Wealthtech

New York and Texas attorneys general take aim at Robinhood

Texas AG Pax­ton issues CIDs to 13 companies including Robin­hood, Interactive Brokers, Webull, Public.com, M1 Holdings, Citadel, and a half dozen other companies

The top cops in two of the country’s biggest states are turning up the legal heat on Robinhood and other wealthtech platforms in the wake of the GameStop stock debacle, with one of them saying the situation “stinks of corruption.”

In a brief statement issued Jan. 28, New York Attorney General Letitia James said she was reviewing Robinhood’s involvement in this week’s sudden, unexpected rise in the stock price of beleaguered video game retailer GameStop.

James’ Texas counterpart, Attorney General Ken Paxton, has gone much farther in responding to the Robinhood-GameStop controversy. On Jan. 29, Paxton issued civil investigative demands against 13 corporate entities seeking documents related to the Robinhood brouhaha. The attorney general sent the investigative demands to three Robinhood entities along with:

  • Interactive Brokers, a clearinghouse for trades
  • Digital communication platform Discord
  • TD Ameritrade, now owned by Charles Schwab, and TD Bank, the former parent of TD Ameritrade
  • E*Trade, a trading platform owned by Morgan Stanley
  • Webull Financial, operator of the Webull trading platform
  • Public Holdings, which operates the Public.com social trading network
  • M1 Holdings, owner of the M1 Finance wealthtech app
  • Citadel, a financial services company and hedge fund
  • Apex Clearing Corp., which runs a clearinghouse for trades

Paxton complains that the 13 businesses, including Robinhood, prohibited certain stock purchases, required higher margin reserves for trading certain stocks or suspended trading-related chats. His investigative demands seek information such as terms of service, content control and moderation policies, and communication between platforms and moderators of chat servers.

Following the GameStop stock surge Jan. 28, the 13 companies receiving the investigative demands “took extraordinary and unusual steps” to curb access to the stock market, according to Paxton’s news release. GameStop is based in Paxton’s home state of Texas.

“Wall Street corporations cannot limit public access to the free market, nor should they censor discussion surrounding it, particularly for their own benefit. This apparent coordination between hedge funds, trading platforms and web servers to shut down threats to their market dominance is shockingly unprecedented and wrong. It stinks of corruption,” Paxton said.

On the same day that Paxton’s investigative demands went out, the U.S. Securities and Exchange Commission (SEC) said it was “closely monitoring and evaluating the extreme price volatility of certain stocks’ trading prices over the past several days.”

“Our core market infrastructure has proven resilient under the weight of this week’s extraordinary trading volumes,” the SEC said in a statement. “Nevertheless, extreme stock price volatility has the potential to expose investors to rapid and severe losses and undermine market confidence.”

Meanwhile, federal lawmakers on both sides of the aisle are lashing out at Robinhood, accusing the platform of favoring hedge funds over everyday traders, and the Senate Banking Committee and House Financial Services Committee promise to hold hearings about the matter.

As The Washington Post explains, the improbable run-up of GameStop’s stock was “propelled by ordinary investors, spurred by a Reddit message board, looking to show up the Wall Street funds that bet big money on the shares to fall.” The message board in question is WallStreetBets.

Other stocks that received GameStop-like treatment this week by short-sale traders include troubled brands AMC, American Airlines, BlackBerry, Bed Bath & Beyond and Tootsie Roll, and even the corporate shell of bankrupt Blockbuster.

At one point, the stock frenzy pushed GameStop to a nearly $20 billion valuation, the Post noted. On Jan. 29, the stock closed at $325 per share. The 52-week range for the stock is $2.57 to $483. In the wake of the stock’s massive spike, Robinhood and other players in online trading cut off or limited trading activity.

In addition to scrutiny from the New York and Texas attorneys general, the GameStop ruckus has drawn lawsuits from several consumers who were angered by the restrictions imposed by Robinhood.

Robinhood said it clamped down on the trades to protect investors and the stock market. Other companies that tried to reel in the GameStop chaos have offered similar defenses.

In November, Robinhood was hit with class-action lawsuit over a stock trading halt. The suit alleged that the company breached its fiduciary duty to “unsophisticated investors.”

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