Robinhood faces lawsuits after restricting trading on some stocks, as politicians demand answers

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CHICAGO — The online trading platform Robinhood is facing multiple lawsuits Thursday after it froze trading of stocks which its users helped to spike dramatically over the past week.

While Wall Street Hedge funds shorted stocks for struggling companies like GameStop, betting they would fall, amateur investors who share stock tips on Reddit banded together to drive up the price. 

What followed was a wild ride on Wall Street where stocks for companies like GameStop, AMC and Blackberry rose dramatically, costing some hedge funds millions.

GameStop stock has rocketed from below $20 earlier this month to more than $400 Thursday as a volunteer army of investors on social media challenged big institutions who had placed market bets that the stock would fall.

Among the restrictions announced by Robinhood on Thursday was that investors would only be able to sell their positions and not open new ones in some cases. Also, Robinhood will try to slow the amount of trading using borrowed money.

According to Motherboard, over half of Robinhood users own at least some stock in GameStop.

The company is already facing multiple lawsuits for the move, including one from a Naperville lawyer asking a federal judge to require Robinhood to allow its users to trade, saying the restriction is causing irreparable harm.

A class action suit in New York also claims Robinhood is manipulating the market, while here in Chicago court documents argue: “the halting of trading of these stocks was to protect institutional investment at the detriment of retail customers.”

Brian Battle, Performance Trust Companies said the issue has now turned from a David and Goliath story to a regulatory and legal problem because those Wall Street brokers who don’t use these app can continue buying and selling the restricted stocks.

“It doesn’t seem fair. If you can buy stocks and sell stocks as an institutional investor, it seems like retail investors should be able to do the same thing,” Battle said. “So that’s going to be the lesson we’re going to learn from this.”

On Thursday, Alexandria Ocasio-Cortez called Robinhood’s decision “unacceptable.”

“We now need to know more about Robinhood’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit,” she said. “As a member of the Financial Services Cmte, I’d support a hearing if necessary.”

In a tweet, Senator Ted Cruz said he agreed with Ocasio-Cortez’s statement.

Besides GameStop, Robinhood said trading in stocks such as AMC Entertainment, Bed Bath & Beyond, Blackberry, Nokia, Express Inc., Koss Corp. and Naked Brand Group would be affected by the new restrictions.

Some big institutions such as Citron Research and Melvin Capital had placed bets that GameStop shares would fall as the company tries to transform itself from a bricks and mortar retailer to a seller of online video games.

But smaller investors rallied to the stock. By sending the stock soaring higher, they forced the big players to cover their bets by buying the stock, increasing the stock even further.

Robinhood’s stated goal is to “democratize” investing and to bring more regular people into it. But the company has run afoul of regulators who say the company downplays the risks of trading. Robinhood says it is making moves to better educate users of its platform about those risks.

The Associated Press contributed to this story.

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