The no-fee brokerage, Robinhood, encountered a significant setback in their battle against Massachusetts’ Secretary of State, Bill Galvin. A ruling by the Supreme Judicial Court of Massachusetts (SJC) confirmed that the state’s fiduciary duty rule, crucial to the case, stood valid.
Massachusetts High Court Supports State Regulator
Bill Galvin put forth an enforcement action against Robinhood in December 2020. He accused the digital brokerage of not safeguarding its customers and their finances. Galvin alleged that Robinhood gamified trading, using tactics to attract novice and young traders, such as showering confetti on users’ phone screens after each transaction.
Galvin further asserted that this supposed neglect violates the state’s fiduciary duty rule, which heightened standards for broker advice in early 2020. He aimed to revoke Robinhood’s broker-dealer license due to these allegations.
In March of the previous year, a trial court in Boston, the Suffolk County Superior Court, ruled on Robinhood’s side. The court maintained that federal law superseded state regulator guidelines. Judge Michael Ricciuti stated that Galvin had exceeded his jurisdiction by enforcing a regulation conflicting with federal law.
Following an appeal by Galvin at the SJC in May, the regulator and Robinhood disputed the state fiduciary duty rule’s legitimacy at Massachusetts’ top court.
Meme Stock Madness: Robinhood Wins in Court
Simultaneously, Robinhood triumphed in a separate case brought by a group of ex-traders. Earlier this month, a US appellate court dismissed several allegations against Robinhood for enforcing trading restrictions during the meme stock craze that happened three years ago.
In 2021, unhappy traders filed a lawsuit against Robinhood, accusing it of market manipulation after the broker limited trading of several meme stocks. Prices of stocks, including Gamestop, AMC Entertainment, and Blackberry, were inflated via coordinated efforts by a large group of newbie traders on the subreddit channel WallStreetBets.
The traders’ actions resulted in severe losses for hedge funds that had wagered on the stocks’ price drop. The stock mania swiftly forced Robinhood to secure over $1 billion in extra funding. Furthermore, it drove other brokers like TD Ameritrade, IG Group, and Charles Schwab to stop trading on these soaring stocks and related derivatives.