Market disruption.
Colorado investor sues brokerage firms, including Robinhood, in “meme” stock controversy.
A Colorado man has filed a potential class action lawsuit against brokerage firms including Robinhood and Charles Schwab alleging the companies’ decision to limit buying of so-called “meme stocks” such as GameStop and AMC Entertainment on Thursday was blatant market manipulation that caused him and other investors to suffer massive losses.
Chance Daniels holds accounts with established brokerages such as Schwab and TD Ameritrade as well as free online trading platforms Robinhood and Webull, working as a day trader, according to attorney Kevin Hannon of Denver’s Hannon Law Firm.
On Thursday, Hannon filed a lawsuit in U.S. District Court in Denver on behalf of Daniels and “all others similarly situated” against the firms for actions they took on Thursday.
The lawsuit alleges that the brokerages intentionally created a situation where only hedge funds and other institutional investors could benefit from trades involving a variety of stocks that have become the darlings of amateur investors after gaining traction on the Reddit message board r/wallstreetbets.
The best example is GameStop, a struggling retail chain best known for buying and selling used video games that saw its stock price jump from less than $20 a share in early January to more than $400 in a matter of weeks when scores of investors jumped in. That meteoric rise cost some hedge funds billions this week. They had invested heavily in positions betting on GameStop’s value to fall — “shorting” the stock, in industry-speak.
On Thursday, Robinhood and Webull temporarily restricted new retail purchases of GameStop stock as well as stock for other companies popular with the r/wallstreetbets community such as movie theater chain AMC.
Doing so, “in the midst of an unprecedented stock rise thereby deprived retail investors of the ability to invest in the open-market, thereby manipulating the open-market,” the lawsuit says. “Numerous retail investors were forcefully stopped out of their positions by Defendants at incredibly low prices as a result of these attacks, suffering massive financial losses.”
The lawsuit alleges Schwab and TD Ameritrade, which is owned by Schwab, also froze purchases of certain meme stocks Thursday. Those companies have disputed that.
In a news release issued Friday, Schwab officials said, “Neither firm restricted buying or selling basic options. Both firms did adjust margin requirements on select stocks to ensure clients had sufficient assets to pay for stock purchases. Both firms also restricted certain advanced options strategies.”
Specifically, the release said, Schwab and TD moved the margin requirement to buy GameStop stock up to 100%. That margin adjustment started Jan. 13, according to Schwab
An attachment to the lawsuit indicated Daniels’ portfolio lost more than $71,000 in value on
Thursday. The damages the lawsuit said Daniels and others in his position sustained included not only value lost in the stocks but the value that could have been gained if they had continued to grow.
The lawsuit provided an alleged motive for the brokerages’ actions: Pleasing large institutional investment funds that either already are or may eventually be investors in the companies.
Thursday’s buying freeze sparked outrage across the retail investor community.
Matt Watkajtys, a Denver web developer who started trading on Robinhood in April with money from his stimulus check, told The Denver Post, “I’m furious at the system. We’re no longer in a free market basically.”
It caught the attention of leaders on opposite ends of the political spectrum as well. U.S. Rep. Alexandria Ocasio-Cortez, a Democratic socialist from New York, and U.S. Sen. Ted Cruz, a conservative Republican from Texas, publicly criticizing Robinhood.
Robinhood, in a blog post on its website Thursday, said the decision to limit trading temporarily on certain stocks was “a riskmanagement decision, and was not made on the direction of the market makers we route to,” referring to companies such as Citadel Securities, which also is named in Daniels’ lawsuit, although not as a defendant.
Robinhood opened up limiting buying of GameStop on other stocks Friday but is facing a substantial backlash from users as it prepares for a potential initial public stock offering of its own.