robinhood app

Judge Cecilia Altonaga from the Southern District Court of Florida has given investors the green light to pursue charges against the US-based retail trading platform Robinhood Markets for market manipulation as part of a class-action lawsuit concerning last year’s so-called “meme-stock” incident.

Even though other claims were dismissed by Judge Altonaga, it appears that the District Court magistrate saw enough evidence to support that Robinhood may have tried to exert some influence on the price of AMC Entertainment (AMC), GameStop (GME), and another seven stocks for its benefit by concealing its capital and liquidity shortage.

Why is This Broker Being Sued by Investors?

Several lawsuits have been brought against the trading platform as investors felt it acted against their interests during the so-called “meme frenzy” of January-February 2021 when the price of the stocks mentioned above started to surge on the back of coordinated efforts from retail traders who frequented the Reddit messaging board called Wall Street Bets.

Multiple investment funds that were betting against these companies by borrowing shares to gain if the price declined experienced severe losses due to the incident and, in the midst of that chaos, Robinhood unilaterally decided to prevent users from buying more shares and options by citing the prevailing volatility that the securities were experiencing back then.

Investors interpreted this as a plot against their movement and accused Robinhood via social media of conspiring with hedge funds and other market participants who stood to lose from the situation.

Also Read: eToro vs Robinhood – Which is Best in August 2022

Judge Altonaga dismissed claims concerning that alleged conspiracy along with others related to a breach in the company’s fiduciary duty. In addition, the possibility that Robinhood manipulated the market to prompt investors to sell their shares was also thrown out.

Moving forward, investors will have to present enough evidence to support that the company manipulated the markets by canceling buy orders and closing out options trades without the explicit permission of its users.

Robinhood responded to the ruling by stating that they continue to believe that they took the appropriate actions to support their customers back then.

“The court has not yet made any findings of fact or ruled on the merits — and we will continue to vigorously defend ourselves in this matter”, stated Cheryl Crumpton, the company’s associate general counsel of litigation and regulatory enforcement, Reuters reported.

Robinhood Lays Off 23% of Its Workforce as COVID Tailwinds Fade

Setbacks in the legal front are just one of the many issues that Robinhood has had to deal with recently as the company has also experienced its fair deal of pain during the latest downturn in the financial markets.

A sharp decline in the value of cryptocurrencies and equities has depressed the firm’s financial performance so far this year and has resulted in a 41% loss for Robinhood (HOOD) stock since 2022 started.

Roughly a week ago, the Chief Executive Officer of the trading platform, Vlad Tenev, informed the public that the company was forced to lay off 23% of its workforce as a previous 9% target fell short of shoring up the firm’s finances during these trying times.

The company cited a deterioration of the macroeconomic backdrop, including elevated inflationary pressures, and the resulting crypto market crash as the leading causes of this decision to shrink their organizational structure.

In addition, Tenev acknowledged that the company overestimated the impact that the COVID-19 pandemic would have on the behavior of retail traders as they initially believed that the elevated trading volumes that the platform experienced during lockdowns were going to persist well after the crisis was over.

Led by this belief, the management went on a hiring spree and has now been forced to roll back that decision in an effort to improve the company’s bottom-line performance.

During the second quarter of its 2022 fiscal year, Robinhood reported a 52% decline in transaction-based revenues, a net loss of $1.95 billion, and negative free cash flows of approximately $1.26 billion.

In addition, monthly active users (MAUs) experienced their fifth consecutive quarter of sequential negative growth as they dropped to 14 million while assets under custody dropped from $102 billion in Q2 2021 (the company’s record for this metric thus far) to $64 billion.

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