Written by Evelina Dimitrov, CNN
Robinhood, the self-described “free investing app,” was named in a lawsuit filed last month by the NY Stock Exchange (NYSE) and would have been required to prove its users “make an average of at least 30 trades per month.”
On February 12, however, a federal judge dismissed the complaint , though Robinhood is still facing a class action suit from several of its users.
The market giant said the suit was “hopelessly flawed” and has vowed to appeal the decision.
The suit, filed last month, alleged that Robinhood let many users invest without registering and without paying a fee. Robinhood declined to comment on the suit.
The NYSE is asking for the court to “gain any and all relief necessary and proper,” and Robinhood is being required to: show compliance with “minimum capital, segregation and other recordkeeping and applicable financial data and record-keeping standards;” and to “determine compliance strategies.”
Lawyers for Robinhood users who claim to have fallen victim to fraud charges called the case a “grave attack on its users’ due process rights.”
“Citing its plain meaning, (U.S. District Judge Jack Weinstein) referred to Robinhood users as buyers rather than sellers, determining that compliance with the 30-trade threshold is ‘easily satisfied’ if an average of 1.6 percent of users make at least one trade a month (despite no indication that the NYSE has told Robinhood to account for its members who don’t make one),” a Robinhood blog post said last month.
“The judge’s decision is grave,” said a statement from John Jackson, a lawyer for the plaintiffs. “This issue of consumer protection remains deeply troubling for all the millions of ordinary investors that use Robinhood who could have become victims of fraud were the NYSE lost its case.”
In addition to the class action suit, the NYSE also filed a suit against Robinhood on January 16 for allowing users to make trades without registering.
The app charges only $5 a month for its broker-based service, and has no commission on investments up to $3,000.
Jackson said in an interview that the class action and the NYSE case are all “meritless.”
“The court said there was no merit to the claims based on really trivial distinctions between Robinhood and regular online investment sites,” Jackson said.
In a statement on January 16, Robinhood said the NYSE claims “are without merit” and that the app was reviewed by regulators in New York.
“We have always been clear with our users that they have a choice between Robinhood and the competition. Many of them choose Robinhood, and in fact, there are over 25 million investors with Robinhood and the competition combined,” Robinhood said in its statement.
“We are proud to provide the best value proposition in the industry to all of our users,” it said.
A Robinhood spokesman declined to comment on the court’s decision, which is only a preliminary ruling.
In its statement, Robinhood pointed out that many of its users have negative balances — some of them more than $1 million — despite making only small, one-time investments.
“About 15 percent of our users have always been positive, which is akin to a dark identity – we have one-year terms for these users who never mature and simply ask to complete a single trade and leave.”
Jackson said he plans to seek an injunction to block any of Robinhood’s users from providing more than $1 million in investment to non-members.
The NYSE declined to comment.