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Robinhood is Facing a Lawsuit for Allegedly Manipulating GameStop Investment Opportunities

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Robinhood is Facing a Lawsuit for Allegedly Manipulating GameStop Investment Opportunities

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Popular online brokerage firm Robinhood, previously boasting 10 million users, is facing a class action lawsuit over their recent decision to remove GameStop from their platform after thousands of people rushed to invest.

Robinhood is a popular online brokerage firm where customers can go to buy and sell stock.

Robinhood is an online brokerage firm where customers can engage with the stock market, trading securities and options through the firm’s app. With over 10 million users, Robinhood has become particularly popular among young investors who prefer to use a mobile app for their trading. A recent snafu regarding a “volatile” rise in GameStop Corporation’s stock caused the firm to remove it from the platform altogether, leaving many outraged as they accuse the brokerage firm of boxing out regular investors in favor of big-money hedge funds, violating the free nature of the free market. To give a better idea of just how significant this “snafu” actually was, according to The New York Times, GameStop stock trading, which remained at around $4 a year ago, closed out at $193 on Thursday, January 28th 2020.

In early-mid January, GameStop’s stock (GME) reached stratospheric heights thanks to an unorthodox collection of investors.

The story of GameStop’s recent investor influx reaches back into 2019, when former financial educator and Reddit user Keith Grill under the username Roaring Kitty boasted of a $53,000 investment in the then-struggling company. Despite initial criticism of this investment, Grill began posting videos on social media about the investment and general financial guidance. Upon discovering the Reddit board WallStreetBets, some of Grill’s fans announced that they intended to follow in his footsteps and invest in GME themselves.

This led to a first-of-its-kind rush on options trading for GameStop, causing stock prices to shoot sky-high. Wall Street regulars and established investors responded with shock to the influx of run-of-the-mill people choosing to take part in the stock market that has for a long time felt relatively exclusive to investment experts and wealthy stock titans.

On January 27th, Robinhood suddenly removed GME from their app for reasons of “recent volatility” caused by the influx of new investors.

As of Thursday, January 28th, Robinhood announced that it would only allow users to close out their GME stock positions, before later the same day announcing that it would begin to allow limited purchases of the stock on Friday; this has left many wondering how the brokerage firm intends to choose who does or doesn’t deserve the opportunity to invest in a market that has long been praised for its availability to anyone with a few dollars to trade.

Reddit quickly became part of the picture again as more than 31,000 users gathered in the form of a subreddit called r/ClassActionRobinhood to coordinate efforts for a lawsuit against the firm. Critics of Robinhood’s decision make the point that these recent GME retail investors were only doing what hedge funds have been doing for a long time; many feel that the system is rigged, citing the fact that hedge funds are still allowed to trade freely in the stock while run-of-the-mill investors have been blocked out, at least temporarily and will likely be allowed to trade only under restrictions in the future.

The lawsuit alleges that Robinhood’s actions constitute a breach of contract and requests an injunction forcing the firm to reinstate GME.

Included in the allegations in the official class action complaint are breach of contract, breach of implied covenant of good faith and fair dealing, negligence, and breach of fiduciary duty. Considering these allegations, it’s not surprising that so many people are up-in-arms about the brokerage firm’s decision, as the free market has in the past been praised for its unbiased availability to all.

The official complaint alleges that “ order to slow the growth of GME [Robinhood] deprived their customers of the ability to use their service, abruptly, purposefully, willfully, and knowingly pulled GME from their app. Meaning, retail investors could no longer buy or even search for GME on Robinhood’s app.” And that, “Upon information and belief, 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.” The lawsuit is seeking relief in the form of an injunction requiring Robinhood to reinstate GME on their trading platform, a court-determined award for the plaintiffs, as well as punitive damages for “willful, wanton, and reckless behavior of Defendants.”

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