.

mobjack• 5 years ago

These lawsuits seem silly.

Are investors suing for the right to be the biggest fool in a pump and dump scheme?

The consequences of not buying GameStop is that the investor has more cash in their account which doesn't change in value. Most of those who would have bought around the peak would have lost a lot of money.

If Robinhood prevented investors from selling their shares or closing their positions then that would be grounds to sue. Investors were exposed to an extremely volatile stock with no means to exit and could have lost everything in that scenario.

manishsharan• 5 years ago

I think you are minimizing the extent of Robinhood's perfidity. Almost all fiduciaries would have advised and blocked such trades but Robinhood can't decide to become a fiduciary on a whim. Robinhood was interfering in a decision made by a user . What if your calendar decides you shouldn't be dating a particular person ?

jcranmer2• 5 years ago

I've read a couple of the lawsuits on courtlistener. From what I've read, these lawsuits are going to go absolutely nowhere.

The biggest problem most of the lawsuits face is that there is a provision in the Terms of Service that basically says that Robinhood can prevent you from trading in any stock it wishes. Any complaint that amounts to "Robinhood violated its contract" is going to go down in flames as a result--it didn't violate its contract; the people who are complaining didn't read the contract.

That really only leaves two kinds of claims that might have legs: arguing that Robinhood violated securities laws, and arguing conspiracy on the part of hedge funds. The first part is difficult to win on because many of the complainants will simply lack the standing to do so (you have to have owned the stocks in question and bought/sold at a manipulated price to show standing, and since the complaints are generally on the theme of "we tried to buy but couldn't", they fail that) [1]. The last one might survive until discovery if properly pled, but I sincerely doubt they'll ever eventually win it.

[1] One of the cases filed for a temporary restraining order mainly on the basis of the complaint. The judge found that the briefing didn't even meet the "raises serious questions" burden of proof, although they mentioned that the TRO failed really hard at the "suffered irreparable harm" part because losing money is pretty much by definition a reparable harm.

rkagerer• 5 years ago

Have any claimants presented compelling arguments for the judge to throw out that contract provision?

jcranmer2• 5 years ago

In short, no, not that I've seen. However, there also hasn't particularly been much of a reason to yet--there haven't been any motions that need argumentation, and the defense (Robinhood) hasn't responded yet to the cases.

nextaccountic• 5 years ago

That really only leaves two kinds of claims that might have legs: arguing that Robinhood violated securities laws, and arguing conspiracy on the part of hedge funds. The first part is difficult to win on because many of the complainants will simply lack the standing to do so (you have to have owned the stocks in question and bought/sold at a manipulated price to show standing, and since the complaints are generally on the theme of "we tried to buy but couldn't", they fail that)

Someone that owned GME shares could argue that by restricting buying but not selling shares, Robinhood was acting to lower the value of this asset. They might argue that in this situation the only fair thing to do is to restrict buying and selling altogether.

gruez4• 5 years ago

Someone that owned GME shares could argue that by restricting buying but not selling shares, Robinhood was acting to lower the value of this asset. They might argue that in this situation the only fair thing to do is to restrict buying and selling altogether.

Whether that's fair is debatable. If you held GME shares and wanted to get out, but couldn't because robinhood restricted sells for no reason (ie. they couldn't execute buys because they couldn't put up the collateral, but they can still process sells because they don't need collateral for that), that can also be construed as unfair.

nrmitchi6• 5 years ago

restrict buying and selling altogether

Robinhood is a brokerage, they are not the entire stock market.

Robinhood has 0 ability to prevent people from selling GME in the market at large.

It kind of feels like some people don't understand that Robinhood is only a gateway into a much larger system, and is fundamentally different than an "app/game" that controls the entire system on it's own servers.

Kranar• 5 years ago

Contracts do not override a broker's fiduciary duty to its clients. A fiduciary duty is the highest standard of care recognized by law and requires the agent to act in the best interest of the principal.

Once the evidence is presented, a plaintiff may find that Robinhood did not act with the highest standard of care, did not do everything it could have done to prepare for and handle the situation.

We don't know because the evidence hasn't been disclosed, a major part of any lawsuit is to give plaintiffs an opportunity to assess the evidence produced by the defendant to determine if any wrongdoing took place.

mam22• 5 years ago

Rh will argue best financiary duty was to protect his customers from the volatility

KuhlMensch• 5 years ago

One side-effect is the suits provide a lens on the parts of the T&Cs that retail investors do not like.

Court action (and senate hearings)have the ability to hold the publics attention under certain circumstances. Especially if there is a reviled antagonist, for which hedge funds are a good casting

scotuswroteus• 5 years ago

Did Robinhood make people click that they accept the terms?

lenkite• 5 years ago

You mean that somewhere in the huge Wall Of Text..err Terms of Service, they can say that they want my firstborn child for human sacrifice and once I click Accept, I am a goner ?

LatteLazy• 5 years ago

I imagine very few have any merit.

The far more damaging aspect is commercial: they're no longer the darling of r/WSB.

Robinhood is facing nearly 50 lawsuits over GameStop frenzy

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