Disgruntled customers take Robinhood to Court
Disgruntled customers have taken Robinhood Financial LLC and Robinhood Securities LLC to Court over the alleged failure of the companies to disclose that their business operations relied extensively upon “payment for order flow,” in which they received payment from market makers in exchange for executing the service’s trades.
The class action lawsuit was filed by Justin William Lemon at the California Northern District Court. The summons in this case were issued on December 28, 2020.
The complaint states that Robinhood, a mobile application and website investment service, has capitalized on a surge of first-time market investors by misleading and luring consumers to execute inferior market trades on the platform under the guise of “commission free” trading.
For larger value orders, this price differential often exceeded the commission its competitors would have charged. These inferior prices were caused in large part by the unusually high charges Robinhood required from principal trading firms for the opportunity to obtain Robinhood’s customer order flow. The principal trading firms/electronic market makers in turn passed these costs along to Robinhood’s clients on each trade through inferior execution quality – the price at which the requested market orders were executed.
According to the complaint, Robinhood charged backdoor commission fees to each of its clients’ orders, while concealing and denying the payment for order flow scheme. To effectuate this scheme, the defendants are said to have published misleading statements and omissions in customer communications relating to the execution of trades and Robinhood’s revenue sources. For years, Robinhood’s retail communications to consumers omitted receipt of payment for order flow, even though it was Robinhood’s single largest source of revenue.
Robinhood allegedly failed to disclose and omitted information regarding this process in numerous ways, including instructing customer service representatives not to mention payment for order flow in response to questions about Robinhood’s sources of revenue and omitting it from its website’s FAQ section.
The plaintiff argues that, as a broker-dealer that routed customer orders for execution, Robinhood had a duty of best execution to its clients, a duty to seek and obtain the best reasonably available terms for customers’ orders. Robinhood allegedly violated its duty of best execution by charging unusually high payment for order flow rates to its vendors and failing to conduct adequate regular and rigorous reviews of the execution quality it was providing on customer orders.
The plaintiff brings this action on behalf of himself and a class of similarly situated individuals who were victims of Robinhood’s materially deceptive acts and omissions, relying upon Robinhood’s warranties, advertisements, and representations, as well as Robinhood’s duty of best execution in executing trades on consumer’s behalf.
The plaintiff brings this class action against the defendants for:
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Violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5;
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Violations of California Consumers Legal Remedies Act (“CLRA”), Civil Code § 1750, et seq.;
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Violations of California Unfair Competition Law (“UCL”), Bus. & Prof. Code § 17200, et seq.;
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Violations of California False Advertising Law (“FAL”), Bus. & Prof. Code § 17500, et seq.;
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Negligent Misrepresentation;
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Breach of Implied Covenant of Good Faith and Fair Dealing; and
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Breach of Fiduciary Duty.
The plaintiff seeks an order for relief including but not limited to the following: (1) requiring the defendants to pay damages and restitution to the plaintiff and the class; and (2) enjoining the defendants from further legal violations through Robinhood’s payment for order flow collection scheme and requiring the defendants to publicly correct the false and misleading statements and omissions alleged herein.
Let’s recall that, earlier in December, the Securities and Exchange Commission (SEC) announced charges against Robinhood for repeated misstatements that failed to disclose its receipt of payments from trading firms for routing customer orders to them, and with failing to satisfy its duty to seek the best reasonably available terms to execute customer orders.
Robinhood agreed to pay $65 million to settle the charges brought by the SEC.