The Class Action Lawsuit Against Robinhood after they Restricted GameStop’s Stock

Did you buy any GameStop stocks? Even if you didn’t, you’ve probably heard about this “war” between day traders and hedge funds that’s been getting lots of mainstream attention over the past week or so. With everything going on, it can be very confusing to people, especially those who don’t know too much about stock trading. Because of that, we wanted to break down the situation and find out why Robinhood, an investing app that was beloved just a week ago, now is hated by a large group of their customers and has a class action lawsuit being filed against them.

Background

The pandemic has changed the ways that many of us live our lives. We have stopped relying on brick-and-mortar stores and instead have begun to rely on online shopping to take its place. Many retail stores were deeply affected by this, including the video game retail store; GameStop, which announced that they were expecting to close around 450 stores in 2021.

Since GameStop is a publicly-traded company, news of their decline was exciting for hedge funds who thought they could make money from shorting their stock. This is where people get confused because short selling is a confusing topic. All you need to know is that the hedge funds started to bet that the stock would go down, and if it did, then they would lose money. If you would like to read more about short selling, click here.

Reddit to the Rescue

Reddit users in a subreddit called “r/wallstreetbets” decided to fight back against the massive hedge funds by using their Robinhood accounts to buy GameStop stock and encourage others to do so as well. This caused the stock price to rise rapidly, and the more that the price rose, the more the hedge funds lost money. This caused many hedge funds to buy the stock back, which in return made the price go up even more. Some hedge funds tried to hold on to the stock, hoping that the price would go down, only to find the price continuing to go up. This is called a Short Squeeze.

Around this time last year, GameStop stocks cost $4 per share, now they are over $300 per share and reached over $450 per share on Thursday, January 28th. This group of over 6 million users has also begun to target other shorted stocks such as AMC Entertainment, Bed Bath and Beyond, Nokia, and BlackBerry. Hedge funds have lost billions to short-sellers just this month.

Class Action Lawsuit Filed Against Robinhood

On Thursday, January 28th, Robinhood froze the buying of particular stocks, including GameStop, AMC, and more. This caused outrage from many users, who claim that what Robinhood is doing is market manipulation by illegally regulating the stock market. By restricting buying of the stock, the price cannot go up, which protects the hedge funds from more losses. This outrage led to a class action lawsuit being filed against Robinhood. The lawsuit states that “Robinhood’s actions were done purposefully and knowingly to manipulate the market for the benefit of people and financial institutions who were not Robinhood’s customers.”

A class action lawsuit isn’t the only problem that Robinhood must worry about. The SEC has pledged to investigate and punish any abusive activity that they find from brokerage firms like Robinhood. It has also caused outrage from both the political left and right when politicians such as Representative Alexandria Ocasio-Cortez and Senator Ted Cruz took to Twitter to comment on their outrage towards Robinhood.

Robinhood has since started to reopen trading of the restricted stocks, but outrage has not settled, and the SEC investigation and the class action lawsuit are still expected to go on as planned. There are still restrictions on how many shares you can buy of companies like GameStop and AMC, but despite that, Robinhood has been forced to raise $2.4 billion to meet investment demands.

Follow along with our blog to get future updates on this situation.