Robinhood Hit With Breach of Contract Fine – Could This be an Opening for Further Litigation?

Mandatory Credit: Photo by Erik Pendzich/Shutterstock (12237521x)Robinhood (HOOD) signage and promotion to celebrate the companies initial public offering (IPO) on Wall Street in New York.
Erik Pendzich/Shutterstock / Erik Pendzich/Shutterstock

In what might represent the first in a long series of lawsuits, the Financial Industry Regulatory Authority (FINRA) ruled that Robinhood was liable for almost $30,000 in damages to a retail investor following losses he suffered due to the trading app’s trading restrictions of certain stocks last year.

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In his claim against Robinhood, Jose Batista, a 27-year-old retail investor, asserted breach of contract, breach of the implied covenant of good faith and fair dealing, negligence, breach of fiduciary duty, unjust enrichment, non-disclosure or concealment, intentional interference with prospective economic advantage and negligent interference with prospective economic advantage, according to the FINRA filing.

“The causes of action relate to Respondents placing trade restrictions on numerous stocks on Jan. 28, 2021, including, but not limited to “KOSS” and “EXPR” on its trading platforms in the midst of an unprecedented stock rise,” FINRA said, awarding Batista $29,460.77 in compensatory damages.

Jorge Altamirano, partner at the law firm Iorio Altamirano, which represented Batista at the FINRA hearing, along with August M. Iorio, told GOBankingRates: “Mr. Batista is pleased with the arbitration award secured by our firm, Iorio Altamirano LLP. The award is a big win for retail investors — particularly younger, self-directed investors.”

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“The award also offers hope to the thousands of Robinhood users who may now see a potential road to recovering their investment losses and encouraging news that arbitration panels are willing to hold online broker-dealers accountable,” Altaminaro added.

GOBankingRates reached out to Robinhood, which declined to comment.

Robinhood halted trading in January on stocks popular on the Reddit subthread r/WallStreetBets, and the app quickly faced a slew of lawsuits. In February, the company faced at least 33 federal lawsuits filed in 10 states, including California, Florida, Illinois and New York, with most seeking class-action status and alleging violations of securities laws or consumer protection statutes, as GOBankingRates reported at the time.

Retail traders on the subreddit group WallStreetBets, who were intent on taking down hedge-fund short-sellers by buying shares of stocks that didn’t seem to have much of a chance of success, were unable to trade stocks, including GameStop, AMC Entertainment and Bed Bath & Beyond.

What makes Batista’s case different and might set a legal precedent is that it is narrow and specific, choosing to focus on how the restrictions impacted his shares in headphone maker Koss fashion brand Express Inc. as opposed to his whole portfolio, MarketWatch explains.

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In turn, the platform could potentially be at risk of facing an avalanche of similar laser-focused cases, although some experts say that this might not be Robinhood’s foremost issue.

Peter Cohan, a senior lecturer at Babson College and author of “Goliath Strikes Back,” told GOBankingRates that this case will not be a big threat to Robinhood.

“It faces a much bigger problem — coming up with a new source of revenue to pick up the slack from declining crypto revenue,” Cohan said. “The FINRA judgement was a very specific case where the client could prove how much he lost due to Robinhood trading restrictions on those stocks.”

“The $30,000 amount that Robinhood has to pay would be small change even if 1,000 clients were able to get a similarly favorable arbitration decision,” he added.

In June, FINRA fined Robinhood $57 million and ordered the firm to pay approximately $12.6 million in restitution, plus interest, to thousands of harmed customers. The sanctions represent the largest financial penalty ever ordered by FINRA and reflect the scope and seriousness of the violations, the regulator said in a statement at the time.

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In response to the fines, Jacqueline Ortiz Ramsay, Robinhood’s head of public policy communications, made a statement to GOBankingRates at the time:

“Robinhood has invested heavily in improving platform stability, enhancing our educational resources and building out our customer support and legal and compliance teams. We are glad to put this matter behind us and look forward to continuing to focus on our customers and democratizing finance for all.”

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About the Author

Yaël Bizouati-Kennedy is a full-time financial journalist and has written for several publications, including Dow Jones, The Financial Times Group, Bloomberg and Business Insider. She also worked as a vice president/senior content writer for major NYC-based financial companies, including New York Life and MSCI. Yaël is now freelancing and most recently, she co-authored  the book “Blockchain for Medical Research: Accelerating Trust in Healthcare,” with Dr. Sean Manion. (CRC Press, April 2020) She holds two master’s degrees, including one in Journalism from New York University and one in Russian Studies from Université Toulouse-Jean Jaurès, France.
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