RobinHood Halting GameStop Trading Sparks Lawsuits, Investigation

RobinHood, an online brokerage app that allowed people to buy GameStop stocks, is now on the receiving end of two lawsuits and an investigation.

The dramatic story of Redditors buying up stocks like GameStop is continuing. Yesterday, we reported on Redditors buying stocks and driving up values. The idea is that stocks like GameStop were being shorted by billionaires and hedge fund CEO’s. In response, Redditors banded together and started buying up those stocks in an effort to make those shorting the stock lose money. Reportedly, those shorting the stock lost quite a stack of cash, causing some to pull out to stem their losses.

While this wound up being a case of stock market manipulation to manipulate the manipulators, some are accusing some of those online brokerage apps of pulling off their own manipulation. Those apps started blocking users from buying Gamestop stocks. Some said that the app forced them to sell their stocks as well, but this hasn’t been confirmed.

Now we are seeing the fallout of those decisions. Robinhood, one of those online brokerage apps, is now the target of a fair bit of backlash. Users have taken to the reviews section of the app download page and posted thousands of one star reviews. From Investor Place:

Robinhood is now stopping these small investors from freely trading due to the recent rise in Reddit stock squeezes from members of r/WallStreetBets. That, in turn, has angered many online and have led to a surge of negative reviews dropping the app to a one-star rating on the Play Store. Many of these reviews also mention deleting the app and moving to a new one for stock trading.

In response, Google is reportedly intervening and deleting negative one star reviews in their store. From Gamerant:

The ongoing conflict between the Stock Market and the Wallstreetbets subreddit continues to ignite as stock traders attempt to fire back at the popular trading app Robinhood. This recent attack on the app is in response to Robinhood halting stock trading for GameStop, the gaming retailer that set off this whole situation due to the way a number of hedge funds had been manipulating the market.

However, as the Redditors and other onlookers retaliated against Robinhood by review bombing the app on the Google Play Store, Google rushed in to halt the quick ratings decline. The tech conglomerate used a tactic that many critic aggregating websites have used before to keep knee-jerk reactions from affecting the state of a product before, effectively saving Robinhood from consequences of the GameStop trading freeze.

This exact tactic used simply required Google to find a number of new ratings that marked Robinhood at 1-star, the lowest available on the Play Store, and remove them. It’s a strategy that websites like Metacritic have used before in order to keep the effects of online outrage organized by players who may have never played a game from affecting a review score without having actually been able to form a real opinion of their own. In the case of the recent review bombing of Robinhood, the situation is a little more complicated, on one part because Google had to remove almost 100,000 negative reviews in order to salvage the app’s rating from a 1-star to a 4-star.

The reason why 1 star reviews is so bad is because it affects the apps visibility in the store. If there is a string of negative reviews, this lowers the apps visibility which means competing apps get better visibility. Google’s intervention basically prevented the app from suffering the negative consequences of the app freezing people out of buying Gamestop stocks.

Of course, while the backlash did happen on the app store itself, offline, there are other activities going on that is putting the app in the spotlight for the wrong reasons. Reportedly, there are two lawsuits being filed against the app. From Fox Business:

Two Robinhood users filed separate lawsuits against the brokerage app Thursday after it and other apps restricted trading of certain securities.

The first lawsuit filed in the Southern District Court of New York alleges that Robinhood “purposefully, willingly, and knowingly” restricted certain securities transactions, including GameStop. The other filed in the Northern District Court of Illinois alleges that the app manipulated its platform.

“Robinhood’s mission is to ‘democratize finance for all.’ They have failed,” Alexander Cabeceiras, an attorney for the Derek Smith Law Group representing plaintiff Brendan Nelson in the New York suit, said in a statement to FOX Business.

Cabeceiras continued: “They have purposefully failed this mission and failed their clients in an attempt to—what appears to be—appease their investors and/or potential investors.”

Many observers suggest that these lawsuits have a very large uphill battle ahead of them. A number suspect that the lawsuits are basically doomed to fail. Still, even if those lawsuits fail to make any headway, the app itself isn’t exactly out of the woods here. Reports are surfacing that the New York Attorney General’s office is also saying that they will look into the activities of Robinhood. From The Hill:

New York Attorney General Letitia James (D) in a statement Thursday said her office was “reviewing” trading on the Robinhood app relating to GameStop stock.

“We are aware of concerns raised regarding activity on the Robinhood app, including trading related to the GameStop stock,” James said. “We are reviewing this matter.”

The stock trading app announced Thursday it would block the purchase of stocks made popular on Reddit, including BlackBerry, AMC and GameStop. Users of the r/WallStreetBets subreddit began collaborating to drive up the price of the stocks to counter short-selling by hedge funds. A class-action lawsuit was filed against Robinhood shortly after.

The move drew criticism from both Democrats and Republicans who said it represented a different standard for independent traders as compared to established hedge funds.

“People on Wall Street only care about the rules when they’re the ones getting hurt. American workers have known for years the Wall Street system is broken – they’ve been paying the price,” incoming Senate Banking Committee Chairman Sherrod Brown (D-Ohio) said in a statement. “It’s time for the SEC and Congress to make the economy work for everyone, not just Wall Street.”

“We now need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit,” tweeted Rep. Alexandria Ocasio-Cortez (D-N.Y.).

Robinhood did face accusations that it is acting on behalf of some of these hedge fund traders. As a result, many say that there was illegal activity going on because of it. None of this, of course, is proven, but the app is certainly facing severe criticism in the first place.

In the mean time, Robinhood is now receiving a $1 billion cash infusion from investors as well. From CNN:

Robinhood raised $1 billion from existing investors just hours after it halted purchases of GameStop, suggesting the free-trading app faced a potential cash shortage.

The startup faced a bipartisan backlash Thursday for its decision to limit trading — a move that ran counter to its stated mission of democratizing investing.\

“This is a strong sign of confidence from investors that will help us continue to serve our customers,” Robinhood said in a statement.

But the fact that Robinhood felt the need to raise so much money, just months after raising hundreds of millions of dollars, signals the financial pressure facing the company. It either faced a liquidity crisis — or narrowly avoided one.

Robinhood told CNBC on Thursday that tapping its credit line was a “proactive measure.”

Still, many users are fleeing the app for alternatives. The Verge notes that Redditors are actively going to alternatives – or are actively seeking alternatives because of the freezing of buying certain stocks.

The news isn’t all bad, though. One ten year old kid in Texas had apparently received $60 in stock for Gamestop before this massive rally. He apparently decided to sell and managed to walk away with $3,200 dollars – more than enough to buy a nice chunk of the latest games and consoles. Suffice to say, he’s very happy. From Global:

Jaydyn Carr, 10, has been sitting on 10 GameStop shares since December 2019, when his mother Nina gave them to him as a Kwanzaa gift to teach him about economics. Nina spent a total of US$60 on the shares at the time, but their value soared this week amid a flurry of Reddit-driven interest in GameStop.

“My phone was going off, because I have GameStop on my watch list,” Nina Carr told local paper My San Antonio.

“I was trying to explain to him that this was unusual, I asked him: ‘Do you want to stay or sell?’”

Although many on Reddit would urge Jaydyn to “hold the line” as part of their “stick-it-to-the-man” plan, he decided to cash out.

Jaydyn agreed to sell the shares, and his $60 gift suddenly transformed into $3,200 cash — enough to buy a PlayStation 5, a gaming computer, or pretty much any video game-related thing a boy could dream of.

Technically, it’s more than possible to spend more than $3,200 on a souped up gaming rig. Still, that is enough to buy a reasonable gaming rig. You can, though, easily buy a PS5 with that kind of cash. How much you have left over, of course, depends on which version and where you buy it from. The prices for an XBoX X series is also similar, so you can easily buy both with that chunk of change if you really wanted. Nintendo Switches, meanwhile, are a bit cheaper, but you can still run up the bill depending on what version you want to get. In this day and age, $3,200 isn’t quite an unlimited amount of money to buy a set of brand new consoles, but you can very easily get some good mileage off of it.

Alternatively, dumping the money into a safer investment might also be a great idea of one were to think in the long term. There are nice safe GIC’s (Guaranteed Investment Certificate) that can net you a safe small steady flow of cash. It isn’t an amazing return, but you know that, for many of those GIC’s, that return will hit. With the stock market, you never know if it’s going to be beaten into submission.

As for stock values today, as of this writing, North American stocks are tumbling again after yesterday’s bounce. Some of it is because of the Gamestop drama, but some it is the result of news coming from Johnson & Johnson and their vaccine development. From Investor’

The Novavax coronavirus vaccine was just over 89% effective in a late-stage trial, the biotech said late Thursday. That’s slightly less than the roughly 95% mark set by the Pfizer (PFE) and Moderna (MRNA) vaccines, but the Novavax details were more encouraging. NVAX stock skyrocketed, signaling a breakout.

Early Friday, Johnson & Johnson (JNJ) said its one-shot coronavirus vaccine was 72% effective in the U.S., but less so in other parts of the world. JNJ stock fell solidly early Friday.

So, multiple reasons for the decline, not just the Gamestop drama. Gamestop stock continues to surge. That value is, as of this writing, up by more than 130 points or up by more than 65%. So, the rally for that particular stock continues as Redditors call on each other to “hold the line”. At any rate, the wild ride isn’t over yet.

Drew Wilson on Twitter: @icecube85 and Facebook.

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