By: Marie Innarelli
If you’ve been watching the news or keeping up with social media in recent weeks you’ve likely heard of the GameStop stock fiasco. GameStop, a company that was headed towards bankruptcy along with others such as AMC and Nokia, suddenly experienced a surge in investments unlike ever before. Essentially, reddit users, connected through a forum known as r/wallstreetbets, heard of Wall Street hedge funds plan to “short” the GameStop stock. However, shorting a stock is contingent upon the value of the stock going down. Therefore, the reddit users joined together to increase the value of the stock and in turn deprive the hedge funds of their prospective gains. The users spread the word on social media to encourage investors to buy the stock. This resulted in a 14,300% increase in stocks for the company.
Unsurprisingly, the hedge funds alleged market manipulation and demanded intervention. According to a Harvard Law School case study, in order to successfully allege market manipulation a plaintiff must prove“(1) the defendant possessed an ability to influence market prices; (2) an artificial price existed; (3) the defendant caused the artificial price; and (4) the defendant specifically intended to cause the artificial price.”
Here, though, users of a popular social media forum simply shared their opinions and made educated guesses on what they anticipated happening in the open market—which is exactly what the Wall Street hedge funds did in “shorting” the stock. To draw attention to the hypocrisy, Robert Leich tweeted a comparison between the alleged market manipulation of Reddit users supporting GameStop to the Wall Street bankers gambling away the economy in 2008 resulting in a recession.
While these claims are likely considered unsubstantiated, that may not be the case for the 90+ lawsuits filed against Robinhood. Robinhood is an app that enables investors to trade stocks and other entities without fees. Thereby allowing individuals who prior may not have had the means to invest to now do so. Ironically, their motto is “We’re on a mission to democratize finance for all.”
Reddit users primarily used Robinhood as their venue through which to increase the value of GameStop shares. However, once the increase reached unprecedented levels Robinhood promptly halted the buying of GameStop stocks. The Twitter account for the Reddit forum r/wallstreetbets posted that they felt as though the freeze by Robinhood clearly favored the major Wall Street investors and opposed the small traders whom it claims to be aligned with. This freeze also limited the potential financial gains of its users.
Since the freeze, multiple parties filed lawsuits and class actions. In a lawsuit filed in the Southern District of New York the claimants accused Robinhood of “purposefully, willfully, and knowingly removing the stock ‘GME’ from its trading platform in the midst of an unprecedented stock rise …[which] deprived retail investors of the ability to invest in the open-market.” Additionally, DoNotPay.com initiated a system through which people can automatically join a class action lawsuit against Robinhood. Robinhood recently released a response to the allegations against it. Robinhood claims that it was not its intent to stifle the access of its users to the free market but rather that it was a response to the lack of funds possessed to help cover its user’s trades.
Despite the plethora of lawsuits filed against Robinhood it is unclear whether or not they actually make it to Court. Robinhood includes an arbitration clause in their user agreement. An arbitration clause functions to avoid involving the court system in dispute resolution. Therefore, there is a chance that some of these lawsuits will be forced into arbitration rather than having their day in court. Robinhood’s arbitration clause states that, “all parties to this Agreement are giving up the right to sue each other in court, including the right to a trial by jury, except as provided by the rules of the arbitration forum in which a claim is filed…”. However, because Robinhood is regulated by the Financial Industry Regulation Authority, they have to comply with the rule that class action lawsuits cannot be forced into arbitration unless class certification is denied, the class is decertified, or the member is no longer participating in the class action.
Despite substantial support behind the claims against Robinhood, there is still a considerable amount of information up in the air. It is unclear whether or not the class action lawsuits are valid because it is yet to be proven whether all the members of the class action suffered similar damages. Additionally, Congress held a hearing on February 18th about the situation which ended with few conclusions being reached. As for the state of the matter right now, Robinhood has promised to try to do better.
Student Bio: Marie Innarelli is a second-year law student at Suffolk University Law School and serves as a staff member on the Journal of High Technology Law. Marie holds a Bachelor of Arts in History from Hobart & William Smith Colleges.
Disclaimer: The views expressed in this blog are the views of the author alone and do not represent the views of JHTL or Suffolk University Law School.
