A US federal appeals court has dismissed a class-action lawsuit against Robinhood Markets over its restrictions on trading 13 meme stocks in early 2021.

The class action, involving 16 investors, was filed in September 2021. The plaintiffs alleged that Robinhood’s trading restrictions prevented them from purchasing meme stocks when hedge funds were short-squeezed in January 2021. They claimed this led to the loss of potential profits and a sharp decline in share prices.

Robinhood successfully sought a motion to dismiss the complaint in January 2022, arguing that the plaintiffs failed to state a claim. The investors subsequently contested this decision in the US appeals court in March 2023 but faced another setback.

US Appellate Court Judge Britt Grant upheld the decision to dismiss the lawsuit, stating the arguments lacked legal merit. She explained that Robinhood was within its legal rights to impose the restrictions, as the firm was not obligated to protect investors from pure economic loss.

“When Robinhood restricted its customers’ ability to buy meme stocks, it took a sizable – and perhaps justifiable – hit in the court of public opinion. But in this court, Robinhood is only accountable for specific legal duties.”

Britt Grant, judge at US Appellate Court

The initial short squeeze was triggered by users of the /wallstreetbets subreddit, aiming to cause large losses for firms shorting stocks such as GameStop, AMC Entertainment, American Airlines Group, Blackberry, Bed, Bath & Beyond, and Trivago.

GameStop was notably one of the most substantial gainers of the Reddit-fuelled price surge, rising over 9,900% from $0.86 to over $86 between April 2020 and January 2021.

In related financial news, Robinhood’s Q2 results showed a profit for the first time since going public. However, the firm’s crypto revenue declined by 18% to $31 million in the same quarter, with $11.5 million in crypto asset investments remaining unchanged at the quarter’s end.