Traders ask Court about Robinhood’s legal responsibility stemming from trading restrictions
A group of traders who have challenged a ruling in favor of Robinhood, have asked the Court whether the company may be held liable under under state tort and contract law for the trading restrictions it introduced back in January 2021.
Documents recently filed by the appellants with the Eleventh Circuit U.S. Court of Appeals show that the key question in this case is:
Whether a stockbroker’s failure to maintain adequate safeguards against market volatility, and its imposition of trading restrictions designed to harm clients, subjects the stockbroker to liability under state tort and contract law.
The list of appellants who signed the brief includes 57 individuals and businesses.
In January 27, 2022, the United States District Court for the Southern District of Florida dismissed the Complaint with prejudice under Fed. R. Civ. P. 12(b)(6). Appellants timely filed a Notice of Appeal on February 28, 2022.
The traders explain that in January 2021, Robinhood imposed on its clients a set of trading restrictions. According to the appellants, the broker deliberately tanked the market price of thirteen stocks. The restrictions were financially devastating for Robinhood’s individual clients, erasing billions of dollars of value invested in their brokerage accounts.
Robinhood’s CEO, Vlad Tenev, publicly admitted that Robinhood “knew this was a bad outcome for customers” but did it anyway “to protect the firm.” The firm was indeed protected. The appellants allege that the trading restrictions (1) ensured Robinhood would not have to raise significant capital to cover regulatory requirements and (2) extinguished the demand driving short squeezes that were causing massive losses for favored institutional investors.
Plaintiffs seek to hold Robinhood accountable and to recover the losses caused by their stockbroker’s alleged breach of duties and negligence.
This case arises at the intersection of Silicon Valley and Wall Street, the appellants say. The question presented is whether the titans of Big Tech are subject to the same rules and duties as conventional stockbrokers or whether they are subject to no rules at all and may advance their self-interest over their clients’ interests.
The traders argue that, in dismissing their complaint against Robinhood, the District Court took the no-rules approach, holding that one of the country’s largest stockbrokers is immune from all common-law duties that apply to other stockbrokers.
Further, according to the traders, the District Court reached this outcome by embracing two contradictory concepts: on the one hand, Robinhood owes no duties to its clients because it supposedly offers only non- discretionary (that is, client-directed) trading services; on the other hand, Robinhood is immune from a failure to execute client directives because it reserves to itself total discretion over client accounts.
This heads-I-win-tails-you-lose concept, if permitted to stand, would mean that every online brokerage can take virtually any action to advance its own profits, rig the market for itself or favored clients, and face no common-law liability, regardless of whether the action was grossly negligent or in admitted bad faith, and regardless of the harm to clients or the market generally.
The appellants conclude:
“The common law offers no such license. Big Tech is not a law unto itself. The district court’s extreme holding was error, and the Appeals Court should reverse”.