The Rise and Fall of the “Meme Stock”: A Look at the Backlash Following Robinhood’s Decision to Restrict the Trade of Certain Stocks.

Photo Credit: https://seekingalpha.com/article/4371893-gamestop-short-squeeze-part-ii (last visited May 13, 2021).

Written By: Ken Thompson
Member, American Journal of Trial Advocacy

          The start to 2021 brought in a new era of trading to Wall Street in the form of “meme stocks.”[1]  Investors—inspired by social media forums like Reddit’s ‘/r/wallstreetbets’—sought to raise the share price of companies like GameStop, Nokia, and AMC by purchasing shares of each in massive numbers.  Hedge funds with short positions in the companies were left panicking as Gamestop in particular increased from a mere $4 to $483 per share within a six-month period.[2]

            However, on Jan. 28, 2021 several investing platforms took controversial action that left some wondering if they were catering to the interests of the hedge funds, rather than the individual investor.  Beginning on the 28th, Robinhood blocked users from purchasing shares of the “meme stocks” listed above, while hedge funds continued to buy and sell the stocks.[3]  After this restriction, prices fell sharply as more and more “meme stock” investors jumped ship.[4]  Hedge funds could finally breath again, as what seemed to be a catastrophic loss was averted and prices finally simmered to more manageable levels.

            A rare outcry of bipartisan support from Ted Cruz and Alexandria Ocasio-Cortez sums up public perception of the events, with AOC stating the move was “unacceptable” and Cruz echoing the same.[5]  Following that outcry, the House Financial Services Committee held a hearing on February 24 to determine what, if any, congressional response it might take.[6]  At the hearing, Robinhood defended itself by claiming that the massive volume of purchases increased its collateral and deposit requirements set by its Clearinghouse and there was “no other choice.”[7]  While some claim that the purpose of the hearing was theatre, one lawmaker concluded afterwards that the “episode expose[d] a serious threat to our financial system.”[8]

          What’s more, as of February 17, 2021 over 90 lawsuits have been filed against Robinhood in district courts across the country within a month.[9]  Prior to the trading restriction, Robinhood was involved in only 50.[10]  The majority of these complaints assert a Sherman Act violation, among other claims like breach of contract, etc.  As an example, Diamond v. Robinhood Financial, LLC, alleges that Robinhood colluded with hedge funds to eliminate competition “in the price of certain stocks” and allowed the hedge funds to “recoup monies lost from Robinhood customer’s purchasing stocks that [the hedge funds] had large short sale positions in,” leading to violation of the act.[11]  In addition, the class, comprised of all Robinhood customers in the United States, seeks treble damages for the “unreasonable restraint of trade.”[12]

          Unfortunately for the plaintiff class, there are a few problems ahead.  For one, while brokers owe fiduciary duties to investors, that “does not necessarily mean that they must carry out trades in a given security.”[13]  There’s another wrinkle for any breach of contract claim laying in the fine print.  Specifically, the User Agreement that each investor is presented with when they create an account stating that Robinhood “may at any time, in its sole discretion and without prior notice to [m]e, prohibit or restrict [m]y ability to trade securities.”[14]  Based on that language, the lawsuits “are likely subject to dismissal.”[15]  Therefore, any successful claim likely needs to show that Robinhood acted in bad faith by colluding or giving preference to particular investors.[16]

          To demonstrate that the restrictions were the product of collusion, the complaint in Diamond stitches together a relationship between Melvin Capital, a hedge fund with a $12,500,000,000 short position in GameStop, and Robinhood.[17]  Melvin’s position in GameStop and the subsequent rise of the “meme stock” caused it to lose an enormous amount of its net worth—close to 30%.  In order to save the hedge fund two other hedge funds invested in Melvin, Citadel and Point72 Asset Management, which sent $2,750,000,000 Melvin’s way.[18]  Importantly, the complaint notes that around 40% of Robinhood’s revenue comes from Citadel.[19]  The complaint attacks Robinhood by arguing that the restriction came about for “anti-competitive” reasons and “was nothing more than a blatant conflict of interest and obvious monopolistic activity.[20]  Robinhood’s CEO Vlad Tenev strongly denies any collusion took place, and instead insists that such claims are “absolutely false” and “market-distorting.”[21]

          As a final challenge for these plaintiffs, the Robinhood User Agreement contains an Arbitration Clause, requiring any dispute to remain outside the courtroom.[22]  However, this is not an absolute bar as Robinhood is a member of the Financial Industry Regulatory Authority (FINRA).[23]  Under FINRA there are some exceptions to an arbitration clause for class actions, but how a judge will rule on that issue is anyone’s guess.[24]  That being said, the U.S. Supreme Court ruled “in several cases to allow companies expansive use and application of arbitration clauses.”[25]

          One thing is for certain, social media has just as much play in the lawsuit as it did in the meteoric rise of the “meme stock.”  Redditors immediately created a new subreddit entitled ‘r/ClassActionRobinHood’ in order to “coordinate efforts for a lawsuit.”[26]  The subreddit gained over 31,000 new members in 24 hours.[27]  One lawyer described the participation as “unprecedented.”[28]

          With so many factors at play here, like the enforceability of the arbitration clause, the assertions of collusion, calls for government regulation, and the interplay between Wall Street and social media, these lawsuits will likely be a fixture on financial news outlets and the legal community for some time.  Regardless, the rise and fall of the “meme stock” in the early days of 2021 served to entertain and fascinate us all.


[1] Nicole Banas, Robinhood faces revised suit over GameStop ‘short squeeze’, (Feb. 12, 2021).

[2] Megan Leonhardt, Robinhood now faces roughly 90 lawsuits after GameStop trading halt—here’s how customers might actually get their day in court, CNBC (Feb. 17, 2021),

[3] Banas, supra note 1.

[4] Id.

[5] Alexandria Ocasio-Cortez (@AOC), Twitter (Jan. 28, 2021, 10:36 AM),

[6] Ben Popken, Under fire, Robinhood CEO apologizes to Congress for restricting trading, NBC News (Feb. 18, 2021), https://www.nbcnews.com/business/business-news/under-fire-robinhood-ceo-apologizes-congress-restricting-trading-n1258285.

[7] Robinhood CEO Testimony Transcript GameStop Hearing February 18 (Feb. 18, 2021), https://www.rev.com/blog/transcripts/robinhood-ceo-testimony-transcript-gamestop-hearing- february-18.

[8] Id.

[9] Leonhardt, supra note 2.

[10] Id.

[11] Class Action Complaint, Diamond v. Robinhood Financial, LLC, No. 6:21-cv-00207 (M.D.Fla. Jan. 29, 2021).

[12] Id.

[13] Jeff John Roberts, Robinhood is being sued over the GameStop meltdown. Do investors have a case?, Fortune (Jan. 28, 2021), https://fortune.com/2021/01/28/robinhood-class-action-lawsuit-gamestop-gme-amc-stocks-walstreetbets-halted-purchasing/.

[14] Tom Hals, Analysis: Robinhood and Reddit protected from lawsuits by user agreement, Congress, Reuters (Jan. 30, 2021), https://www.reuters.com/article/us-retail-trading-robinhood-liability-an/analysis-robinhood-and-reddit-protected-from-lawsuits-by-user-agreement-congress-idUSKBN29Z0HI.

[15] Chris Dolmetsch, Robinhood lawsuits: Traders face hurdles to prove wrongdoing, Property Casualty 360 (Jan. 29, 2021), https://www.propertycasualty360.com/2021/01/29/robinhood-vs-traders-lawsuits-face-hurdles-to-prove-wrongdoing/?slreturn=20210124201153.

[16] Id.

[17] Id.

[18] Id.

[19] Id.

[20] Id.

[21] Robinhood CEO Testimony Transcript GameStop Hearing February 18, supra note 7.

[22]Marcia Brown, How the Supreme Court Protects Robinhood, The American Prospect (Feb. 2, 2021), https://prospect.org/justice/how-the-supreme-court-protects-robinhood/.

[23] Id.

[24] Id.

[25] Id.

[26] Fenado Alfonso III, Class-action lawsuit filed against Robinhood following outrage over GameStop stock restriction (Jan. 29, 2021), https://www.cnn.com/2021/01/28/investing/lawsuit-robinhood-gamestop-wallstreetbets/index.html.

[27] Id.

[28] Id.

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