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Regulation and Compliance > Federal Regulation > FINRA

How One Investor Beat Robinhood in FINRA Fight

By Jeff Berman

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What You Need to Know

  • The investor's victory is likely to create a “headache” for Robinhood, law professor Benjamin Edwards says.
  • One key to the FINRA arb decision: Having experienced lawyers arguing the case.
  • Lawyers argued that Robinhood was guilty of negligent liquidity risk management.

Last week’s unprecedented victory for an investor in his Financial Industry Regulatory Authority arbitration dispute with Robinhood was achieved, at least in part, by having lawyers experienced with securities cases representing him and the decision to claim the firm was guilty of “negligent liquidity management,” according to a legal expert and one of the attorneys who represented Batista.

A FINRA arbitrator on Jan. 5 ordered Robinhood to pay $29,460 in compensatory damages, plus interest and fees, to Jose Batista, an investor who alleged he suffered investment losses as a result of the robo-advisor’s decision to restrict trading in GameStop and other select stocks on Jan. 28, 2021, in reaction to trading frenzy surrounding the stocks.

“The case stands out as an outlier because Batista is the first to recover damages against Robinhood in the FINRA arbitration forum,” Benjamin Edwards, associate professor of law at the William S. Boyd School of Law at the University of Nevada, Las Vegas, pointed out Tuesday on Twitter.

Although the FINRA arbitrator, as usual, did not specify why he reached his decision, Edwards pointed to “one major difference: representation. Batista had a lawyer,” one who specializes in claims against brokerages and financial advisors.

The law firm Iorio Altamirano filed the FINRA arbitration claim on Batista’s behalf. At the arbitration hearing, attorneys Jorge Altamirano and August M. Iorio represented the investor.

In most of the other cases against Robinhood, investors have opted to try and make their cases without the help of legal counsel, Edwards noted.

It also helped that Batista had an attorney “familiar with the forum,” Edwards told ThinkAdvisor on Wednesday.

Although Nathan Volheim, an attorney at Sulaiman Law Group in Lombard, Illinois, represented investors in a few disputes with Robinhood, FINRA arbitrators ruled in favor of Robinhood in those cases.

Edwards told ThinkAdvisor he reviewed the cases where Volheim appeared in FINRA awards. “It’s impossible to know exactly what happened or what arguments were made simply based on the awards” in those cases, Edwards said.

But Edwards said: “My review of the Volheim decisions showed that he had brought some fraud and unfair competition claims” — arguments quite different than the one made in the Batista case. Volheim did not immediately respond to a request for comment Thursday.

Liquidity Management

“Firms are supposed to be prepared for extreme market conditions and had Robinhood put in place effective funding and liquidity risk management practices to enable it to meet its obligations during times of stress and volatility, it would not have had to cut off market access to customers,” Iorio told ThinkAdvisor Wednesday.

“Robinhood had the tools and resources to monitor its risk and estimate potential clearing fund requirements,” he said.

The lawyers also argued Robinhood had “actual prior notice of certain factors that were material in increasing its counterparty requirements, including that retail investors, and in particular, its customers, were purchasing large quantities of the ‘meme stocks’ and that new retail investors were flocking to the firm to open accounts and purchase the stocks,” he noted.

When all was said and done, “we believe that we were successful in showing that Robinhood knew that the increase in trading volume had a direct impact on its liquidity risk, and that Robinhood had the means and ability to secure additional funding to prevent the liquidity crisis that it found itself in” on Jan. 28, 2021, he added.

“We were able to prove that Robinhood’s negligent conduct, including its ineffective liquidity management practices, led it to implement the PCO restrictions that harmed retail investors, including Mr. Batista. The same conduct resulted in a breach of Robinhood’s contractual commitments to Mr. Batista.”

He was referring to “position closing only” restrictions — in other words, curbs on stock buying.

‘Headache’ for Robinhood

Batista’s victory is “likely to create an enormous headache for #Robinhood because it’s likely to give hope to many people who suffered losses in its trading interruption,” Edwards tweeted. “Many of them may decide that it’s worth filing arbitration cases now. #Robinhood isn’t invulnerable.”

Because it proved to be successful, “I would expect more cases to press the negligent liquidity management theory,” Edwards told ThinkAdvisor. Robinhood declined to comment on the arbitrator’s decision.

But Edwards said: “Ultimately, it’s still very early for these cases and you can’t draw too much of a conclusion from the single win…. FINRA arbitrators often have different views from one another and their decisions do not create legal precedent.”

Batista’s success, however, is already having an impact. Since the arbitrator’s decision in his favor, Iorio Altamirano has been contacted by hundreds of individuals who have asked the lawyers to evaluate their potential claims, Iorio told ThinkAdvisor.

(Image: Shutterstock)

Jeff Berman

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