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Robinhood asks judge to toss payment for order flow lawsuit

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The Robinhood App is displayed on a screen in this photo illustration January 29, 2021. REUTERS/Brendan McDermid/Illustration/File Photo

  • Online trading platform says lawsuit too vague to meet bar for securities fraud
  • Argues trade execution too fact-specific for class treatment

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(Reuters) - Robinhood Markets asked a federal judge in Oakland to end a lawsuit alleging the online trading platform committed securities fraud by getting paid to send customer orders to other broker-dealers.

The motions filed on Tuesday urged U.S. District Judge Yvonne Gonzalez Rogers to dismiss or deny class action status to the lawsuit, which alleges the company failed to alert customers that broker-dealers paid Robinhood to execute their trades.

Attorneys for Robinhood user Ji Kwon did not immediately reply to requests for comment on Wednesday.

Kwon seeks damages on behalf of a class of potentially millions of users whose trades he alleges Robinhood executed at sub-par prices while taking payment from brokers, known as payment-for-order-flow, between 2016 and 2020.

The issue of payment-for-order-flow has recently attracted attention from U.S. Securities and Exchange Commission Chair Gary Gensler, who has said it raises concerns about conflicts of interest.

In its motions filed on Tuesday, Robinhood said that it had disclosed the payments and that the case should be dismissed.

Robinhood argued allegations that unidentified staff knew users were getting worse execution on their trades than those on other platforms suggests "at worst – mismanagement," not fraud.

Robinhood also took the unusual step of asking the judge to deny class certification at the outset of the case.

It said the question of whether users received best execution on their trades can only be answered on a trade-by-trade basis with information about the market for each security at the time.

Robinhood said other judges have rejected class treatment in similar cases.

In September, the 8th U.S. Circuit Court of Appeals said a lawsuit against TD Ameritrade over best execution could not proceed as a class.

The lawsuit is only one of the ongoing legal battles for the Menlo Park-based fintech company, which also faces lawsuits for restricting trading in some stocks during a meme-fueled rally in January and system outages that allegedly prevented trading on record market volatility caused by the COVID-19 pandemic.

On Wednesday, the Financial Industry Regulatory Authority ordered Robinhood Financial, the company's brokerage, to pay $70 million for supervisory failures and causing "significant harm" to millions of customers with misleading or false information and outages.

The case is In re: Robinhood Order Flow Litigation, U.S. District Court, Northern District of California, No. 20-cv-09328.

For Robinhood: Maeve O’Connor, Elliot Greenfield and Brandon Fetzer of Debevoise & Plimpton and Brandon Wisoff and Russell Taylor of Farella Braun + Martel

For the customers: Nicholas Coulson of Liddle & Dubin, Tina Wolfson of Ahdoot & Wolfson and Scott Bursor of Bursor & Fisher, among others

Read More:

U.S. online brokers still profiting from 'dumb money'

Robinhood to pay $70 million for harming clients, supervisory failures, says U.S. regulator

U.S. SEC chair signals sweeping review of exchange, broker rules

Jody Godoy reports on banking and securities law. Reach her at jody.godoy@thomsonreuters.com

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