By: Daniel Raddenbach, Volume 105 Staff Member
Robinhood, an investment app designed to make trading easy for small investors, caught national attention in January when hordes of its users banded together to defeat hedge funds who were actively profiting from the decline of the value of GameStop stock. Robinhood’s decision to temporarily halt users’ ability to buy the stock, contributing to the stock value’s plummet and huge losses for small investors, caused an outcry among users and lawmakers. Lawsuits began piling up at Robinhood’s door, beginning with a class action lawsuit filed in the Southern District of New York alleging that Robinhood manipulated the market for the benefit of “financial institutions.”
Robinhood emphasizes its mission to enable small traders and democratize finance, but its day-to-day operations are not driven by this idealism—Robinhood’s core money-making structure is built around catering to large investment firms. Recent lawsuits against Robinhood are unlikely to force it to realign with its populist mission for two reasons. First, and most obviously, the lawsuits are likely meritless given the broad user agreements that Robinhood users must sign. Second, Robinhood’s role in the GameStop crisis was not driven by a desire to bail out hedge funds that were hemorrhaging money—Robinhood had little choice to halt trading due to massive increases in its deposit and lending obligations. Punishing Robinhood for a decision that had nothing to do with cozying up to large investors will not do anything to impact its decision-making in the future.
I. THE RISE OF ROBINHOOD: A TALE OF COMPETING PRIORITIES
Robinhood grew up alongside a new generation of trading apps and firms that have adapted to the digital era by attracting small investors via commission-free trading. Robinhood’s mission is simple: “[T]o democratize finance for all.” Robinhood vaulted ahead of its peers during the COVID-19 pandemic, when market volatility and the creation of a new class of traders “armed with $1200 stimulus checks and nothing much to do” sent users flocking to Robinhood’s user friendly interface. In the first half of 2020 alone, Robinhood “reaped $271 million in revenue,” more than double the growth of its nearest competitors.
Throughout its rise, Robinhood has touted its credentials as an app for the small trader. As a commission-free app, Robinhood does not draw fees directly from its users—it can only make money by selling its users’ transactions to large, institutional traders. Thus, while the app “talks about ‘democratizing finance for all’ . . . it will always place the needs and priorities of the companies that pay for that order flow over the needs and wants of its users.” This tenuous loyalty to small traders came to a head during the January 2021 GameStop buying frenzy.
II. ROBINHOOD’S ROLE IN THE GAMESTOP FRENZY
For years, GameStop has been a company in decline. Noticing this, large investors took massive shorts in the stock, betting that the stock price would continue to fall. In January 2021, Reddit users noticed the investors’ move and banded together on a Reddit forum to coordinate a massive surge of GameStop purchases, causing its price to skyrocket. By January 28, 56 percent of Robinhood’s approximately 13 million users owned GameStop stock. The price of the stock peaked on January 28 at $347.51 per share, up nearly 1600 percent in a single week. Large investors who shorted the stock faced huge losses as they were forced to buy up the now-expensive stock.
On January 28, Robinhood announced that it would temporarily halt purchases in GameStop, citing “market volatility.” Within five days of the decision, GameStop stock lost 60 percent of its value, creating massive losses for small investors. There was immediate outcry from users, and bipartisan criticism from lawmakers. Reddit users began to file a barrage of lawsuits against Robinhood, alleging that the trading halt caused them massive losses.
III. DON’T EXPECT GAMESTOP-BASED LAWSUITS TO CHANGE ROBINHOOD’S BEHAVIOR
As of March 2, 2021, nearly 90 lawsuits have been filed against Robinhood in connection with its decision to halt GameStop trading. The first to be filed, which remains the most high-profile case, was submitted by Robinhood user Brendon Nelson on January 28 in the Southern District of New York. Mr. Nelson’s class action filing in Nelson v. Robinhood Financial, LLC alleges, inter alia, breach of contract and breach of fiduciary duty for halting trading unfairly and causing massive losses for users. For two reasons, Nelson and related lawsuits against Robinhood will likely fail to hold Robinhood accountable for departing from its founding mission of being a trading app for small traders.
- Lawsuits Against Robinhood Are Likely to Fail as a Matter of Law
Robinhood will not be held accountable by these lawsuits because, most obviously, the lawsuits are almost certain to fail as a matter of law. Robinhood’s fiduciary duties to its customers are highly limited; courts in the Second Circuit, especially, have determined that “stockbrokers generally do not owe a fiduciary duty unless a customer has delegated discretionary trading authority to that broker.” Given the laissez-faire nature of the Robinhood app, where users trade freely and Robinhood plays no more than a facilitating role, it is unlikely that a court would find that Robinhood is bound by any significant fiduciary obligations to its users. And legal expert Ann Lipton, a law professor at Tulane University, has noted that attempts to sue brokers are generally unsuccessful, especially in the class action context, where there are difficulties proving bad faith or unfair actions.
Moreover, Robinhood requires its users to sign an expansive user agreement that (1) requires its users to go to arbitration before instituting any lawsuit; and (2) provides that Robinhood may, in its sole discretion, prohibit or restrict trades without prior notice. The arbitration clause may not sound the death knell for these lawsuits, but the rest of the contract almost certainly will. Under relevant regulations by the Financial Industry Regulatory Authority (FINRA), mandatory arbitration clauses will not be enforced if a class is certified in a class action. However, even if the plaintiffs in these cases manage to certify a class, many legal experts have observed that, given the scope of the agreement and the fact that brokers are under no obligation to accept trades on their exchanges, the lawsuits are almost certain to fail on the merits.
- The Lawsuits Do Not Target Robinhood’s Core Problems
Even if the lawsuits were meritorious, they would not serve as an effective punishment for Robinhood’s failure to abide by its “free trading for all” mission. By halting trades, Robinhood was trying to protect itself against massive potential liabilities, not to bail out large investors. The decision to halt trading was the immediate result of “a sudden increase in clearinghouse deposit requirements, a capital obligation Robinhood . . . need[s] to meet on a daily basis.” As an online brokerage, Robinhood is required to deposit money with a clearinghouse to temporarily cover consumers’ transactions. During the GameStop buying frenzy, its obligation shot up tenfold. Robinhood explained that it halted trading “because the required amount we had to deposit with the clearinghouse was so large . . . that we had to take steps to limit buying . . . to ensure we could comfortably meet our requirements.”
Additionally, Robinhood engages in margin lending, through which it lends money to its users to facilitate stock purchases. With the massive demand for GameStop increasing, Robinhood was lending massive amounts of money to users for purchases of a hugely volatile stock. As one analyst notes, the fact that “Robinhood made a reasonable decision once the bubble became excessively risky does not mean that it upheld its obligations to its customers, but it does put paid to the belief that it’s in the business of protecting ‘the system.’” Thus, punishing Robinhood for this decision-making would not serve the purpose of punishing it for cozying up to institutional investors.
Suing Robinhood for halting trades of GameStop will not influence its future decision-making or hold it accountable to small investors. Robinhood has been frequently criticized for selling out small users in favor of institutional partners, but its decision to halt GameStop trades was an exercise in caution. Even if the lawsuits moving forward against Robinhood were meritorious, they would fail to address the underlying problem: as long as Robinhood’s core money-making structures remain in place, its goal will not be to “democratize finance for all.”
 Our Mission, Robinhood, https://robinhood.com/us/en/support/articles/our-mission/ [https://perma.cc/BJ6M-V6WU] (last visited Mar. 2, 2021).
 See infra Part II.B.
 Drew Harwell, As GameStop Stock Crumbles, Newbie Traders Reckon with Heavy Losses, Wash. Post (Feb. 2, 2021, 4:34 PM), https://www.washingtonpost.com/technology/2021/02/02/gamestop-stock-plunge-losers/ [https://perma.cc/T4AJ-SWCB].
 See Kelly Anne Smith, Robinhood Halts Gamestop Trading, Angering Lawmakers and Investors, Forbes Advisor (Jan. 28, 2021, 12:03 PM), https://www.forbes.com/advisor/investing/robinhood-gamestop-trading/ [https://perma.cc/5RJV-5B6V].
 Class Action Complaint at 3, Nelson v. Robinhood Fin. LLC, No. 21-cv-777 (S.D.N.Y. Jan. 28, 2021), https://www.courtlistener.com/recap/gov.uscourts.nysd.553175/gov.uscourts.nysd.553175.1.0_4.pdf.
 See infra Part II.A.
 See infra Part II.C.
 See infra Part II.C.1.
 See infra Part II.C.2.
 See Tara Siegel Bernard, Low-Cost Investing Can’t Get Any Lower Than Free, N.Y. Times (Oct. 1, 2019), https://www.nytimes.com/2019/10/01/your-money/charles-schwab-free-trades.html [https://perma.cc/LKG7-A29J].
 Robinhood, supra note 1.
 Jeff Kauflin & Antoine Gara, The Inside Story of Robinhood’s Billionaire Founders, Option Kid Cowboys And The Wall Street Sharks That Feed On Them, Forbes (Aug. 19, 2020, 6:30 AM), https://www.forbes.com/sites/jeffkauflin/2020/08/19/the-inside-story-of-robinhoods-billionaire-founders-option-kid-cowboys-and-the-wall-street-sharks-that-feed-on-them/?sh=4bf42d74268d [https://perma.cc/LH4D-CADW].
 Ron Shevlin, The GameStop Aftermath: The Rise of the Anti-Robinhoods, Forbes (Feb. 8, 2021, 6:00 AM), https://www.forbes.com/sites/ronshevlin/2021/02/08/the-rise-of-the-anti-robinhood/?sh=3024f97dd3d6 [https://perma.cc/3C5X-CVVH].
 Id. (emphasis added).
 Anne D’Innocenzio, GameStop’s Stupefying Stock Rise Doesn’t Hide Its Reality, Associated Press (Feb. 3, 2021), https://apnews.com/article/gamestop-reddit-stocks-update-92a98aa87d88753a1aa52a72b49321c6 [https://perma.cc/A3Q3-S9NA].
 Investors “short” a stock to profit on its declining value. Elizabeth Lopatto, How R/Wallstreetbets Gamed the Stock of Gamestop, Verge (Jan. 27, 2021, 10:15 AM), https://www.theverge.com/22251427/reddit-gamestop-stock-short-wallstreetbets-robinhood-wall-street [https://perma.cc/9AVK-PHUR]. Shorting is “a practice where you borrow shares for a fee and sell them for (ideally) a high price, then buy them back at (ideally) a lower price to return them.” Id.
 Harwell, supra note 3.
 For an excellent analysis of Reddit users’ coordinated efforts, see Casey Epstein, Stopping GameStop’s “GameStonk”: Why Courts Must Confront GameStop Colluders and Prohibit Open-Market Manipulation, Minn. L. Rev.: De Novo (Feb. 3, 2021), https://minnesotalawreview.org/2021/02/03/stopping-gamestops-gamestonk-why-courts-must-confront-gamestop-colluders-and-prohibit-open-market-manipulation/ [https://perma.cc/MK7D-Q3F6].
 Smith, supra note 5.
 GameStop – Stock Price History, Macrotrends, https://www.macrotrends.net/stocks/charts/GME/gamestop/stock-price-history [https://perma.cc/38SN-QCFY] (last visited Mar. 1, 2021).
 See Smith, supra note 5.
 See An Update on Market Volatility, Under the Hood: The Official Robinhood Blog (Jan. 28, 2021), https://blog.robinhood.com/?offset=1611974223357 [https://perma.cc/EQW9-JX8D] (announcing the halt).
 D’Innocenzio, supra note 17.
 Smith, supra note 5; see Ted Cruz (@tedcruz), Twitter (Jan. 28, 2021, 10:47 AM), https://twitter.com/tedcruz/status/1354833603943931905?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1354833603943931905%7Ctwgr%5E%7Ctwcon%5Es1_&ref_url=https%3A%2F%2Fwww.forbes.com%2Fadvisor%2Finvesting%2Frobinhood-gamestop-trading%2F [https://perma.cc/XS3C-5F6R].
 See supra note 4 & accompanying text.
 Megan Leonhardt, Robinhood Now Faces Roughly 90 Lawsuits After GameStop Trading Halt—Here’s How Customers Might Actually Get Their Day in Court, CNBC: Make it (Feb. 17, 2021, 3:04 PM), https://www.cnbc.com/2021/02/17/robinhood-faces-lawsuits-after-gamestop-trading-halt.html [https://perma.cc/KJ8D-D44W].
 See Class Action Complaint, Nelson v. Robinhood Fin. LLC, No. 21-cv-777 (S.D.N.Y. Jan. 28, 2021), https://www.courtlistener.com/recap/gov.uscourts.nysd.553175/gov.uscourts.nysd.553175.1.0_4.pdf.
 Id. at 7–9.
 United States v. Hunt, No. 05 Cr. 385, 2006 U.S. Dist. LEXIS 64887, at *15 (S.D.N.Y. Sept. 6., 2006); see also Rush v. Oppenheimers & Co., Inc., 681 F. Supp. 1045, 1055 (S.D.N.Y. 1988) (noting that fiduciary obligation “is limited to matters entrusted to the broker.”).
 See De Kwiatkowski v. Bear, Stearns Co., No. 96 Civ. 4798, 1997 U.S. Dist. LEXIS 13078, at *14 (S.D.N.Y. Aug. 28, 1997) (implying that obligations only arise when the brokers acts as more than a mere agent “executing transactions” for the customer).
 Tom Hals, Analysis: Robinhood and Reddit Protected from Lawsuits by User Agreement, Congress, Reuters (Jan. 30, 2021, 6:20 AM), https://www.reuters.com/article/us-retail-trading-robinhood-liability-an/analysis-robinhood-and-reddit-protected-from-lawsuits-by-user-agreement-congress-idUSKBN29Z0HI [https://perma.cc/7CZV-JBQK].
 RHF-RHS Customer Agreement, Robinhood Disclosure Library, https://robinhood.com/us/en/about/legal/ [https://perma.cc/AYF9-LTMT] (last visited Mar. 1, 2021).
 FINRA is an independent regulatory corporation that governs many of Robinhood’s brokerage practices. See Leonardt, supra note 28.
 Class Action Claims, FINRA, https://www.finra.org/rules-guidance/rulebooks/finra-rules/12204 [https://perma.cc/X6Y3-AMHR] (last visited Mar. 2, 2021).
 Chris Dolmetsch, Christopher Yasiejko & Christian Berthelssen, Robinhood Users Suing over Trade Limits Face High Legal Bar, Bloomberg (Jan. 28, 2021, 10:47 AM), https://www.bloomberg.com/news/articles/2021-01-28/robinhood-customers-sue-over-removal-of-gamestop [https://perma.cc/4CUT-QLSS].
 Sissi Cao, Do the Lawsuits Against Robinhood for Its GameStop Pause Have a Chance?, Observer (Feb. 2, 2021, 4:30 PM), https://observer.com/2021/02/robinhood-gamestop-stock-reddit-lawsuit-market-expert/ [https://perma.cc/7Y8B-2TFR].
 What Happened This Week, Robinhood (Jan. 29, 2021), https://blog.robinhood.com/news/2021/1/29/what-happened-this-week [https://perma.cc/A9UX-6HNX].
 Daniel Tenreiro, Why Robinhood Halted GameStop Trading, Nat’l Rev.: Cap. Matters (Jan. 28, 2021, 8:14 PM), https://www.nationalreview.com/2021/01/why-robinhood-halted-gamestop-trading/ [https://perma.cc/5Q7N-RRSW].
 Id. (emphasis added).
 Robinhood, supra note 1.