Robinhood's Legal Woes: Breaking The Law?

Robinhood Markets Inc. is an American financial services company that offers commission-free trades of stocks, exchange-traded funds, and cryptocurrencies. The company has faced several lawsuits and regulatory actions, with some alleging that the company is engaging in illegal market manipulation. In 2021, Robinhood restricted transactions in certain securities, including GameStop, to closing positions only. This decision led to a class-action lawsuit, with plaintiffs alleging that Robinhood had manipulated the open market and breached its contract by failing to disclose that it would randomly pull a profitable stock from its platform. Robinhood has also been fined by the Financial Industry Regulatory Authority (FINRA) for violating best execution trading laws and misleading customers about revenue sources.

Robinhood fined $1.25 million for violating best execution trading laws

Robinhood, the trading platform, was fined $1.25 million by the Financial Industry Regulatory Authority (FINRA) for violating "best execution" trading laws. FINRA, which regulates US broker-dealers, charged Robinhood with not following "best execution" practices. The regulator found that Robinhood routed non-directed stock orders to four broker-dealers who then paid it for the trades. This practice, known as payment for order flow, is not illegal, but Robinhood's methods fell outside of FINRA's guidelines.

FINRA's laws require brokerages to conduct either order-by-order reviews or implement a "regular and rigorous" review program to ensure users are getting the best prices and trade execution speed possible. Robinhood was found to have not "reasonably considered" where it could find the highest-quality trades for its users, focusing only on pre-existing routing partners that paid for orders instead of exploring alternatives. As a result, hundreds of thousands of orders each month fell outside of the firm's "regular and rigorous" review process.

Robinhood has since improved its best execution processes and established relationships with additional market makers, according to a company spokesperson. The spokesperson also noted that the issue was historic and that the firm has implemented a better way to match traders with best execution practices. Robinhood neither admitted nor denied the charges but consented to the entry of FINRA's findings.

This fine highlights the issues that can arise with payment for order flow, especially as discount brokerages are dropping trading commissions, which may impact customers' execution quality. It is important for brokerages to maintain their best execution requirements to ensure customers are getting the best prices and trade execution speeds.

This incident is not the only time Robinhood has come under regulatory scrutiny. In 2021, a Robinhood user filed a class-action lawsuit against the company after it restricted GameStop trading on its platform. The lawsuit accused Robinhood of breaching its contract and purposefully manipulating the market.

Robinhood sued for market manipulation

Robinhood, the app-based online stock trading platform, has been sued for market manipulation. The company restricted transactions in certain securities to closing positions only, including stocks such as GameStop, Bed Bath & Beyond, and AMC, to "keep customers informed through market volatility".

This move, however, resulted in an artificial market constriction, causing the prices of these securities to fall dramatically, and investors to suffer significant losses. As a result, Robinhood has been accused of purposefully manipulating the market and breaching its contract by failing to disclose that it would "randomly pull a profitable stock from its platform".

In August 2022, Judge Cecilia Altonaga of the U.S. District Court for the Southern District of Florida denied Robinhood's motion to dismiss shareholder allegations of market manipulation. The Court held that investors adequately alleged that Robinhood manipulated the market and artificially depressed share prices by restricting trading, cancelling purchase orders, and selling shares to meet margin requirements.

The outcome of this case will likely have a significant impact on the future of online securities trading regulation in the United States.

Robinhood fined $65 million for misleading customers

Robinhood, the mobile trading app provider, has been fined $65 million for misleading customers about how it makes money and for failing to secure the best sale prices for them. The company has also been fined for failing to adhere to its obligations under the bank secrecy act/anti-money laundering (BSA/AML) program.

The Securities and Exchange Commission (SEC) charged Robinhood with misleading customers about its revenue streams, which primarily come from payment for order flow. This is a practice where Robinhood receives payments from broker-dealers for routing trades to them. While not illegal, Robinhood's methods fell outside the regulatory guidelines of the Financial Industry Regulatory Authority (FINRA).

Robinhood was also accused of failing to conduct proper reviews to ensure its users were getting the best prices and trade execution speeds. The regulator, FINRA, found that Robinhood did not "reasonably consider" where it could find the highest-quality trades for its users, instead focusing on pre-existing routing partners that paid them. This resulted in hundreds of thousands of orders falling outside of the firm's "regular and rigorous" review process each month.

In addition to the $65 million fine, Robinhood was also ordered to retain a compliance consultant and make other enhancements to its business practices. The company has since improved its best execution processes and established relationships with additional market makers. Robinhood's spokesperson stated that the issues leading to the fine were a "historic problem" and not reflective of their current practices.

Robinhood has faced additional fines and scrutiny for various regulatory violations, including a $30 million fine in 2025 for failing to meet anti-money laundering, cybersecurity, and consumer protection regulations. A separate $70 million fine was also levied by FINRA in 2021 for outages and misleading customers. These incidents highlight the challenges faced by Robinhood in maintaining compliance with the complex and evolving nature of financial regulations.

Robinhood sued for restricting GameStop trading

Robinhood, a free-stock trading platform, was sued by its customers for restricting the trading of GameStop stocks. The company was named as a defendant in a pair of federal lawsuits filed in New York and Chicago. The lawsuits were filed by Robinhood customers Brendon Nelson, of Massachusetts, and Richard Joseph Gatz, of Naperville, Illinois.

The legal action came after Robinhood restricted the trading of GameStop stocks, which saw its share price spike by 700% in two weeks. The company stated that in some cases, amateur investors would only be able to sell their positions and not open new ones. This move was in reaction to the wild investment in GameStop, which had incurred huge losses for Wall Street investors and hedge funds with short positions.

The New York lawsuit claimed that Robinhood had breached its contract and failed to disclose that it "was going to randomly pull a profitable stock from its platform." It also accused the company of negligence and of breaching its fiduciary duties. The Chicago lawsuit claimed that Robinhood's decision to halt the trading of GameStop and other stocks was "to protect institutional investment at the detriment of retail customers."

Robinhood responded by stating that they acted "in light of recent volatility" and that they continuously monitor the markets and make changes where necessary. The company also raised margin requirements, which increase the amount of money an investor using leverage and derivatives must have in their brokerage account after a stock purchase.

The lawsuits and restrictions on trading brought about bipartisan condemnation from Congress, with Representative Alexandria Ocasio-Cortez and Senator Ted Cruz expressing their concern. The controversy surrounding Robinhood and the trading of GameStop stocks highlights the complex dynamics between retail investors, Wall Street, and the role of trading platforms in the stock market.

Robinhood's user agreement and the likelihood of a successful class-action lawsuit

Robinhood, the commission-free stock trading platform, has faced scrutiny and legal action for its practices. In 2019, Robinhood was fined $1.25 million by the Financial Industry Regulatory Authority (FINRA) for violating "best execution" trading laws. FINRA's laws oblige brokerages to conduct either order-by-order reviews or implement a "regular and rigorous" review program to ensure users get the best prices and trade execution speed possible. Robinhood was found to have routed non-directed stock orders to four broker-dealers who paid it for the trades, a practice known as "payment for order flow." While this practice is not illegal, Robinhood's methods fell outside the agency's guidelines.

In January 2021, Robinhood restricted transactions in certain securities, citing the need to "keep customers informed through market volatility." This resulted in a significant drop in the prices of these securities, causing losses for investors. The Rosen Law Firm announced an investigation into potential market manipulation claims against Robinhood and prepared a class-action lawsuit. The lawsuit includes investors who held common stock in specific companies and sold such shares at a loss between January 28, 2021, and February 4, 2021.

The United States District Court for the Southern District of Florida denied the motion to dismiss, allowing the market manipulation class action to proceed. The court held that investors adequately alleged that Robinhood manipulated the market and artificially depressed share prices by restricting trading, cancelling purchase orders, closing out call options early, and selling shares to meet margin requirements. This led to a significant drop in share prices, causing investors to sell their shares at a loss.

The likelihood of a successful class-action lawsuit against Robinhood depends on several factors. Firstly, the court will consider whether Robinhood's user agreement includes any clauses that may release the company from liability or require users to resolve disputes through arbitration. Secondly, the strength of the evidence demonstrating Robinhood's manipulation of the market and the impact on investors' losses will be crucial. The court's decision to uphold investors' market manipulation claims indicates that the evidence presented was sufficient to proceed with the lawsuit.

Additionally, the legal precedent for similar cases and the effectiveness of the plaintiffs' legal representation will play a role in the outcome. The Rosen Law Firm has a track record of success in securities class actions and has achieved significant recoveries for investors in the past. Overall, while the outcome of any lawsuit is uncertain, the progression of the case thus far suggests that the class-action lawsuit against Robinhood has a reasonable chance of success.

Frequently asked questions