Silicon Valley-based online trading app Robinhood, co-founded by Indian American Baiju Bhatt, now faces class-action lawsuit after a disgruntled user moved court against the company over the restrictions put on traders from buying shares of GameStop promoted by WallStreetBets, a popular Reddit group for investors.
The class-action lawsuit, reported filed in the Southern District of New York, claims that “Robinhood’s actions were done purposefully and knowingly to manipulate the market” for the benefit of people and financial institutions who were not its customers.
It also claimed that the restrictions had denied retail investors the opportunity to make potential gains.
For those not following the developments this week, in an apparent bid to to challenge Wall Street’s dominance, a group of online investros bid up the price of stocks like GameStop, putting big-money hedge funds that had bet against the stocks in a spot.
After many individual investors traded in its stocks, GameStop’s market stock value soared more than 1,000% over the past several weeks, chiefly believed to be a result of promotion from Reddit’s WallStreetBets forum.
Since short-sellers were betting against the stock, they now had to buy shares to hedge their positions due to the stock’s surge, eventually sending the stock’s value even higher.
The high volume of trading this week also increased demands for cash that led Robinhood to seek emergency funding of $1 billion from its existing investors.
The platform approached several of its investors, including the venture capital firms Sequoia Capital and Ribbit Capital, said a New York Times report.
The app also temporarily restricted the buying of certain stocks, including AMC Entertainment Holdings and GameStop, on Thursday. Several traders have slammed Robinhood for putting the curbs.
“Amid this week’s extraordinary circumstances in the market, we made a tough decision today to temporarily limit buying for certain securities,” Robinhood said in a blog post on Thursday.
Robinhood is one of the top platforms that made trading online easier as it also offers no-fee trading.
Adoption of the app especially increased during the pandemic as millions of young investors who had never traded before flocked to the app.