Robinhood Puts a Hold on GameStop’s Trades, So Investors Filed Two Lawsuits
It is the philosophy of Robinhood to make the tools of trading on Wall Street indispensable for the average investor. For so long, elite Wall Street executives accumulated massive amounts of wealth with strategies and complex algorithms that were relatively unknown to the retail consumer. A group of traders on Reddit started a conversational chatroom, Wallstreetbets, looking forward to taking down “the man” by diminishing his wealth.
And what better way to do this than on Robinhood. The company offers commission-free trades, making it easier for anyone to buy a slice of stock for $1. Last year, consumers opened 10 million stock brokerage accounts. Anyone with a cell phone can get a piece of the action by downloading apps that make purchasing stocks exciting with trackable graphs. You can day trade stocks by following the action every minute.
Moreover, you can connect with members of your chatroom from all over the world. Together, you could decide whether to buy, hold, or sell a stock.
Simultaneously, hedge firms were looking at the markets for short-selling, another means for accumulating wealth. They decided that GameStop was the perfect stock for short-selling.
GameStop had several brick-and-mortar stores in malls and shopping centers across the nation. Started in the early 2000s, they have been losing millions of dollars since consumers are no longer buying hard copies of video games.
Rather, consumers are purchasing new releases digitally, through the Internet. In 2019, the company lost $795 million, so they searched for a new CEO who has changed GameStop’s operating model. He plans to take GameStop to the next level by increasing revenues through the digital market.
So, hedge funds borrowed millions in stock to purchase GameStop, expecting that the stock would fall, and firms could make a profit. Unfortunately, with users on the Robinhood app, this did not happen. Since January 5, the stock price has skyrocketed from $19 to $325 a share, a 1,900% increase.
Other stocks are similar to GameStop’s position — AMC, Nokia, Blackberry, and Bed Bath and Beyond. The previous year took a giant hit on many industries, and stock prices have plummeted.
Wall Street firms began losing millions of dollars; they did not know what to expect. Should you hold the stock, hoping it would go back down, or get out now. Melvin Capital sold their shares and took a 100% loss. Other companies are following suit.
So far, in 2021, financial firms have lost $5 billion from short-selling, and Robinhood wants to stop the financial hemorrhaging.
Therefore, Robinhood closed their retailers by stopping the wealth transfer. You had limited options for trading the stock through market manipulation. Customers could only trade out their positions. Because of the market volatility, customers were barred from purchasing any more stock. That was on Thursday.
On Friday, the following day, the company adjusted its position by allowing limited stock buys. Many investors think the reactions of Robinhood harmed the market, with stock prices falling, but eventually, the stock price recovered.
Like the David vs. Goliath story, members have exercised their options and filed two class-action lawsuits against Robinhood. One lawsuit, which attorneys filed in the Southern District of New York, claims that Robinhood rigged the market against their customers.
Robinhood intended to benefit financial institutions, hedge funds, pensions, and retirement plans. However, these were not Robinhood’s customers. The case number is 21-CV-777.
Attorneys filed the second lawsuit in the Northern District Court of Illinois. Investors claim that Robinhood put limits on their platform through app manipulation.
Many investors were angry when Robinhood stopped the feeding frenzy. One user felt betrayed by a company that calls itself Robinhood but shuts down on their investors.
If you are an affected user, you can also join the lawsuit at DoNotPay.com. The CEO charges a fee of $36 to join. You will need to demonstrate that you lost money when Robinhood closed trading options for GameStop.
Since last week, 26,000 investors have joined the lawsuit, 4,000 people have filed grievances with the Securities and Exchange Commission (SEC), and 400 people have voluntarily entered arbitration.
Restricting Stock Purchases
Online brokerage firms are looking at other base stocks and restricting their sales. Robinhood is limiting stock buys for American Airlines, Naked Brand Group, Tootsie Roll, Koss, Sundial Growers, Trivago, among many others.
Cabeceiras believes such restrictions are a breach of fiduciary duty. Robinhood has contractual obligations to its millions of consumers. America is a free-market economy. Investors should proceed as they like with no unreasonable limits on stock market trading.
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