A Robinhood client filed a class action lawsuit against the stock trading app Thursday after the company banned traders from buying GameStop shares promoted by WallStreetBets, a popular Reddit group for investors.
The lawsuit, filed in the Southern District of New York, claims that Robinhood’s actions manipulated the market against its clients.
“Robinhood’s actions were done on purpose and knowingly to manipulate the market for the benefit of individuals and financial institutions who were not Robinhood clients,” the lawsuit states.
Robinhood did not respond to a request for comment. The company imposed restrictions on trading on the shares on Thursday, citing “recent volatility.” The company said in a blog post that it will only allow users to close their positions in those stocks, which include GameStop, AMC, Bed Bath & Beyond and Nokia.
Following Thursday’s decision, GameStop shares fluctuated widely.
The lawsuit alleges that Robinhood’s decision deprived retail investors of the potential gains they could have made by buying when the stock was down and selling when its price rose.
What happened to GameStop shares
This is how small investors shake up Wall Street 1:05Shares in GameStop have skyrocketed since January 11, after the company hired several new board members who investors believe could help the company boost its digital sales. Reddit’s WallStreetBets group began promoting the stocks and saw them grow more than 1,000% in recent weeks.
The increase forced short sellers betting against stocks to buy shares to hedge their positions, causing them to rise even higher.
Many daily traders took advantage of the free trading on Robinhood and bet on GameStop and other actions promoted by the Reddit group. But those customers are playing a dangerous game. Company fundamentals can’t support such high stock prices, and the bubble could burst, wiping out traders who had made big bets on GameStop and the like.
“We are committed to helping our customers navigate this uncertainty,” the company said in a statement. “We essentially believe that everyone should have access to financial markets,” he added.
Robinhood published another blog post Thursday afternoon in which he said he would “allow limited purchases of these” stocks starting Friday.
The ‘redditors’ unite
Following Robinhood’s decision on Thursday, the ‘redditors’ organized a new forum, r / ClassActionRobinHood, to coordinate efforts for a lawsuit. The forum gathered more than 31,000 users on Thursday.
One law firm that redditors have become involved with is Cleveland, Ohio-based ChapmanAlbin LLC, which specializes in investment and financial fraud. The company’s homepage currently has a message titled “Are you a Robinhood user who has suffered losses?” Along with a way for people to submit information.
The firm has collected information from more than 6,000 people while investigating Robinhood, attorney Philip Vujanov told Citizen Free Press.
“This is unprecedented, I have never heard of another scenario like this,” Vujanov told Citizen Free Press in a telephone interview. “There will be many people carrying the dead,” he added.
Vujanov called today’s Robinhood actions “dishonest” and quoted a tweet from Robinhood’s official account in March 2016 that read: “Let the people trade.”
“Now all of a sudden they are changing positions,” Vujanov said of Robinhood.
An avid Wallstreetbets user dismayed by Robinhood’s decision is Christopher Kardatzke, 21. Kardatzke is a recent college graduate who, together with his brother, has developed free financial software used by redditors to guide their investment strategy.
It seems a bit silly. The folks at r / wallstreetbets were buying GameStop and playing a game of Jenga, but it’s the same game that hedge funds have been playing for decades and decades, ”Kardatzke said. “It’s a bit ridiculous,” he opined.
The controversy with Robinhood reaches the Capitol
This sentiment was echoed in the Capitol. There, Democratic Rep. Alexandria Ocasio-Cortez and Republican Senator Ted Cruz were part of a group of lawmakers who criticized Robinhood’s decision.
“Now we need to know more now about @RobinhoodApp’s decision to prevent retail investors from buying stocks, while hedge funds can freely trade the stocks as they see fit,” Ocasio-Cortez tweeted.
In a subsequent tweet, Ocasio-Cortez said that she will be on Twitch tonight to discuss GameStop and today’s events.