Transcript of Vlog:
Hello, and welcome to Legal Briefs. I’ve been asked a lot recently “Can I sue Robinhood or some other stock or crypto exchange because it halted trading?” And, me, aiming to please, am here to answer THAT question and at the end of this video you are going to understand the issues and also why Robinhood could be in BIG TROUBLE.
A long time ago, people would ask me “Can I sue so and so?” And I used to say “Anyone can sue anyone – the question is are they going to win.” Thank God I soon realized that that is a smart-aleck answer because “Win” is of course implicit in the question. Kids, make note no one likes a smart-aleck, unless your this guy- which is, inconceivable. Anyone know the movie and Actor’s name?
So, last week while GameStop was being bumped up to crazy levels by a decentralized group of Redditfollowers, Robinhood decided to stop all trading of GameStop ostensibly because its broker couldn’t fund the trades. Hundreds of thousands of potential traders were suddenly locked out from trading GameStop and could only watch as the price came falling down and they lost money.
Now, it didn’t take long for law firms to smell the blood in the water and as I speak just a little over a week later there are ALREADY 30 class action lawsuits filed. https://www.pcmag.com/news/robinhood-now-faces-over-30-class-action-lawsuits-for-blocking-stock-buys
Man, these trial lawyers are hardcore.
That reminds me, I did a video consult with a lady today who showed me a picture of her damaged luggage and asked if she could sue the airline. I told her she didn’t have much of a case. (Off-camera: you mean I can never tell a joke again ever?)
In ANY case (look sly off-camera) back to the class actions – the question becomes are these cases “winners” that are worth your time and effort to get involved with? Before I outlined this vlog today I read a couple articles which said the lawsuits are probably not going anywhere.
Here in this story a law school professor opines that the lawsuits will not go anywhere because the Robinhood terms of use or User Agreement states that Robinhood “may at any time, in its sole discretion and without prior notice to Me, prohibit or restrict My ability to trade securities.”
That’s also the opinion I saw on Youtube from another cool legal vlog I sometimes watch (because he has awesome hair) basically saying the lawsuit fails because of the user agreement and arbitration clause. https://www.youtube.com/watch?v=9vd3iZDN_OI (21:35-21:43) And that is the opinion you might hear or read online.
BUT NOT SO FAST, I think the legal commentators underestimate the ingenuity of us trial lawyers. Not only do I think Robinhood might lose but it MIGHT be in big trouble. So let’s take a look at the lawsuit against Robinhood and I’ll explain why and how the lawyers try to get around these problems and what the big problem is for Robinhood.
This lawsuit filed in New York is a fairly typical example and I want you to look at paragraph 16 and 17. Paragraph 16 states that Robinhood “in order to slow the growth of GME and deprived their customers of the ability to use their service, abruptly, purposefully, willfully, and knowingly pulled GME from their app.” Make note of the words “purposefully and willfully” and then look at paragraph 17 where you get the bombshell allegation: “Upon information and belief, Robinhood’s actions were done purposefully and knowingly to manipulate the market for the benefit of people and financial intuitions who were not Robinhood’s customers.” Upon information and belief is legalese for “we heard and we’re kind speculating” but the allegation here in paragraph 17 is that Robinhood was essentially in cahoots with the hedge funds in order to save the HEDGE FUNDS money at the expense of the regular user – which is where things get interesting.
Because the legal commentators are correct that the Robinhood user agreement is problematic, as is the arbitration agreement. But here now we have an allegation that takes us in a completely new direction. And here’s what it opens the door for.
Let’s look down at the Causes of Action. A Cause of Action is the legal basis for a lawsuit. You don’t sue someone for “car accident” you sue them for “negligence” you have to tell the Court the legal basis. Here the first cause of action is “Breach of Contract” and that HAS to be in there and that’s what the legal commentators are focused on. But to me that’s just a side-show.
Actually we are going to go past Breach of Implied Covenant of Good Faith Dealing, right past the Count for Negligence – which I’ll just note is a good count because it gets you outside of the Contract and the user agreement defenses and such – but just a quick note that I was surprised they didn’t allege Gross Negligence which just means “really really” negligent, But perhaps the lawyer didn’t think he needed to go there because the real fight in this lawsuit is going to be the last Cause of Action: Breach of Fiduciary Duty.
This is a strong cause of action – a Breach of Fiduciary Duty cause of action alleges that the Defendant had a special relationship of trust imposed on them and here in Paragraph 59 it’s laid out “ As a provider of financial services, Robinhood at all times relevant herein was a fiduciary .. and owed Plaintiffs the HIGHEST standard of integrity in performing its financial services. “ A fiduciary is different than a regular old person who enters into an arms-length contract. A fiduciary has to almost watch out for your best interest kind of like how doctors have to watch out for their patients.
And the count for Breach of Fiduciary Duty also does something extremely important – it unlocks PUNITIVE DAMAGES. This is the KEY and in California punitive damages for Breach of Fidcuiary Duty are codified in California Civil Code 3333 and I assume it is also in New York.
Think of the damages in this case really fast: In a case against Robinhood – if you had bought $1,000 of Gamestop at the top and then were locked out of trading and 2 days later your Gamestop stock was only worth $250 – what are your damages? That’s right – $750. That’s how much money you lost because you weren’t able to sell – $750 – and that’s what Robinhood might have to pay you.
But the concept of punitive damages are completely different than breach of contract damages. Punitive damages are intended to PUNISH the Defendant and are reserved for the more egregious torts.
So look down at the Prayer for Relief and what do you see? The legal bombshell is right there in the form of Request #5 which is the request for Punitive Damages for willful, wanton, and reckless behavior.
Anyone remember the lawsuit against McDonalds where the lady spilled coffee on her lap and got $3million? The actual medical bills and pain and suffering awarded by the jury was only like $100k. But the jury then was allowed to look at McDonald’s earnings and balance sheets and decided to PUNISH McDonalds to the tune of $2.9 million.
So IF the Plaintiffs in these lawsuits can in effect take the lawsuit OUT OF the breach of contract only posture and make it past summary judgment with AT LEAST the Breach of Fiduciary Duty count intact, then the issue becomes whether there is evidence of collusion between Robinhood and Citadel or other players.
I’m not going to go into it but this article points out some interesting relationships between Robinhood, Citadel the Hedge Fund, Melvin Capital and Point72. All very interesting connections that make you go hmm. But again, do not worry brave citizens Our new Treasury of Secretary is on top of it and will protect you from these big hedgefund players.
(Oh… bleep… Wait a minute… )
In any case, back to our lawsuit, you can see maybe where the Plaintiff lawyers are taking this. If Robinhood failed its fiduciary duty to work for the best interests of traders, then punitive damages allow the traders in the class actions to ask Robinhood: 1. How much money is the company worth? 2. How exactly does Robinhood / Citadel / etc. make money off of trades? And finally, and MOST IMPORTANTLY the Plaintiffs get to ask a jury HOW MUCH MONEY WOULD THIS MULTI-BILLION DOLLAR COMPANY HAVE TO PAY TO PUNISH THEM FOR THEIR CONDUCT? How much money coming out of their bank account would get their attention and make sure they never do this again? THAT is the billion dollar question and THAT is what this lawsuit is all about – make no doubt about it.
So, Can you sue Robinhood ? Yes. DO I think the lawsuit will succeed – I qualify my answer with a “probably” but, come on, we are not children here, does anyone really think Robinhood was watching out for John Smith and his $1k investment? Or do you think they were watching out for “Other interests” like the big hedge funds that back their operation? And finally, if the answer to the breach of fiduciary question is “yes” which I think it is, I also think that Plaintiffs can make it past summary judgment on the User Agreement arguments and arbitration clauses and get to a jury.
Make no mistake, the lawsuit shows you that isn’t about a Breach of a Contract. It’s about much more than that AND with much bigger consequences.
And finally, what do you need to do? Probably nothing right away. Most class actions are opt-out versus opt-in, meaning you are automatically in it unless you opt out. But what I would suggest, if you absolutely want to pursue it, is reach out to one of the 30 Plaintiff’s law firms who filed lawsuits and provide your information for later. I would also probably suggest you try and get into a California or N.Y. action because the state laws there are much more consumer oriented and you want lawyers familiar with those.
But in any case, yes I think you can sue Robinhood et al. and now you know some of the issues that are involved. Best of luck to you and thanks for watching.
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