Online Broker Faces Securities Class Action and Government Investigation in Response to “Wallstreetbets” Controversy

by | Feb 16, 2021 | Blog

Last month, a group of over 100,000 retail investors made a stir in the financial world by causing an astonishing and rapid rise in stock price for video game retailer GameStop (GME). These amateur investors were members of an online community known as “Wallstreetbets” which is organized around an internet forum of the same name hosted by popular social media platform Reddit. This group organized a campaign to purchase a massive number of GME stock, raising its price from $76 to $347 per share in the short span of a week. As a result of this campaign, investors who had heavily shorted GME stock faced losses totaling billions of dollars.

Being retail investors, many of the members of Wallstreetbets purchased and sold GME stock through commission-free online brokers such as E*Trade and TD Ameritrade. However, the most popular broker among Wallstreetbets members by far was the app-based broker Robinhood.

In the wake of the sudden rise and fall of GME stock, Robinhood has received extensive criticism regarding its treatment of independent investors who had attempted to trade in GME stock. On January 28, when GME was at peak trading volume, Robinhood and other brokers severely restricted purchases of GME and other companies favored by Wallstreetbets, while still permitting sales of open positions. As a result, the price of GME stock sharply declined.

Robinhood’s conduct has been met with both litigation and government investigation. In recent weeks, dozens of class actions have been filed against Robinhood. One of these lawsuits[1] has accused Robinhood of violating federal securities law, arguing that the broker illegally manipulated the market for several securities (including GME stock) by restricting trading. While other brokers imposed less extensive trading restrictions than Robinhood, they are receiving similar treatment.[2] Furthermore, the Department of Justice, the Commodity Futures Trading Commission and the Securities and Exchange Commission have all also opened investigations into Robinhood’s conduct.

The controversy surrounding Robinhood and other brokers’ treatment of retail investors is clearly far from over. If you have any inquiries regarding these events, please contact James Pedersen ( at 914-733-7219.

[1] Muncy v. Robinhood Securities, LLC et al, No. 21-cv-1729 (D.N.J.).

[2] See, e.g., Daniels v. Robinhood Financial, LLC et al, No. 21-cv-290 (D. Colo.) (bringing suit against Robinhood as well as TD Ameritrade, Charles Schwab, and other brokers.