New York (WF Business) Robinhood is in hot water as it banned investors from buying GameStop in part of last month’s Reddit-induced market turmoil. And now Fidelity is accused of blocking an investor from selling Reddit lovers, a move it says cost it $ 830,000.
Louis Hernandez sued Wall Street’s self-regulating body on Thursday for blocking attempts by Nokia (NOK) and AMC (AMC) to offload its shares on January 28. Hernandez, who lives in Arizona, eventually sold the stock at a large discount from where they were trading when he initially tried to sell it, the lawyer said.
Attorney William Lewis, who represents Hernandez, said in an interview, “it caused a huge loss for our client in a matter of days.
Fidelity said it had not received the specific complaint and did not comment on specific customers. The company said there were no restrictions except for customers trading with borrowed money, known as margin trading.
Fidelity said it regularly adjusted margin and risk requirements for individual stocks based on market risks and other factors.
“Fidelity strongly encourages all investors to review their investments and ensure they comply with their overall financial plans,” the company said in a statement.
The Financial Industry Regulatory Authority (FINRA), The Wall Street self-regulatory agency that Hernandez is suing, has not made the allegations public and declined to comment.
The episode shows the chaos that ensued last month when an army of traders in Reddit’s wallstreetbets community swiftly boosted GameStop (GME), AMC and other stocks. Brokerage firms such as Robinhood have been forced by clearing houses to put up staggering amounts of capital. Short positions of hedge funds such as Melvin Capital, which bets against GameStop, have blown up. Some retail investors lost money when Reddit-driven stocks boomed.
A big bet went bad
Hernandez bought $ 1.5 million worth of shares from AMC on January 27, his attorney said. Shares in the cinema chain jumped 301% that day, driven by traders at wallstreetbets.
The next morning, Hernandez bought $ 1.5 million worth of shares from Nokia, another wallstreetbets favorite.
Hours later, Robinhood angered customers by temporarily suspending variable stock purchases, including AMC and Nokia. Other brokerage firms have also placed restrictions on Reddit shares.
Seeking to avoid impending sales, Hernandez sought to discount AMC and Nokia shares when they traded at prices above what he was paying, his lawyer said.
Lewis said: “he was trying to sell for hours. The computer program won’t let him. He called customer service and they said he should be able to sell,” he said.
Collateral call triggered
The timing was particularly critical because Hernandez had borrowed money through brokerage, known as margin trading, to buy most of the shares.
In the end, AMC and Nokia’s share price fell so deeply that it triggered a margin call in which brokers demanded that investors who bought shares with borrowed money invest additional cash or securities. Hernandez tried to cash in to cover margin calls, but Fidelity wouldn’t let him do that, he said.
Allegedly, Hernandez was forced to liquidate the stock at a large discount from where they were trading when he first tried to sell it – he lost about $ 830,000 due to the delay.
AMC lost 57% on January 28, and Nokia lost 28%.