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Robinhood faces class action suit over selling stock orders

Robinhood is facing a class action suit after allegedly failing to tell clients the company was selling investors' stock orders. Yahoo Finance’s Alexis Keenan shares the details.

Video Transcript

BRIAN SOZZI: Buzzy trading platform Robinhood finds itself in hot water yet again for some alleged unsavory business practices. Yahoo Finance legal reporter Alexis Keenan is here with the details. Alexis.

ALEXIS KEENAN: Hi, Brian. This time, it's a proposed class action lawsuit. It was filed in the Northern District of California, and it's similar to the charges that were settled last week with the SEC, where Robinhood agreed to pay $65 million for the alleged offenses. Though, this time, it's Robinhood's customers alleging that the company-- that they really got a raw deal because of failures by the company to disclose exactly their business model and how they made money.

These plaintiffs-- they say that the company relied so extensively on selling their stock orders, the customers' stock orders to Wall Street firms in this kind of arrangement that's called payment for order flow. They said that Robinhood fees that they received from these Wall Street firms were so high that there was a compensation really passed on and that their orders were filled for less than optimal prices, by comparison, had they filed with other firms.

Now, to read from the complaint, this proposed class of plaintiffs says this-- while the defendants promoted and advertised an easy-to-use "commission free" trading platform, defendants profited extensively from unsuspecting customers who executed trades on Robinhood's platform at inferior execution prices. These inferior prices were caused in large part by the unusually high charges that Robinhood required from principal trading firms for the opportunity to obtain Robinhood's customer order flow.

Now, Yahoo Finance did request comment from Robinhood on this particular lawsuit and hasn't yet heard back. Though, last week, in response to that SEC lawsuit, the company said that those practices were historical and that they no longer exist at Robinhood. But still, you have to take into account-- on top of those two lawsuits, you also have Massachusetts regulators coming down on Robinhood, filing an administrative claim last week accusing the company of using aggressive tactics in order to attract inexperienced investors, really. Also, there are lawsuits pending across the country in other jurisdiction over those outages that the company experienced earlier in the year.

JULIE HYMAN: You know, Alexis, Robinhood-- yes, we knew about Robinhood before 2020. But Robinhood is one of the companies that has really become synonymous with this year and the Robinhood trader, right? You're out with an article on YahooFinance.com looking at some of the other companies that we were really talking about that much before this year.

ALEXIS KEENAN: Right. So I really had this premise where I wanted to say, OK, if we talk to analysts, and we say, but for the pandemic, which companies would not have had these blockbuster successes in 2020? So here's a look at what analysts came up with. I'm sure there are more companies out there, but the real big three were in the technology sector, no surprise there. Zoom, Slack-- Zoom being our company of the year, by the way, at Yahoo Finance-- and, of course, mentioning there the Slack acquisition by Salesforce at $27.7 billion. One analyst said that that transaction probably wouldn't have happened but for the pandemic. Also, DocuSign.

Other honorable mentions in tech-- Okta, Palantir, CrowdStrike. And then added to those are-- oh, I should mention one more. Zscaler was one that we have in there for the technology sector. But also, of course, fitness and personal health-- we have Peloton making huge strides this year and largely due to lifestyle changes, right? Many customers who would never have considered doing their exercise at home and preferred a gym now willing to do that kind of activity. Also, food delivery-- Uber Eats, DoorDash, and, of course, a company at the very heart of this pandemic, Moderna, with its vaccine development and kind of taking strides there and getting a place among some of the biggest, really, pharmaceutical firms in the country. And globally, too, I should say.

BRIAN SOZZI: And full and fair disclosure, Alexis. I never used Zoom before the pandemic. I did use Peloton-- burning lots of calories on that. Definitely did not use Zoom, but now it's part of my daily workflow. Alexis Keenan, thanks so much.