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The Ferraro Law Firm Takes Action Against Robinhood and Co-Conspirators
Within hours of reports that trading app Robinhood may have illegally halted buying shares of GameStop, AMC, and other companies to protect the short positions of Melvin Capital, while imposing losses on retail investors, The Ferraro Law Firm, in collaboration with Jeffrey Kwatinetz, Esq. and Sean Burstyn, Esq., took action on behalf of Robinhood customers who were not able to execute trades on stocks. This corrupt market manipulation harms ordinary citizens and broadly undermines faith in the financial system.
Anyone with an interest in financial news is likely familiar with the current situation involving Robinhood. To summarize, Robinhood’s creators and marketers targeted young and inexperienced investors when they released the investment app by highlighting its lack of transaction fees and ease-of-use.
On January 28, 2021, the company released the statement “Keeping Customers Informed Through Market Volatility.” It indicated that Robinhood was going to (at least temporarily) restrict trading on certain securities to position closing only trades. This essentially involves selling off a stock or closing a short position by buying a stock back. Additionally, Robinhood raised the margin requirements for the applicable securities.
This move was very clearly a response to a trend that began when a group of Reddit users decided to buy stock in GameStop to raise the price. In doing so, they would be betting against the positions of hedge funds who were planning on shorting the stock.
When someone is trying to short a stock, they want the price to go down. Shorting involves borrowing shares of a stock, selling them right away, and, when the price goes down, buying them back and returning them to the lender. The goal is to pocket the difference. However, shorting can be very risky. If the price of a stock goes up, the investor is on the hook for the difference, meaning theoretically, there’s no limit to how much money they could lose.
The investors who planned to short GameStop stock were aware of this risk. However, when their strategy didn’t pay off, rather than allow smaller investors to continue buying GameStop stock and other affected securities, Robinhood stepped in to protect the hedge funds. Although Robinhood’s statement indicates the company was claiming to have users’ best interests in mind, those who made this decision must have known that it would actually harm their customers’ positions and only benefit the company and their co-conspirators by preventing the price of these securities from rising even higher.
Robinhood’s leaders also claimed that they needed to temporarily halt trading of certain securities to raise capital. The company says this despite also claiming not to have any liquidity problems nor regulatory issues. Such inconsistency is a sure sign of negligence or even malicious intent.
Robinhood users have understandably reacted to these questionable business dealings with outrage. While Robinhood’s leaders can claim to support “the little guy” all they like, users only needed to point out Robinhood’s relationship with major hedge funds and investment firms to prove there is an obvious conflict of interest at play here. Robinhood’s true allies are the Wall Street titans that the company pretends to oppose. Thus, it is no surprise that Robinhood conspired with Point72, Citadel, and its subsidiary, Melvin Capital Management, to protect them.
This isn’t the first time Robinhood has abused user trust. A previous SEC investigation found that Robinhood was selling client order information to high-speed traders, preventing users from getting the best prices. Robinhood’s failure to disclose this practice resulted in the company being fined $65 million.
Robinhood and its co-conspirators must be held accountable. To that end, we at The Ferraro Law Firm have agreed to represent numerous plaintiffs in a class action case naming Robinhood and the company’s co-conspirators as defendants. Our goal: secure compensation for the plaintiffs, and expose Robinhood for what the company truly is. Fighting for regular people against powerful interests is our calling. We are standing up for retail investors against a rigged system. Keep an eye on our blog for more news as the case develops.