To hear Robinhood traders talk, there’s a new and easy way to make money off the Reddit-Robinhood saga: join a class-action lawsuit against the platform that halted their trades earlier this week.
But just like shares of GameStop, the stock that caused the trouble in the first place as it surged to $500 a share, the lawsuit bet may be overhyped.
Small investors on apps like Robinhood lost thousands of dollars on speculative stock picks as platforms including Robinhood, Cash App and Stash halted trades earlier this week. Day traders using the app to make a few extra bucks panicked as the brokerages they relied on refused to complete their trades.
FOX Business has received dozens of messages and queries from investors who lost money and want to join the class-action lawsuit.
While many are eager to jump on the bandwagon, seeking restitution, the likelihood of these cases actually paying people back is slim, legal experts tell FOX Business. Columbia Law Professor Joshua Mitts advises, “I wouldn’t go in thinking you’re going to get your money back.”
TJM Managing Director Tim Anderson puts it more bluntly, “I’m convinced the class action law suits are going absolutely nowhere.”
Multiple class-action suits have been filed — including in the prominent Southern District of New York. The lawsuits are gaining traction in various Reddit groups as many day traders shift their energy from trading to sticking it to Robinhood.
Ironically, one group crowdsourcing signatures, Do Not Pay, is referred to as “The Robinhood of the internet.” Do Not Pay, an online legal service which costs $3 per month, allows users to sign on to the lawsuit filed in the Southern District of New York.
Do Not Pay CEO Josh Browder tells FOX Business more than 26,000 users have signed onto the class-action lawsuit since they launched this feature on the site. “We want to give people options to fight back,” Browder said.
In a class-action suit, the more people who claim injury, the stronger the case becomes. “It’s not a technical requirement to have signatories but it helps a lawsuit’s chance that the court will hear it,” Mitts adds.
But simply notching tens of thousands of signatures does not make this is a strong case, according to legal experts.
Class-action suits are most successful when the defendant is at fault. In a situation where it’s not clear Robinhood did anything wrong, the plaintiff has a much harder case. “Even in highly culpable crimes like Bernie Madoff’s Ponzi scheme, people are lucky if they recover their losses. … In this case its buyer beware,” Mitts says.
And Robinhood investors were warned—they willingly submitted to the platform’s terms of service meaning the brokerage didn’t breach a contract, legal experts tell FOX Business.
As investors grapple with losing money, theories proliferate about whether big hedge funds were behind Robinhood stopping trades. Barstool Sports founder David Portnoy has posted extensively on Twitter suggesting that hedge funds including Citadel Securities that fill many of Robinhood’s order flow were putting pressure on the smaller brokerage to halt trades of Gamestop and AMC in order to serve their interests. Point 72 notably invested in Melvin Capital which lost billions in the short squeeze of GameStop stock.
However, both funds are quick to refute the theory saying they make money by handling trades and that ultimately it was Robinhood’s call to pull the plug—a move which Robinhood made to minimize its liability as it ran afoul of capital requirements that regulate how many trades it can settle.
“What we don’t know is what their internal reporting mechanism was telling them, and how ‘real time’ their internal system was keeping up with the surge in trade volume,” Anderson says. Anderson adds we don’t know all of the issues Robinhood may have been handling behind the scenes yesterday, “Given Robinhood has gotten in trouble with the SEC before, they are trying to be extremely careful.”
In discovery, more information will surface as lawyers look at whether Robinhood could’ve done more by tapping into additional credit lines sooner to allow customers to complete trades. But for now, most theories are just that: theories.
Making the case that Robinhood — and not a gyrating market is at fault for people losing money is a tough sell. Robinhood’s restriction on trades yesterday morning prevented investors from purchasing additional shares of the most volatile stocks like GameStop but did not prevent users from selling their shares.
“From my understanding Robinhood never stopped customers from closing out of existing positions,” Anderson adds.
While these class-action suits aren’t expected to give plaintiffs a payday, they could refocus the conversation on the disparity between the resources wealthy hedge funds have and the resources accessible to average investors. “To be locked out at the exact moment when you can recuperate losses is deeply offensive to notions of fairness and equity,” Mitts told FOX Business. “Hedge funds that have prime brokerages can change a position anytime they want so there’s a question about differential and disparate treatment.”
Some working on the lawsuit still remain optimistic they can get a favorable outcome. Browder tells FOX Business, “It’s a new era of consumers banding together.”