A class action alleges Robinhood defrauded those who placed orders on the brokerage platform between Sept. 2016 and June 2019 by concealing the practice of routing orders to a group of outside trading firms in exchange for compensation.
Robinhood Financial faces additional proposed class action lawsuits as multidistrict litigation (MDL) has been established to consolidate dozens of similar cases against the securities trading app and other brokers over early 2021’s “meme stock” price frenzy.
A securities case filed in California on March 23 alleges Robinhood Financial, Robinhood Securities and Robinhood Markets defrauded those who placed orders on the brokerage platform between September 1, 2016 and June 30, 2019 by concealing the practice of routing customer orders to a group of outside trading firms in exchange for compensation. The 48-page proposed class action claims Robinhood received order-routing compensation as either “liquidity rebates,” “payment for order flow” or improved prices for customer trade executions, arrangements alleged to have generated tremendous revenue for the embattled fintech app while retail traders were misled as to the company’s flow practices and trade execution quality.
As a result of Robinhood’s decision to conceal this important information, proposed class members, the complaint alleges, paid higher prices for purchase orders and lower prices for sale orders. They also suffered slower executions, lesser fill rates and exposure to a higher risk of adverse selection than had the broker “fulfilled its legal and regulatory duties to provide best execution,” according to the suit. The plaintiffs claim they invested tens of thousands of dollars via the Robinhood trading platform while the company withheld the details of how it actually made money.
“Robinhood’s customers pay a hidden cost on each trade, however, one which often exceeds the cost [of] Robinhood’s competitors’ commissions,” the suit says. “Robinhood accomplished this sleight of hand through undisclosed arrangements that generate substantial profit for Robinhood in exchanged [sic] for inferior execution quality for each and every one of its customers’ trades.”
A proposed class action filed in New York on March 25 rings similar, alleging Robinhood traders were saddled with inferior execution prices compared to what they would have received from the company’s competitors.
“In fact, the difference in execution price typically exceeded the commission Robinhood’s competitors would have charged,” the complaint claims, alleging Robinhood breached its obligation as a broker-dealer to provide customers with the most favorable terms reasonably available in the market.
On April 1, the United States Judicial Panel on Multidistrict Litigation consolidated 39 class action cases against Robinhood and a litany of other brokerage platforms in Florida’s Southern District Court as a way to save time, money and resources for the parties handling the suits. (Read all about multidistrict litigation and what might come next here.)
According to the panel, the expansive Robinhood MDL is slated to be “a complex litigation that will require careful management.” Excluded from the MDL is a proposed class action against the Redditor said to have sparked the price frenzy around GameStop shares.
ClassAction.org’s earlier coverage of the Robinhood litigation can be found here.
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