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Days Before Going Public, Robinhood Faces a Consolidated Class Action Lawsuit for January Trading Restrictions
As Robinhood celebrates its virtual IPO roadshow, The Ferraro Law Firm isn’t letting them forget about how they hurt the users they claim to support when they restricted trading in January of 2021. On July 27, The Ferraro Law Firm and Safirstein Metcalf consolidated more than 55 cases filed by investors throughout the country into one class action complaint against Robinhood and Apex.
The lawsuit alleges that Robinhood was “woefully ill-prepared” and undercapitalized for the trading activity that occurred on January 28 when purchases of GameStop and other stocks went viral. Rather than raise capital, Robinhood halted purchases of shares of “hot stocks,” including GameStop, AMC, Nokia, and others.
While the company continues to advertise that they “are on a mission to democratize finance,” their actions tell another story: One of self-interest and supporting Wall Street heavy hitters at the expense of small investors.
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GameStop Trading Frenzy Revealed That Robinhood Was Undercapitalized By Billions of Dollars
Robinhood was founded in 2013 with a mission of making finance and retail investing more inclusive, and “turning first-time investors into long-term investors.” In eight years, they’ve experienced explosive growth and now have 18 million users and $80 billion in assets.
That growth came at a cost though—and it wasn’t Robinhood who paid the price.
The events of January 28, 2021 showed just how ill-equipped they were to effectively navigate a volatile market.
On January 28, a Reddit group, r/wallstreetbets, encouraged users to purchase shares of stock in GameStop, AMC, and others to raise their value. The intent was to stand up to hedge funds that were planning to short the stocks (betting the share prices will fall).
Shorting a stock involves the following:
1) Borrowing shares of a stock
2) Selling the borrowed shares
3) Buying the shares back at the lower price
4) Returning the shares to the lender while pocketing the profits
When Robinhood users purchased shares of GameStop stock on January 28, the stock value increased from around $19 to $500 per share. Hedge funds that planned on shorting the stock faced significant financial losses if their bet didn’t play out as planned.
Robinhood’s Customers Ultimately Paid the Price for Robinhood’s ‘Startup Mentality’
Rather than support the everyday investors that Robinhood claims it was created for, they did the opposite. They halted purchases of GameStop and other “hot stocks.” Not only did this favor the financial interests of the Wall Street hedge funds and hurt Robinhood users who were forced to sell their stock shares at artificially lower prices, but it also showed that Robinhood was undercapitalized by billions of dollars.
robin hood but stealing from the poor
what a disgrace pic.twitter.com/2jr6S4IbGe
— CarlosR ocelote (@CarlosR) January 28, 2021
“Robinhood’s myopic focus on marketing and growth left it completely unprepared for the damage caused when it suspended trading,” said The Ferraro Law Firm’s Natalia Salas, Lead Counsel for the Robinhood Tranche of claims in the pending Southern District of Florida Miami Division multidistrict litigation (MDL).
“The startup mentality of ‘move fast and break things’ has spawned incredible innovation in the last decade,” said Salas. “What Robinhood failed to appreciate is this mentality is wholly inappropriate when the thing you are breaking is the stock market.”
The Ferraro Law Firm Files a Consolidated Class Action Lawsuit Complaint Against Robinhood
On July 27, 2021, The Ferraro Law Firm and Safirstein Metcalf consolidated more than 55 complaints previously filed by retail investors against Robinhood and their co-conspirators. The pending case, In re January 2021 Short Squeeze Trading Litigation (21-2989-MDL), is being overseen by Chief Judge Cecilia M. Altonaga in Miami. Natalia Salas, Partner at The Ferraro Law Firm, is Lead Counsel for the Robinhood Tranche of claims.
The complaint alleges the following:
- “Robinhood’s business model was designed to attract a demographic most likely to trade in ‘hot stocks’…which Robinhood knew were extremely volatile.”
- “While Robinhood built its business to attract inexperienced, first-time traders, who focused on these ‘hot stocks,’ it failed to sufficiently capitalize its business according to the rules designed to protect the market and traders from at-risk brokers.”
- Prior to January 28, 2021, Robinhood “aggressively recruited—through marketing and addictive user interface”—new users to trade popular “hot stocks,” including GameStop, AMC, Blackberry, and Nokia.
- “On January 28, 2021, Robinhood and others took unprecedented action to render the financial system inaccessible to millions of customers and investors by deleting, at the push of a button, billions of dollars worth of demand for certain ‘hot stocks’—wiping away over $10 billion dollars in ‘hot stock’ market caps.”
- “By imposing restrictions on only one side of the transaction—the buy-side…while allowing selling to continue, Robinhood artificially depressed prices of the Suspended Stocks.”
The case is proceeding in the Southern District of Florida before Chief Judge Cecilia M. Altonaga, who appointed Ms. Natalia Salas, a Partner at The Ferraro Law Firm, as Lead Counsel over the claims against Robinhood. The Robinhood case team is made up of several attorneys, including James L. Ferraro, James L. Ferraro, Jr., Sean A. Burstyn, Daniel J. DiMatteo, Angelica Novick, and co-counsel Jeffrey Kwatinetz. Peter Safirstein, Partner and Co-Founder of Safirstein Metcalf LLP, is Lead Counsel for the Other Broker Tranche of claims.
The Real Fighters for Small Investors: The Ferraro Law Firm
While some companies falsely claim they are helping to level the playing field for smaller retail investors, The Ferraro Law Firm has been doing it for more than 30 years. To learn more about the Robinhood litigation, read our latest updates.
What is shorting a stock?
Shorting a stock essentially is betting that share prices will fall in order to make a profit. When a hedge fund attempts to short a stock it looks something like this: They will borrow stock shares, sell the borrowed stocked shares, wait until the share values drop, then purchase the shares back at the lower price. The hedge fund will then return the shares to the lender, all the while making a profit off of the difference in sale price and purchasing price.
What is the Robinhood class action?
The Robinhood consolidated class action lawsuit is filed on behalf of more than 55 Robinhood users who lost money when the platform restricted trading on January 28. This coincided with the rush to purchases shares of GameStop stock and other “hot stocks,” such as AMC, Nokia, and others. When Robinhood halted all purchases of shares in these “hot stocks,” Robinhood users were forced to sell their shares at artificially lower prices. The lawsuit seeks to recover compensation for the financial harm these investors suffered.
Why is Robinhood being sued?
Robinhood is being sued for aggressively marketing to first-time investors, but failing to raise sufficient capital to protect the market and traders from at-risk brokers. The class action lawsuit also alleges that by imposing trading restrictions on the buy side of the stock shares, Robinhood artificially lowered prices of GameStop, AMC, and other stock shares.
What is a class action lawsuit?
A class action lawsuit combines multiple claims filed by many individuals against one corporation or organization. By combining claims into one class action lawsuit, affected individuals can save time, money, and resources by pursuing justice together.