(Bloomberg) — Frustrated investors who sued after getting locked out of trading in frenzied shares like GameStop Corp. are unlikely to have much luck in court either.
Online brokerage Robinhood Markets was named as a defendant Thursday in at least two federal suits demanding it reinstate trading of shares including GameStop, BlackBerry Ltd., Nokia Oyj and AMC Entertainment Holdings Inc. Just hours earlier, Robinhood, Interactive Brokers and others took steps to curtail activity in the high-flying stocks after several dizzying days of trading on their apps whipped up volatility.
While users of the trading platforms claim in court filings that they suffered losses from the restrictions, legal experts say brokerages have broad powers to block or restrict transactions — all of which is spelled out as part of customer agreements everyone signs to gain access to the services.
“I’m looking at the Robinhood contract, and it says in black-and-white they can block or restrict trades at any time,” said Jeff Erez, who runs a Miami-based law firm specializing in securities-fraud litigation. “I’m not aware of any law that would guarantee you a right to purchase a certain security at a certain brokerage firm,” said Erez, who represents plaintiffs in a lawsuit filed last year against Robinhood in California related to service disruptions.
The legal fight comes after a group of maverick, digitally oriented traders who gather in Reddit’s WallStreetBets forum sent shares of GameStop and other companies soaring, with the apparent goal of causing losses to hedge funds that were shorting the stocks.
Read More: Robinhood Users Are Furious Over Its Stock-Trading Clampdown
In a lawsuit filed in New York, Robinhood user Brendon Nelson of Massachusetts said the company removed GameStop from its trading platform in the midst of an “unprecedented stock rise,” depriving individual investors of the ability to invest and manipulating the market. The decision was a breach of its customer agreement and was in violation of financial industry rules, according to the complaint.
In a Chicago lawsuit, Robinhood user Richard Joseph Gatz of Naperville, Illinois, said the halt of trading in BlackBerry, Nokia and AMC “was to protect institutional investment at the detriment of retail customers” and is in “lockstep” with other trading platforms. “The halt of retail trading for these stocks has caused irreparable harm and will continue to do so,” Gatz said.
Robinhood didn’t immediately respond to a request for comment on the suits. The company has faced criticism in the past for allowing relatively unsophisticated investors to engage in risky trades that resulted in massive losses, and some commentators have expressed concern about the losses that individual investors are likely to suffer when the Reddit-driven bubbles burst.
Brokerages are permitted broad discretion in limiting trades to provide flexibility in handling unusual situations like technical glitches or mechanical errors or just mistakes, said Columbia Law School professor Joshua Mitts, who specializes in corporate law.
“There is no obligation that a broker-dealer has to unconditionally accept orders to to buy, sell or short sell securities,” said Cam Funkhouser, a former executive at the Financial Industry Regulatory Authority, a Wall Street-backed regulator that oversees broker-dealers. “If they do accept orders, it is expected that the transaction is executed and settled in compliance with the applicable rules,” said Funkhouser, who worked at Finra for 35 years and oversaw its national fraud-detection office.
“There is no financial incentive for a broker dealer or clearing firm to be non-compliant with trading and settlement rules as there is significant regulatory risk in non-compliant behavior,” he said.
‘Pretty Broad’
Timothy Blood, a partner with Blood Hurts & O’Reardon in San Diego, who has represented investors in disputes with brokerages, said user agreements “tend to be pretty broad” in their ability to prohibit trading, as they can decline to work with anyone just like any other business.
Still, user agreements aren’t always an absolute protection for brokerages.
“It’s going to depend on the particular situation that arises,” Blood said.
There might be liability if a brokerage allows trades by some clients but not others, especially if the one being denied needs access to the market to complete a longer-term strategy with additional trades, Blood said. “If a long-term plan gets cut off midstream, the clause helps Robinhood but won’t be the last word on the issue,” he said.
While Robinhood’s customer agreement clearly states that it can suspend trading at any time, it does raise questions about whether the platform treated some users differently than others, especially after cases in the past decade of market manipulation by short sellers that disadvantaged retail investors, and said Mitts, the Columbia Law School professor.
“When hedge funds are going to lose from a trading suspension, they don’t face any lockup like this, any suspension, any halt at the retail level,” Mitts said. “But when retail investors find themselves locked in, they find themselves unable to exit the trade.”
(Updates with comments from lawyers, former regulator.)
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