Robinhood Faces Legal Blow in Massachusetts Fiduciary Battle
Robinhood, the brokerage known for its commission-free model, has encountered a significant legal setback in its battle against Massachusetts Secretary of State, Bill Galvin. On Friday, the Massachusetts Supreme Judicial Court (SJC) ruled in favor of the state’s fiduciary duty rule, which lies at the core of the case, as per Reuters’ report.
Back in late 2020, Galvin launched legal action against Robinhood, accusing the online broker of failing to adequately safeguard clients and their funds. Galvin argued that Robinhood’s approach of treating trading like a game and employing tactics to attract less experienced traders went against its responsibilities. A notable example was the platform’s use of confetti animations on traders’ screens after executing trades.
Galvin further contended that these alleged breaches violated the state’s upgraded fiduciary duty rule, implemented in early 2020 to elevate investment advice standards. This prompted his efforts to revoke Robinhood’s broker-dealer license.
However, the following year saw a different outcome, with the Suffolk County Superior Court in Boston ruling in favor of Robinhood. The court cited the supremacy of federal laws over state regulatory mandates. Judge Michael Ricciuti also deemed Galvin’s attempt to enforce conflicting state regulations as exceeding his jurisdiction.
In May a legal battle between Galvin and Robinhood was brewing over the validity of the state regulator’s fiduciary duty rule, set to take place in Massachusetts’ highest court. This came after Galvin appealed the initial ruling to the SJC.
Reddit Frenzy Fallout
Meanwhile, Robinhood celebrated a recent win in a separate case involving a group of former traders. A US appellate court dismissed specific claims against the online broker earlier this month, relating to trading restrictions during the meme stock frenzy that occurred three years ago.
In 2021, a group of disgruntled traders initiated legal action, alleging market manipulation by Robinhood after it imposed trading limitations on several meme stocks. These stocks, including Gamestop, AMC Entertainment, and Blackberry, experienced inflated prices due to coordinated efforts by amateur traders on the WallStreetBets subreddit.
These actions led to substantial losses for hedge funds that had bet against these stock prices. The ensuing frenzy forced Robinhood to urgently secure over $1 billion in additional funding. Additionally, other brokerage firms, such as TD Ameritrade, IG Group, and Charles Schwab, temporarily suspended trading in these surging stocks and related derivatives.