By Joseph Cheah
You probably read and heard a lot of talk about GameStop stocks (“GME”) skyrocket as social media warriors take on Wall Street giants.
On 4th January 2021, GME closes at $17.25. As at 29th January 2021, the stock price closes at a whopping $325.00. That is about 1884% increase in 25 days.
Whilst we will not deal with the phenomenon that is happening as there are abundance of news coverage already on the matter, we will focus our attention on a particular legal suit that arose out of this episode.
Brendon Nelson, a Robinhood user, has sued Robinhood, an online brokerage firm, for restricting trade of GME.
Details of the Legal Suit
Robinhood is an American financial services company, registered with the U.S. Securities Exchange Commission. They market themselves to young and first-time investors to trade in the financial markets in a simple and effective manner, using their trading app.
According to the legal suit, the following allegations are:
- On or about 27th January 2021, Robinhood abruptly, purposefully, willfully, and knowingly pulled GME from their app. Retail investors could no longer buy or search GME on the app.
- Since pulling the stock from the app, GME prices have gone up, depriving investors of potential gains.
Among the Legal and Factual Questions posed by Brendon
- Whether Robinhood knowingly failed to provide the financial services that were needed to handle reasonable customer demand, including trading securities that are available on every other competitive trading platform;
- Whether Robinhood was in breach of its legal, regulatory, and licensing requirements by failing to provide adequate access to financial services;
- Whether Robinhood was in breach of its contracts and/or the implied covenant of good faith and fair dealing in connection with its failure to provide financial services;
- Whether Robinhood was negligent or grossly negligent by failing to provide financial services in a timely manner due to its own possible nefarious desires; and
- Whether Robinhood breached its fiduciary duties to customers by failing to provide adequate access to financial services.
- The Plaintiff is seeking inter alia an unspecified award to be determined and award for punitive damages for the willful, wanton, and reckless behavior of Robinhood.
Potential Challenge that may come up against the Plaintiff
Robinhood may have some defence in respect of this suit, inter alia:
- Arbitration Clause : Prior to using the trading app, every customer must agree to the terms and conditions of the customer agreement. The said agreement contains an arbitration clause. In this regard, any dispute against Robinhood shall be dealt with in the private channel of an arbitration.
- Power to Restrict Trade : The customer agreement further contain the clause “I understand Robinhood may at any time, in its sole discretion and without prior notice to Me, prohibit or restrict My ability to trade securities.” In this case, Robinhood may argue that there is no breach of contract as the customer has agreed that Robinhood has full authority to restrict trades. Whether or not this clause holds water in a regulatory perspective remains to be seen.
In an unprecedented series of events has led to an unprecedented lawsuit. It’ll be interesting to see whether a lawsuit like this will stand up in court.