Fintech

Robinhood gets hit with class-action lawsuit over stock trading halt

Lawsuit alleges breach of fiduciary duty to "unsophisticated investors"

A new class-action lawsuit has been filed against Robinhood Financial, the commission-free stock trading startup.

The U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority are already investigating Robinhood’s handling of an outage in March, according to this Bloomberg piece, which also points out the buzzy startup has also been the target of many angry customers and regulatory probes. And while the company’s app seems to have held up during recent market volatility, it seems that some users are unhappy with other aspects of Robinhood’s handling of its customers’ investment trades.

FinLedger has learned of a new class action lawsuit filed by Shterna Pinchasov and on behalf of “those similarly situated” against Robinhood, alleging that the company failed to notify its customers about a T1 Halt. A T1 Halt is a trade halt code representing when trade is halted on a particular company’s stock because that company is “pending the release of material news which is likely to lead to abnormal volatility in said company’s stock price.”

Specifically, according to the lawsuit, Robinhood’s customers did not receive the basic information regarding the T1 Halt placed on the Hertz Corporation stock in March 2020, and as a result “lost significant sums of money.”

Pinchasov was one such customer. Once the Hertz Corporation T1 Halt was lifted, the market price of the stocks had dropped significantly, causing Pinchasov and others similarly situated “damages” as a result of Robinhood executing the pre-T1 Halt trades when they should have instead been cancelled, terminated or otherwise halted.

The lawsuit alleges that “Robinhood breached its [fiduciary] duty of care to its targeted customers by failing to prevent customers from using its interface for stocks that had been the subject of a T1 Halt and failing to provide those customers the knowledge of the T1 Halt.”

The suit is seeking monetary damages in an amount that “exceeds $30,000,” according to the plaintiff’s attorneys, who said that dollar amount is a minimum threshold for filing in the Florida Circuit Court. The amount of damages is actually yet “unspecified,” according to the law firms representing Pinchasov. The Daily Business Review estimates those damages could be in the “millions” of dollars range but the attorneys declined to be specific, saying it was too early to say.

MAC Legal P.A. filed the suit on Nov. 5, 2020, in the Miami-Dade County, Florida, Circuit Court. In a conversation with the attorneys representing Pinchasov, they emphasized to FinLedger that part of the premise behind the lawsuit is that Robinhood on its own website claims that “deliberately engineered systems — not marble office buildings on Wall St — are the cornerstones of establishing trust.”

“Robinhood assumed a duty to these customers, which it failed to abide by, and doesn’t hide the fact that it targets unsophisticated investors. That’s their business model,” MAC Legal’s Michael Citron, one of the representing attorneys, told FinLedger. “But where is the liability? That negligence is the crux of this suit.”

Eli Levy of Levy & Partners PLLC, one of the representing attorneys, said that the startup’s failure to advise account holders about the halting of trading in the Hertz stock led to potentially millions of dollars lost. 

Robinhood had not responded to FinLedger’s request for comment as of press time. The company has been the subject of criticism in the past for “luring young traders, sometimes with devastating results,” as in this New York Times article.

In September, the 7-year-old, San Francisco-based company increased its latest funding round to $660 million at a staggering $11.7 billion valuation. Its backers include a high-profile group of VCs including Sequoia Capital, Andreessen Horowitz and DST Global, among others.

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