The User Agreement of Robinhood Markets Inc. will likely protect the brokerage app from a shower of lawsuits that customers have filed after blocking an insane trading meeting in companies like GameStop Corp that was fueled on social media forums.
The owners of internet platforms where a large part of the discussion took place are likewise protected from liability for users’ activities in terms of a 25-year-old law known as Section 230.
At least a dozen proposed class-action lawsuits accuse Robinhood of violating its contract with customers when it restricted trade on Thursday.
Robinhood’s users were at the center of this week’s wild rally in a handful of hedge fund shares heavily squeezed by individual investors in online chat rooms, including Reddit’s WallStreetBets.
The lawsuit, filed in federal court, alleges that the company in Menlo Park, California, violated its contractual obligation as a regulated broker to execute orders quickly and effectively.
However, Robinhood is not legally obligated to execute every trade, and the lawsuits will not succeed without evidence that the company restricts the trade for an improper reason, such as favoring certain investors, according to several legal experts.
The user agreement on Robinhood’s website states that it may “at any time, in its sole discretion and without prior notice to Me, prohibit or restrict my ability to trade securities.”
Adam Pritchard, a professor at the University of Michigan Law School, said lawsuits would be very unlikely.
“Under the contract, they can do that,” Pritchard said of the company’s decision to restrict trade. “This appears to be a major obstacle to the breach of contract claim.”
Robinhood did not immediately respond to a request for comment.
The popular commission-free trading platform branded itself as an app to empower retail investors to tackle Wall Street and democratize financing, and the trade restrictions sparked a stir and claims of treason on social media.
Robinhood said the restrictions are necessary to meet regulatory capital requirements and deposits in the clearinghouse, which vary according to volatility.
The lawsuits allege that the restrictions benefited large funds that were allegedly invested in or related to Robinhood.
But clients are unlikely to remove the preliminary court barriers to get to the point where they can claim documents and deposits to investigate Robinhood’s actions, said Ann Lipton, a professor at Tulane University Law School. .
She said attempts to sue brokers for mishandling client accounts have generally failed because of the limits set by the federal security law on filing class actions. For example, in 2019, a federal judge dismissed a proposed class action lawsuit against TD Ameritrade Holding Corp for mismanaging a tax function of certain accounts.
The judge said TD Ameritrade customers could not show that the company had broken promises or acted unfairly or maliciously.
According to the experts, the lawsuits against Robinhood have unspecified damages, including penalties, which presents another obstacle to the customers’ chances in court.
It will be difficult to prove that users suffered as a result of Robinhood’s measures because GameStop and other stocks covered by the curbs fell sharply on Thursday after the restrictions were announced, said James Cox, a professor at Duke Law School, said.
“No damage, no dirt,” Cox said.
Some of the court cases said investors were harmed because they could not cut short GameStop or speculate that the stock would fall.
But some investment firms have taken a major hit, and shares in the companies have largely recovered after Robinhood and other online brokers said they planned to lift most of the restrictions on Friday.
Melvin Capital Management and Citron Capital made big bets GameStop would drop in price and suffered huge losses as the stock rose.
While Reddit users are running the rally, the messaging platform is isolated from investment fund demands.
Social media companies are generally not liable for user activities, under a law commonly known as Section 230, a 1996 law that aims to encourage new forms of communication at the beginning of the online era.
In the early days of the internet, there were several notable cases in which companies tried to suppress criticism by suing the owners of platforms.
One involves a case against the early online service Prodigy by Stratton Oakmont, the brokerage firm depicted in the Leonardo DiCaprio film “The Wolf of Wall Street”. The court found Prodigy was liable for alleged defamatory remarks by a user because it was a publisher who moderated the content of the service.
The burgeoning internet industry was concerned that such liability would make a range of new services impossible. Congress finally agreed and incorporated Section 230 into the Communications Decency Act.
“The whole point of Article 230 is to enable sites like Reddit to allow conversations to take place,” said Eric Goldman, a professor at the Santa Clara University School of Law.
“Knowing that some conversations will be antisocial and in some cases illegal, Article 230 states that it is not the responsibility of the service that creates the venue of the conversations.”
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