In the roughly three weeks since Robinhood restricted trading of certain securities, including GameStop, investors have filed more than 90 federal lawsuits generally claiming that the trading app's actions were unfair and unlawful, court records reviewed by CNBC's Make It reveal.
Yet consumer advocates and lawmakers including Sen. Elizabeth Warren, D-Mass., worry that users who have filed these suits will not get their day in court. That's because Robinhood's user agreement contains a clause that requires disputes by users to be settled in arbitration and not in the civil court system.
Most major corporations and employers, including Robinhood, have arbitration clauses in their "terms of service" agreements that require customers to litigate their disputes outside the court system. But Robinhood also must follow regulations that do permit class-action suits until a judge rules otherwise, creating a potential pathway for these suits to move forward.
Although each case varies slightly, most of the lawsuits filed over the last few weeks are on behalf of app users who say they suffered financial setbacks and missed opportunities as a result of Robinhood and other trading platforms sharply restricting the number of shares an individual could buy of GameStop, and other stocks such as AMC and Nokia, starting on Jan. 28.
GameStop's stock, which was trading at about $4 per share six months ago, hit a high of $483 per share on Jan. 28 spurred by its promotion on the Reddit group WallStreetBets and others on social media.
Robinhood's actions were undertaken "purposefully and knowingly to manipulate the market for the benefit of people and financial institutions who were not Robinhood customers," one early class action lawsuit in Massachusetts alleges.
The number of federal lawsuits alone filed in the past month are nearly double the roughly 50 suits filed against Robinhood in the 12 months before the trading halt. And already, several thousand people have signed up with DoNotPay.com to automatically join a class action lawsuit against Robinhood.
Robinhood, in a statement, said the restrictions were due to the amount it's required to deposit with trading clearinghouses, which had reached hundreds of millions of dollars because of the volatility of the share prices and trading volumes.
At this point, it's too early to know whether these lawsuits will prove to be a nuisance or a real threat to Robinhood, which primarily operates as a broker-dealer. The company declined to comment on Friday regarding the lawsuits the company is currently facing.
"What is most out of the ordinary about this whole fiasco is that Robinhood started to prohibit trading without any regulatory action requiring a prohibition," says Adam Gana, managing partner of Gana Weinstein LLP and a lawyer who specializes in securities litigation and arbitration.
"If there is a functional problem with the purchase of a security and the Securities and Exchange Commission halts trading, that's one thing," Gana says. "But for a broker-dealers to be able to arbitrarily halt trading on cherry-picked securities is an entirely different matter that needs to be investigated."
In addition to facing lawsuits, Robinhood is also fielding questions from lawmakers and regulators over the situation. Both the Senate and House are set to hold hearings on the matter, with Robinhood's CEO Vlad Tenev set to testify on Thursday in front of the House Financial Services committee. Regulators are also reportedly investigating the situation for potential violations related to market manipulation.
"Robinhood has a responsibility to treat its investors honestly and fairly, and provide them with access to the market under a transparent and consistent set of rules. It is deeply troubling that the company may not be doing so," Senator Warren said earlier this month.
Mandatory arbitration, sometimes referred to as forced arbitration, is a form of dispute resolution that generally requires consumers to handle any legal issues outside the court system. Instead of going to court, disputes are heard and ruled on before an arbitrator or a panel of arbitrators.
Proponents of arbitration say that it's typically faster and cheaper than having your case work through the court system. But opponents argue that this system can be unfair to consumers and that the arbitration system can hide systemic problems because cases are usually not public and many times require parties to sign non-disclosure agreements.
Robinhood's arbitration provision reads: "This Agreement contains a pre-dispute arbitration clause. By signing an arbitration agreement, the parties agree as follows: (1) All parties to this Agreement are giving up the right to sue each other in court, including the right to a trial by jury, except as provided by the rules of the arbitration forum in which a claim is filed…"
But that doesn't mean all 90 of the lawsuits are going to be immediately shuffled into arbitration. Robinhood primarily operates as a broker-dealer and is regulated by the Financial Industry Regulatory Authority.
Under FINRA rules, broker-dealers can't compel investors involved in a class action lawsuit into arbitration unless class certification is denied, the class is decertified or the member is no longer participating in the class action.
"The bottom line is that they can't force people to not participate in the class action and to go to arbitration instead," says Mark Strauss, a securities litigation and whistleblower attorney based in New York.
But just because Robinhood can't immediately force these cases into arbitration doesn't mean this dispute resolution system is out of the question. It may be difficult to prove that everyone involved in the class action suit suffered similar harms.
"The question is whether it's a proper class action," Melanie Cherdack, a Miami-based securities lawyer with the law firm Genovese Joblove and Battista. In the Robinhood case, investors were trying to trade at different times, attempting to buy and sell different types of stocks and securities, and had been involved in the trading activity for varying lengths of time.
Additionally, although many of the lawsuits have common claims, such as breach of contract and negligence, several of the current class actions are alleging violations of state laws. Only a few are alleging any kind of federal claims, such as securities law violations or antitrust law violations, which could involve a national class of investors. That may make it more difficult to get a judge to approve a class, since state law violations may only affect a small portion of investors, for example.
If the lawsuits can't overcome the hurdle of getting the class certified, then many investors could face arbitration at some point.
For investors who say they were harmed by Robinhood's actions, it may be a long road ahead before they see any results.
Class-action complaints can take two to three years to resolve, if not longer. Consumers have the option to file a lawsuit, either individually or as a member of class, in federal court. But given that many Robinhood users were investing using fractional shares, the amount of potential damages per investor is likely low and could cause some attorneys to turn down individual cases, Cherdack says. That's why most of the suits so far are class actions.
And although there's a chance that some Robinhood users will end up in arbitration, some lawmakers want to give customers like them more of a choice. Last week, Rep. Hank Johnsonm D-Ga., reintroduced the Forced Arbitration Injustice Repeal (FAIR) Act.
The FAIR Act, which was originally passed by the House in September 2019 before languishing in the Senate, would eliminate companies' ability to use forced arbitration clauses in any employment, consumer, civil rights and antitrust cases and allow Americans to fight their lawsuits in federal court. If consumers and employees did want to use arbitration, they still could, but it would be a voluntary process..
While it's not clear if the legislation would affect current users' suits against Robinhood, it could give consumers more legal options in the future.
"Big businesses that already have all the power in the relationship regularly stack the deck to avoid the only thing out there that could hold them accountable — the United States justice system," Johnson said in a statement.
Senator Richard Blumenthal (D-Conn.) is expected to reintroduce the FAIR Act in the Senate this week.