In January 2021, stock trading app Robinhood infuriated users when it responded to surging trades of so-called meme stocks, by halting trades — effectively preventing users from selling shares until the prices had collapsed. Congressional hearings, regulatory probes, and a deluge of regulatory complaints and lawsuits ensued, which was at least one cause of its initial public offering’s wretched post-IPO performance. A year later, at least one investor has finally succeeded in forcing Robinhood to pay out for the fiasco.
As Marketwatch first reported, on Jan. 6, an arbitrator with the Financial Industry Regulatory Authority (FINRA) ruled in favour of 27-year-old truck driver Jose Batista’s May 2021 complaint that the restrictions caused him to lose significant amounts of money, finding the stock-trading app owes him nearly $US29,500 ($41,088) in restitution. FINRA has previously slapped Robinhood with roughly $US70 ($97) million in penalties for system outages in March 2020, issuing false and/or misleading information to investors, and failing to abide by rules designed to protect investors; the Securities and Exchange Commission also fined the company $US65 ($91) million in 2020 on similar grounds. But according to Marketwatch, this is the first time any retail investor complaints specifically related to the 2021 meme stock restrictions have resulted in a monetary judgment.
That’s perhaps because previous attempts to get the company to pay up have relied on elaborate theories Robinhood halted the trades in order to please partner Citadel Securities, its prime market maker. The exact nature of Robinhood’s relationship with Citadel attracted attention from both angry investors and members of Congress. FINRA has previously concluded the accusations of collusion had no merit.
The term “Meme stocks” refers to a class of speculative investments fuelled by social media frenzies. The January 2021 wave of meme stocks was fuelled by Reddit’s r/WallStreetBets board, which collectively plotted to pull off what is known as a short squeeze on video game retailer Gamestop. Short selling is when investors borrow and subsequently sell stock in a poorly-performing company with the expectation the price will fall, resulting in a profit when they repurchase and return the shares at a lower price. The squeeze is a high-stakes investment manoeuvre where if the stock instead rises, anyone holding it at the time the short seller is forced to exit their positions effectively milks them for profit.
/rWallStreetBets targeted hedge funds with short positions against the nostalgic Gamestop brand they saw as predatory vultures; when this succeeded beyond anyone’s wildest imagination, it quickly led to a wave of speculative investments in other companies users thought were due for a rebound. In January 2021, Robinhood temporarily locked down trading in a number of meme stocks, resulting in many users missing out on profits or taking big losses because their investments were frozen during price fluctuations. The company’s excuse was that the volatility jacked up its deposit requirements, the collateral required by clearinghouses to ensure trades are secured, beyond what it could immediately handle.
Batista made a “narrow and specific case” against Robinhood, according to Marketwatch, saying that he focused on how the restrictions made him unable to manage his investments in headphone maker Koss and fast-fashion retailer Express Inc. Shortly before the restrictions went into place, Koss was trading at $US58 ($81) a share and Express was trading at $US9.55 ($13); by the time Robinhood lifted them, Koss was down to $US35 ($49) and Express shares were just $US5 ($7). (While he had Gamestop stock, he had no intention of selling at that point, he told Marketwatch.)
“My plan was to sell Koss and Express that day,” Batista told the site. “I had a lot, but no one could buy it… They basically left me with no other option. They were saying ‘You’re just stuck. If you want to sell it. Sell it.’”
“It was tough to watch,” he continued, though added the matter hasn’t turned him off to meme stocks in general and he continues to trade them.
In the ruling, public arbitrator John James McGovern Jr. wrote that two Robinhood divisions were jointly liable for $US29,460.77 ($41,033) in compensatory damages plus interest. He also ordered Robinhood to reimburse the nonrefundable $US150 ($209) portion of Batista’s FINRA filing fee, as well as told the company it has to pay out the fees related to the arbitration process.
Marketwatch noted that while it’s tempting to imagine the case could open the floodgates for other claimants, Kudman Trachten Aloe & Posner securities litigation attorney Francis Curran gave them a more cautious interpretation: “There’s no precedential value to this award, and FINRA tends to go all over the place on these kinds of arbitrations… I think it’s too soon to tell if it’s the first of a trend.”
Robinhood didn’t respond to a request for comment on this story, and we’ll update if we hear back.