Meme stocks — named for their popularity on Internet forums like Reddit —began to crumble Thursday afternoon after reaching returns as high as 570% this week.
The market drama has already compelled retail investors to file at least four complaints against a brokerage firm in federal court. But some observers suggest it’ll be hard to prove wrongdoing.
Richard Joseph Gatz, an Illinois attorney who filed the pro se lawsuit against Robinhood Financial LLC, claimed irreparable harm when the defendant halted trading on its securities exchange platform of BlackBerry Limited, Nokia Corporation, and AMC Entertainment Holdings, Inc. for retail investors, but not for institutional investors.
A similar lawsuit was filed in New York federal court, claiming Robinhood’s trading halt violated Financial Industry Regulatory Authority rule 5310, which states in part that the brokerage must make “every effort to execute a marketable customer order that it receives promptly and fully.”
A trading halt is a temporary suspension of trading for a security due to a technical glitch, to correct an imbalance, or as a result of regulatory concerns.
And regulatory concerns are on the mind of securities and banking litigators — who do not hold positions in the related stocks — as to the potential legal implications arising from market manipulation.
For instance, should the Securities and Exchange Commission move from its position of “actively monitoring” to investigating regulatory concerns, it could justify a move from Robinhood to halt trading.
Stanley Langbein, a professor of law at the University of Miami School of Law, said volatility in these meme stocks is an example of a pump-and-dump scheme, which is the illegal act of a group of investors in promoting a stock they hold, and then selling once the stock price has risen following a surge in interest.