Robinhood's User Agreement May Prove Critical In Surviving Barrage Of GME-Related Lawsuits

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Given the dramatic rise in share prices for so-called "meme stocks" like GameStop (NYSE: GME) and AMC Theaters (NYSE: AMC), there has been a flurry of activity from an influx of everyday traders. Spearheaded by the so-called "degenerates" from the WallStreetBets subreddit, GME has soared over 1,000 percent in value as hedge funds shorting the stock have in turn lost billions.

One company that has been caught up in this rollercoaster ride has been Robinhood, which came under fire from all sides (WallStreetBets, lawmakers, everyday traders, etc.) when it restricted the purchase of a number of meme stocks like GameStop, AMC, BlackBerry, Bed Bath And Beyond, and Nokia. 

"Amid significant market volatility, it’s important as ever that we help customers stay informed," said Robinhood when announcing the restrictions. "We’re committed to helping our customers navigate this uncertainty. We fundamentally believe that everyone should have access to financial markets."

Robinhood was hit with two lawsuits last week alleging among other things that the firm "purposefully, willfully, and knowingly removing the stock 'GME' from its trading platform in the midst of an unprecedented stock rise thereby deprived retail investors of the ability to invest in the open-market and manipulating the open-market." The number of lawsuits has grown to over a dozen as of this morning.

Robinhood is under fire from multiple lawsuits over its restrictions on "meme stocks"

However, some are questioning whether the lawsuits have any merit due to the language that Robinhood has within its user agreement. While Robinhood has no doubt angered scores of users that had previously flocked to the commission-free platform for its ease of use, the company has no legal obligation execute every trade that is requested.

The agreement states, "I understand Robinhood may at any time, in its sole discretion and without prior notice to Me, prohibit or restrict My ability to trade securities."

Although we doubt that many people bothered to read 33-page document [PDF] prior to (or after) signing up, it is laid out there in plain language. It definitely isn't ideal for the WallStreetBets veterans that were unable to purchase GME shares late last week (and were later restricted to purchasing just 1 share after the initial outcry), it appears that Robinhood may very well be within its legal rights to do so.

“That seems to be a big stumbling block to the breach of contract claim," said University of Michigan Law School professor Adam Prichard in an interview with Reuters.

While it appears that lawsuits might have trouble in their efforts to hold Robinhood accountable, users are already flocking to other platforms that are more receptive to their needs during this meme stock rush.