Financial trading app Robinhood was served a federal class-action lawsuit on Thursday, after the app restricted trading in GameStop and other stocks surging in value from investors on social media.
Robinhood’s decision came after members of a Reddit forum called WallStreetBets banded together to buy stocks in GameStop, a once-popular video game store. The Wall Street hedge fund Melvin Capital had placed short bets against GameStop, however the group of Reddit investors bought into the stock and upended Melvin’s bets, forcing the fund to accept a $2.75 billion cash infusion. Meanwhile, the value of GameStop stock has soared, and investors are now employing the same tactics to boost the stock of other formerly obscure companies.
However, Robinhood on Thursday restricted trading for GameStop as well as BlackBerry, Nokia, and AMC Theaters, all of which have grown in popularity following the GameStop surge. Robinhood states that its “mission is to democratize finance for all,” and allows investors to trade on the app without a commission.
The Southern District of New York filed its lawsuit against Robinhood for “purposefully, willfully, and knowingly removing the stock ‘GME’ [GameStop] from its trading platform in the midst of an unprecedented stock rise, thereby deprived [sic] retail investors of the ability to invest in the open-market and manipulating the open-market.”
The volatility caused by the surge in investments in previously unpopular stock caused the CEO of the NASDAQ, Adena Friedman, to call for financial regulators to “manage the situation.” Meanwhile, Representative Patrick McHenry (R., N.C.), the top Republican on the House Finance Committee, said he would ask committee head Maxine Waters (D., Calif.) for a hearing on the “new world” of investment, Punchbowl News reported.
The Securities and Exchange Commission noted the “volatility in the options and equities markets” on Wednesday, saying in a statement that the agency was “working with our fellow regulators to assess the situation.”