ATLANTA (CN) — A federal appeals court issued a ruling Thursday dismissing claims brought by users of the stock trading app Robinhood alleging they lost money from the platform's decision to restrict purchases of so-called "meme stocks" on its platform for one week in January 2021.
The group of Robinhood investors sued the app in September 2021, claiming that restricting customers’ ability to buy the stocks, but not their ability to sell them, stopped them from acquiring an asset that would have continued to increase in value.
As stockholders, the plaintiffs also alleged that Robinhood’s ban on purchasing meme stocks caused the price of their stocks to fall and forced them to sell their shares at lower prices.
"The plaintiffs fail to state a claim — their contract with Robinhood gives the company the specific right to restrict its customers’ ability to trade securities and to refuse to accept any of their transactions. Because Robinhood had the right to do exactly what it did, the plaintiffs’ claims in agency and contract cannot stand," U.S. Circuit Judge Britt Grant wrote for the unanimous decision.
"And under basic principles of tort law, Robinhood had no tort duty to avoid causing purely economic loss. We thus affirm the district court’s dismissal of the claims."
During the pandemic, viral popularity and heightened social sentiment toward struggling companies such as GameStop, AMC Entertainment, Blackberry and Bed, Bath & Beyond drew in small investors in retail, who purchased their beat-down stocks in huge numbers.
Large hedge funds and institutional investors had bet these stocks would decline in value, so the mass rush to purchase cheap "meme stocks" led to a dramatic increase in their share prices. GameStop’s stock, for example, skyrocketed from 65 cents in April 2020, near the start of the pandemic, to more than $120 by January 2021.
This "short squeeze" resulted in a highly volatile securities trading market, with the prices of certain stocks varying wildly by the hour.
Multiple retail brokers, including Robinhood, grew concerned about the rapidly changing circumstances and their ability to meet fluctuating collateral and daily deposit requirements.
There is a risk for any person who buys a stock on the app that stems from a two-day wait between when the National Securities Clearing Corporation agrees to sell a stock to Robinhood and when it actually gets the money from the individual customer on the app.
As a result clearing brokers like Robinhood Securities must post their own money — not their customers' — as collateral every day, with severe penalties for failing to do so. The amount of collateral posted varies depending on the amount of risk that comes from both the volume of trading and the volatility of the stock price.
And with the sudden surge in demand for certain meme stocks with rapidly changing prices, Robinhood suddenly needed a lot more cash for its collateral.
In a span of three days, Robinhood Securities incurred both a deposit surplus of $11 million and a deposit deficit of over $3 billion. That's when the company chose to curb meme stock purchases on its platform for a week.
U.S. District Judge Cecilia Altonaga in the Southern District of Florida dismissed the case in January 2022, finding Robinhood's actions were pursuant to its customer agreement, which permits the company to restrict customer trading "at any time, in [their] sole discretion and without prior notice."
The group of investors appealed and argued to the 11th Circuit in March that the court's decision opens the door for Robinhood to take virtually any action "to advance its own profits."
Their suit sought to represent two nationwide classes: one of Robinhood customers who were in some way affected by the restriction, and another of all persons in the United States who sold any meme stocks during a particular period, whether or not they personally traded through the app. They argued that California law should apply to their implied contract claims, but that Florida law should apply to their other claims of negligence, bad faith and breach of fiduciary duty.
Judge Grant, a Donald Trump appointee, again sided with the lower court on that argument: "Like the district court, we think that California and Florida law point to the same outcome," he wrote.
Grant was joined by the Obama-appointedd U.S. Circuit Judge Jill Pryor and U.S. District Judge Corey Maze, sitting by designation from the Northern District of Alabama.
While the three-judge circuit panel agreed that stockbrokers are agents of their clients and thus owe them certain fiduciary duties, they turned to Robinhood's customer agreement to determine the extent of those duties based on the contractual language.
They found that based on the customer agreement, Robinhood did not assume a duty to act in its customers’ best interests in determining whether to accept their trade requests. As customers, they agreed to give Robinhood the right to "at any time, in its sole discretion and without prior notice," to restrict their ability to trade securities and execute any transactions.
According to the circuit panel's ruling, Robinhood has no obligation not to cause its customers' economic loss, despite the investors' argument that the company "courted novice investors and knew of the risks inherent in its capital requirements."
The judges noted Robinhood is a non-discretionary broker that simply executes trade requests submitted by its customers, and does not offer any special advice or skills for its customers to depend upon.
"When Robinhood restricted its customers’ ability to buy meme stocks, it took a sizable — and perhaps justifiable — hit in the court of public opinion. But in this court, Robinhood is only accountable for specific legal duties," Grant wrote in the ruling.
"Whether in agency, contract, or tort, the plaintiffs’ amended master complaint did not adequately allege that Robinhood breached a state common-law duty."
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