A proposed class action alleges Robinhood Financial LLC is “yet another Wall Street Wolf disguised in sheep’s clothing” and has conspired with hedge funds Citadel Securities and Point72 Asset Management to protect the financial interests of Citadel subsidiary Melvin Capital Management by restricting transactions on certain stocks at the expense of “mom and pop” investors.
Filed in Florida federal court by 16 plaintiffs, the 29-page complaint is among the latest in a tidal wave of proposed class action litigation against Robinhood over its ban last week on the purchase of GameStop, Blackberry, Bed Bath & Beyond, AMC Entertainment, American Airlines Group, Castor Maritime, Express, Koss Corporation, Nokia, Naked Brand Group, Sundial Growers, Tootsie Roll Industries and Trivago stocks amid a price frenzy driven by Reddit’s r/wallstreetbets subreddit.
The lawsuit alleges outright that Robinhood, by cutting off customers’ ability to profit at the expense of the Wall Street establishment, shored up its good standing with the mainstream financial community to the detriment of the average investor. The suit goes so far as to claim Robinhood “tipped off” Wall Street hedge funds so that they could “reload their short positions and benefit from the ensuing collapse of stock prices” once buyers were eliminated.
Citadel and Point72 knew that their investment in Melvin Capital Management, which was losing billions on its bet that GameStop’s stock price would go down, was secure given Citadel’s “immense influence over Robinhood,” the lawsuit alleges. The case claims that while others saw “blood in the water,” co-defendants Citadel and Point72 recognized an opportunity they were in a good position to exploit, namely to stop Melvin Capital Management from bleeding more money—and potentially even profit from its original bets—while Redditors and retail investors had their hands tied.
“Citadel is Robinhood’s lifeblood,” the suit claims. “It strains credulity to believe that it is a mere coincidence that the primary beneficiary of Robinhood’s sacrifice of retail investors is the Citadel-Point71-Melvin trifecta.”
Working with Wall Street?
At the center of the lawsuit is Robinhood’s “unheard-of” January 28, 2021 decision to restrict the sale of many popular securities to “Selling Only” status, a move that was followed by a television appearance by CEO Vladimir Tenev in which he couched the decision as one made for the benefit of investors. According to the complaint, however, Robinhood knew its conduct would cause the restricted stocks’ prices to plummet, and the decision to halt trades on certain stocks, the plaintiffs allege, is nothing if not self-serving.
As the lawsuit tells it, fear—and not cash-flow issues (as the companies have publicly claimed) —drove Robinhood, Citadel and Point72 to attempt to stamp out last week’s stock-trading frenzy.
“It is clear from their statements and actions that Robinhood and their real constituency are afraid of a ‘populist financial revolution’ and desire to crush it at all costs,” the lawsuit alleges. “Robinhood is also taking inconsistent positions. On the one hand, it claims not to have any liquidity crisis. On the other hand, it raised an emergency $1 billion cash investment in recent days. Apparently, Robinhood’s concern is its own self-interest.”
Whether Robinhood’s claim with regard to liquidity issues is true, the fact remains that nobody authorized the company to “supersede the will of its own customers,” the case continues. Further, the lawsuit describes Robinhood’s apparent attempt to protect its customers as “quite ironic, if not outright dishonest” given the company and “its multi-billion-dollar hedge fund network” were the ultimate beneficiaries.
“Robinhood’s customers did not join the platform so that billionaires, like its Chief Executive Officer Vladimir Tenev, could look out for their best interests while simultaneously betting against them,” the complaint scathes. “Plainly, Robinhood was either malicious, grossly negligent, or a combination.”
With regard to Tenev, the suit alleges the CEO of the embattled fintech unicorn is “clearly in over his head,” claiming Robinhood’s business model either cannot or chose not to keep up with customer demand. Either way, the case reads, Robinhood agreed with customers to contractual terms that the company was in no position to fulfill, in stark contrast to the few, if any, issues experienced by traders on other broker/dealer platforms.
“At no time was Robinhood permitted to restrict customers’ access to stock trades where such restrictions created a conflict of interest, this is especially so under circumstances where Robinhood’s own CEO claimed there was no emergency liquidity need,” the suit says.
“No strangers to scandal,” lawsuit says of co-defendants Citadel and Point72
The lawsuit paints the pairing of Robinhood and co-defendants Citadel Securities and Point72 Asset Management as akin to a shepherd leading sheep, with Robinhood, out front using the lure of ostensibly “free trading,” guiding customers to what the suit calls “the Citadel-Point72-Melvin slaughterhouse.”
According to the complaint, the SEC fined Citadel $22 million in 2017 after finding that its algorithms took advantage of the retail investors whose order flows it was buying. The suit says Citadel’s “accomplice,” Point72, which was founded by newly minted New York Mets owner Steve Cohen, is a rebrand of S.A.C. Capital, which broke up in 2014 after the firm pled guilty to federal insider trading charges and paid a $1.8 billion fine.
From the complaint:
Among the persons named in a smattering of SAC emails containing insider trading-related information was Melvin Capital’s founder, a former SAC employee who managed over $1 billion for SAC. If there are ‘nice guys’ on Wall Street, they’re not Citadel, Point72, or Melvin. Defrauding Main Street is not an accident for these firms. It’s their business model.”
At any rate, Robinhood’s purportedly “commission-free” trading service is not actually free and has drawn the attention of the Securities and Exchange Commission in the past, the lawsuit says. According to the complaint, Robinhood “resells orders for backdoor fees that are not made clear to customers,” and in December 2020 settled a lawsuit with the SEC over its failure to disclose its practice of selling client orders to high-frequency traders by paying a $65 million fine, the case relays, noting that the watchdog determined Robinhood’s conduct cost users more than $34 million.
Had such a scandal befallen established Wall Street entities, it would have been front-page news, the lawsuit avers. In reality, Robinhood, Citadel and Point72 “know the system is designed to cater to the needs of the ‘1 percenter’ at the expense of the 99 percent,” the complaint alleges:
Rather than representing new investors and ‘democratizing finance,’ Robinhood instead picked their pockets in the shadows."
Who’s covered by the lawsuit?
The suit looks to cover all Robinhood customers within the United States. The case additionally, or in the alternative, looks to represent all Robinhood customers in the United States who were not able to execute trades on stocks restricted by the company after Robinhood, together with Citadel and Point72, “knowingly, willfully, and purposefully” removed them completely from their platform.
How do I join a class action against Robinhood?
In general, there’s nothing you need to do to “join” or be considered included in a class action lawsuit. These types of cases almost always take time to work their way through the legal system, usually toward either a settlement or dismissal. Put simply, it might take a while before the time comes for consumers to submit claims for whatever compensation the court feels is appropriate.
At any rate, it’s usually only if and when a class action settles that a consumer would need to take action.
How do I stay in the loop on Robinhood class actions?
ClassAction.org will update this page—and this page here—as the Robinhood situation continues to develop, so be sure to check back often. In the meantime, you can also sign up for our free weekly newsletter here.