Robinhood Legal Battle Updates
On April 16, 2021, the Securities and Exchange Commission (“SEC”) case against Robinhood Financial moved one step closer to a payout when the SEC issued an Order appointing JND Legal Administration as the Fund Administrator of the Fair Fund established for the $65,000,000 that Robinhood Financial had agreed to pay on December 17, 2020.
The Fair Fund will be used to distribute the $65,000,000 among harmed investors.
Robinhood received the $65,000,000 fine for misleading its stock market customers about how the company makes its revenue from their trades.
SEC officials said that between 2015 and 2018, Robinhood only partially explained on its online FAQ page how it makes money, omitting details about its largest revenue source — trades. According to the SEC order, Robinhood takes a user’s stock order and sells it to a larger trading firm that executes the trade, a process known as “payment for order flow.”
The SEC determined that despite Robinhood marketing its services as “commission-free,” in reality, customers received inferior trade prices that “deprived customers of $34.1 million,” despite any savings received from paying zero in commissions.
The December 17th SEC Order came just one day after the Massachusetts Securities Division filed a lawsuit against Robinhood for using gaming strategies to manipulate customers to trade more in order to boost its fees.
The Massachusett’s legal battle heated up more this month, with regulators now pushing to revoke the popular trading app’s brokerage registration within the state. If instituted, Robinhood would lose around 500,000 users from the Bay State.
Robinhood filed a counter-complaint against the proposed revocation on April 15th, along with a motion for a preliminary injunction.
It’s been quite the past year for Robinhood, which saw its customer base grow by over 3 million during the pandemic to more than 13 million total users.
Besides the lawsuits and investigations, Robinhood suffered through a glitch that temporarily allowed users to borrow an unlimited amount of cash, a platform crash that temporarily prevented users from accessing their funds, a tragic suicide of one of its users after an error showed an erroneous negative balance in that user’s account, a hacking incident affecting an undisclosed amount of user accounts, and scrutiny from Congress and the public when the company restricted trading in some popular stocks, including GameStop (GME), during some wild trading activity targeting heavily shorted stocks in late January.
Despite all the controversy, Robin also announced plans for an initial public offering to become listed on the NASDAQ. In September, Robinhood raised $600 million in a VC financing round that lifted its value to around $12 billion. Then last month, it announced on its website that it had just filed paperwork with the SEC for the IPO.
The IPO could come with an exciting twist, as Robinhood also announced plans to build a platform to “democratize” initial public offerings, including its own, that would allow users of its trading app to snap up shares alongside Wall Street funds before the stock hits the public market.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
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Brenda Hamilton, Securities Attorney
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