On Thursday, April 16, Beasley Allen lawyers filed a class action lawsuit on behalf of all users of the Robinhood online trading platform after the FinTech company’s trading software failed, causing outages that left investors locked out of their accounts during major market moves. Our Consumer Fraud Section lawyers Dee Miles, James Eubank, and Leslie Pescia partnered with Jennie Anderson of Andrus Anderson, LLP to represent the investors.
“Robinhood has spent millions on advertising to attract investors but failed to build an adequate system to handle the clients they gained. When it failed, Robinhood clients watched helplessly with no backup method to access their investments and protect their savings,” said Dee Miles, Head of the Consumer Fraud / Class Action / Commercial Litigation Section of our firm.
Robinhood, founded in 2013, brought millions of users to their online trading service with the promise of commission-free trades that save money for investors and account access through a computer or mobile device. Instead of charging trade commissions, Robinhood makes money in a number of other ways. It charges for premium “Gold” memberships and collects interest on idle cash and margin loan balances, but according to revenue estimates, half of Robinhood’s revenue comes from payments from high frequency trading firms who purchase the right to fill Robinhood client orders.
COVID-19 concerns began to rattle U.S. stock markets in late February. Approximately three minutes after markets opened on March 2, Robinhood’s tech infrastructure failed causing a system-wide outage that blocked all users from their accounts. Robinhood had no backup system and no live brokers to handle orders in the event of an outage. After Robinhood failed, U.S. markets surged all day, with the Dow Jones Industrial Average logging its largest single-day point gain in Dow history at the time. The system failed again for parts of the trading days on March 3 and March 9.
The lawsuit, filed in the Northern District of California where Robinhood is headquartered, alleges that Robinhood breached its contract to provide safe and secure investing services to its clients. It further alleges that Robinhood was grossly negligent for not anticipating the demand and for having no contingencies for outages in the form of either backup computer systems or personnel to handle client orders.
As our own James Eubank explains it, “Robinhood blamed the outage on record trading activity and record client signups, but it doesn’t add up. Trading volume was actually higher in the day before the outage, and Robinhood should be well aware of how many clients they are adding to their own service. The system simply wasn’t adequately designed and failed when it was needed most. The outages show they focused more on revenue generation than investor safety, and no one was warned of the risk. This lawsuit will hold Robinhood accountable and ensure that investor protection is prioritized.”
The proposed class consists of all Robinhood users at the time of the outage. The exact number is not known, but Robinhood announced on Dec. 4, 2019, that the service had reached 10 million users.
The class action lawsuit, Gwaltney v. Robinhood Markets, Inc., et al. was filed in the United States District Court for the Northern District of California, case number 3:20-cv-02665. We will keep our readers posted as this case develops.