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Lawsuits & Litigation

Robinhood Faces Class Action Immediately After Paying $65m Fine to SEC

— December 25, 2020

Shortly after agreeing to pay a $65 million federal fine, financial tech start-up Robinhood has been targeted by a new class action lawsuit.

Robinhood, a phone-based application, allows its users to transfer money from a bank account onto the company’s platform. Consumers are then able to buy and sell stocks for free. Launched in 2013, Robinhood has at least 13 million users.

However, the class action claims that many Robinhood consumers could have gotten better rates and deals if the company had been more transparent about its profits.

The San Francisco Business Times notes that the complaint was filed Wednesday in a Bay Area court.

According to the Business Times, the class action claims that Robinhood did not inform platform users that it was selling consumer stock orders to trading firms. This complaint is similar to the $65 million case that Robinhood recently settled with the United States Securities and Exchange Commission, or SEC.

Calculator and paperwork; image via Pxhere, CC0.
Calculator and paperwork; image via Pxhere, CC0.

In the filing, lead plaintiff Justin William Lemon—a New Hampshire resident—said that Robinhood had failed to inform him and other consumers that its business operations rely on “payment for order flow.” In other words, Robinhood turns a profit by receiving money from market traders, who pay to executive trades made over the app.

“These payments,” the lawsuit states, “often came at the expense of the consumer.  While [Robinhood] promoted and advertised an easy-to-use ‘commission free’ trading platform, [the company] profited extensively from unsuspecting consumers who executed trads on its platform at inferior execution prices compared to what consumers would have received from Robinhood’s competitors.”

The lawsuit, says the Business Times, names as defendants both Robinhood Financial LLC and Robinhood Securities LLC. Both companies are based in Menlo Park, Maryland, but operate primarily out of California.

Robinhood purportedly refused the San Francisco Business Times’s request for comment. However, the company had previously claimed that it had or would reform its business model following the SEC settlement.

In a statement, the company claimed that it was now “fully transparent in our communications with customers about our current revenue streams.”

The $65 million fine, explained Chief Legal Officer Dan Gallagher, arose from “historical practices that do not reflect Robinhood today.”

The app is also facing a legal challenge from Massachusetts’ securities commission, in which regulators claim the company violated state statutes by “aggressively marketing itself to Massachusetts investors without regard for the best interests of its customers and failing to maintain the infrastructure and procedures necessary to meet the demands of its rapidly growing customer base.”


Robinhood Financial fined $65 million by SEC for misleading users

Robinhood Financial hit with class-action suit for selling stock orders

Robinhood hit by new class-action lawsuit

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