Investors hit the financial trading app Robinhood with a class action lawsuit Thursday after the company blocked users from cashing in on stocks that were surging because of chatter generated on a popular social news website.<\/p>\n
Shares of video game company GameStop had more than doubled in value on Wednesday after users on the web forum Reddit targeted hedge funds making big bets against the video game company.<\/p>\n
The hedge funds had said GameStop and several other stocks were struggling or failing, sparking a buying spree for amateur investors who were using the Robinhood app, which allows users to buy and sell stock without a commission fee.<\/p>\n
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Pedestrians pass a GameStop store on 14th Street at Union Square, Thursday, Jan. 28, in the Manhattan borough of New York. (John Minchillo\/)<\/p>\n
But Robinhood \u2014 named for the folklore bandit who robbed from the rich to give to the poor \u2014 shut down the party, reversing gains for GameStop, trading as GME, and several other companies.<\/p>\n
\u201cRobinhood purposefully, willfully, and knowingly removing the stock \u2018GME\u2019 from its trading platform in the midst of an unprecedented stock rise thereby deprived retail investors of the ability to invest in the open-market and manipulating the open-market,\u201d said the lawsuit, filed in Manhattan federal court. \u201cRetail investors could no longer buy or even search for GME on Robinhood\u2019s app.\u201d<\/p>\n
The lawsuit, filed by Massachusetts resident Brendon Nelson on behalf of all Robinhood users in the U.S., asks a federal judge to force the app to immediately reinstate the stock to the trading platform.<\/p>\n
In a statement on its website, the Robinhood company defended its shutdown decision.<\/p>\n
\u201cOur mission at Robinhood is to democratize finance for all,\u201d the statement said. \u201cWe continuously monitor the markets and make changes where necessary. In light of recent volatility, we are restricting transactions for certain securities to position closing only.\u201d<\/p>\n
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FILE – This Dec. 17, 2020 file photo shows the logo for the Robinhood app on a smartphone in New York. (Patrick Sison\/)<\/p>\n
Among the other stocks affected were AMC, BlackBerry and Trivago.<\/p>\n
After the market closed Thursday, Robinhood said it would allow \u201climited buys\u201d of those securities.<\/p>\n
Still, the shutdown sparked a social media backlash against the company.<\/p>\n
Robinhood investor Carlos Amaya said the app\u2019s action Thursday was a disappointment to users like him who prided themselves on being a \u201cdifferent breed of investors.\u201d<\/p>\n
The 28-year-old school operations manager in Washington, D.C., said his parents immigrated from El Salvador and he was the first person in his family to buy stocks when he started using the app in 2017. He\u2019s since made several thousand dollars.<\/p>\n
\u201cWe pride ourselves in the name Robinhood because we\u2019re trying to make more money and be the next people at the top,\u201d he said. \u201cYou would expect Robinhood to let us do our thing instead of blocking us and saying it\u2019s for our protection.\u201d<\/p>\n
Ziad Cohen, another Robinhood user, said he\u2019ll ditch the trading portal once he sells his GameStop shares. He bought 85 shares last week, and says he is ahead by $20,000, even with the stock\u2019s decline Thursday. The 19-year-old college student from Los Angeles plans to use that money to pay rent and his student loans.<\/p>\n
\u201cI feel pretty good about it,\u201d Cohen said.<\/p>\n
The Securities and Exchange Commission said that it is monitoring the stock and options markets. Protecting investors is one of the jobs of the SEC, but it\u2019s not clear what the agency can do in a case like GameStop, said Chester Spatt, a former chief economist at the SEC and a finance professor at Carnegie Mellon University.<\/p>\n
\u201cThere\u2019s not necessarily the obvious coordination here that one thinks of in a case of manipulation,\u201d Spatt said. \u201cBut regulators may view this as a mechanism for manipulation.\u201d<\/p>\n
Regardless, Spatt said regulators will likely feel pressure to look at it deeply.<\/p>\n
\u201cAt some point, things shooting up in these kinds of ways are going to come crashing down,\u201d he said. \u201cPeople are going to be crying out, \u2018Where were you, and why didn\u2019t you protect these investors?\u2019\u201d<\/p>\n