Robinhood Markets expects a $100 million finance cost in the third quarter tied to legal and regulatory matters that were previously disclosed, the trading app operator said on Friday. The company has had several run-ins with regulators, including being at the center of the “meme stock” trading frenzy in early 2021. The frenzy spooked retail investors, who comprise the brokerage’s chief customer base. As a result, Robinhood tightened its margin requirements, increased the minimum initial deposit for new accounts, and restricted trading during the short squeeze in GameStop (GME.N).
A US appeals court upheld the dismissal of a class-action lawsuit filed by 16 investors against Robinhood concerning those restrictions. The plaintiffs alleged that the firm’s actions prevented them from profiting and caused their shares to drop during extreme market volatility surrounding the short squeeze. The lawsuits are among 50 private lawsuits the company faces over its January trading restrictions.
The firm has also been hit with multiple investigations by state securities regulators, which have issued subpoenas or sought information and testimony from the company and its CEO, Vladimir Tenev. The Securities and Exchange Commission also plans to scrutinize practices core to Robinhood’s business model, such as payments for order flow and other transaction rebates, which accounted for 75% of its $959 million in revenues last year. The SEC chairman has warned that such arrangements raise antitrust and conflict of interest concerns and that he wants to recommend new rules to address them.
In a settlement with the SEC in December 2020, Robinhood agreed to pay $65 million to settle charges. It should have disclosed its arrangement to route customer orders to Citadel Securities and other market makers. The company has defended the practice, saying it helps ensure customers receive the best prices on their trades. Robinhood’s disclosures say it routes more than half of its customer orders to Citadel, and it also works with other market makers such as Virtu, G1 Execution Services, Wolverine, and Two Sigma.
Those relationships, combined with Robinhood’s low-cost structure and free trades, give the company an advantage over traditional brokerages but have also sparked scrutiny from federal regulators. The company has paid more than $136 million to settle various investigations since its IPO in 2019, and the legal expenses it expects to incur are proliferating.
State regulators are putting pressure on all financial firms to make sure they have robust anti-money laundering (AML) compliance programs and that their employees understand their obligations, says Sarah Beth Felix, a former Bank Secrecy Act/BSA compliance officer who now runs Palmera Consulting, an AML consulting firm. She says those challenges are especially relevant for online brokers with a different infrastructure and staff than traditional financial institutions. “The rules are getting stricter, and the penalties for violations are higher,” she says.
