Robinhood Lawsuits Over GameStop Stock

This Week’s Wacky Wednesday: Robinhood Lawsuits Over GameStop Stock

The past few years have been odd by anyone’s standards. The way we live and see the world has changed due to the pandemic. But there have been quite a few other strange things that we never saw coming, such as “meme stocks”. These are risky types of investments that most serious investors would not consider. They don’t take into account the fundamentals of a business or valuation. Instead, people invest in them because they are getting attention from social media.

Robinhood Wasn’t Happy

While you might think that this probably isn’t a big deal—people can invest and waste their money if they want to. Maybe they’ll get lucky.  However, not everyone feels that way, and that was made abundantly clear in early 2021. Robinhood, one of the most popular options for day traders, was not happy with the way that people were trading on the site.

They restricted trading certain securities, including GameStop, when the company’s stock started to soar due to meme trading. This brought a lot of attention to GameStop, a company that has been struggling for years. It was building up the stock on false premises. The company wasn’t necessarily doing better. It was the sudden interest from a large number of people that were pushing the stock prices higher and higher.

Trading Restrictions

This didn’t sit right with Robinhood, and they choose to restrict trading. They also said that the restrictions were added because of the amount that they had to deposit with trading clearinghouses, which was in the hundreds of millions of dollars because the stock was so volatile.

Users were only able to buy a certain number of shares from GameStop and other stocks, including AMC, which also got a meme stock boost around the same time.

Of course, many traders weren’t happy about this. Scores of federal lawsuits were filed claiming that the actions taken by Robinhood were unfair and unlawful. However, there is wording in the Robinhood user agreement that says disputes need to be settled in arbitration rather than civil court, which means the cases aren’t likely to go to court.

Why are people so upset? Many of the lawsuits that were filed claim that the various restrictions have caused them to miss out on good opportunities and they have suffered from financial setbacks due to not being able to trade how they wish.

How Much of a Difference Did the Uptick in Trading Make?

Stock for GameStop was trading at about $4 per share six months before the meme stock started to take off. By January, the price per share was at $483. When you start to see how much money people were able to start making, it’s easy to see why traders were upset that they were being limited and restricted.

Many of the day traders who use Robinhood aren’t wealthy, but they were starting to make money from the meme stocks. Quite a few found it ironic that the company named after a folk hero who stole from the rich and gave to the poor was now restricting trading. Traders felt like they were being kept down while traders who already had a lot of money and could do as they please.

In addition to the lawsuits that are being filed by individuals, there is also a class-action lawsuit underway. It’s unclear how this will play out and what types of changes might be implemented in the future. One thing’s for sure, in 2019, most people probably didn’t think that people would be clamoring to buy as much GameStop stock as they could.