Robinhood is responding to a legal battle over its decision to ban users from buying a rapidly rising share on a popular online trading platform. Robinhood has responded to the lawsuit with legal action against New York State Attorney General Eric Schneiderman.
Robinhood’s lobbying skills and knowledge in Washington are being tested as the company faces regulatory changes that could upend its business model. The company’s actions were blasted by lawmakers from both parties after an uproar sparked by a Reddit subset that sent shares of the high-performing company soaring.
“This brings in so many populist issues from anti-Wall Street, anti-Big Tech. Those words seem to be colliding a little bit with this story,” said Dave Oxner, managing director at Cogent Strategies and a former GOP aide on the House Financial Services Committee.
Robinhood CEO Vlad Tenev is expected to testify at the February 18 hearing, which will focus on the company’s $1.2 billion annual revenue, according to a press release. A separate hearing before the Senate Banking Committee is underway, but not all witnesses have yet responded, Senate Finance Committee Chairman Chuck Grassley said Wednesday in Iowa. He added that he wants to hear Tenev as a witness and said he is “very concerned” about the potential impact on Robinhood’s business.
Lawmakers on both sides of the aisle have criticized Robinhood’s decision to bar users from buying bitcoin and other fast-growing companies targeted by Reddit forums. Hedge funds and some other investors, meanwhile, continued to buy shares, according to the company.
At the hearings, Robinhood will have to present their case to sceptical lawmakers, but anger has bridged the political divide with Republicans. Alexandria Ocasio-Cortez (D-Calif.) and Sen. Lamar Smith (R-Texas) are on the same page. The company, founded in 2013, argues that its decision to restrict trading in GameStop shares is in its best interest at a time when it is struggling to keep pace with rapid growth. “It seems like Robinhood has no idea why they’re doing what they’re doing,” Slovick said.
It will be left to Robinhood, which recently expanded its team to more than 1,000 employees, to quell the backlash, he said.
The company has bolstered its Washington office with former SEC officials and has also brought in former U.S. Attorney General Eric Holder as deputy attorney general. In May, Robinhood hired former Republican Commissioner Dan Gallagher, who served from 2011 to 2015, as its top legal adviser. Although many have no background in the SEC or on Capitol Hill, he has a long history of lobbying in Washington, D.C. and New York. According to the most recent filings with the Securities and Exchange Commission, it plans to spend $275,000 on lobbying by 2020.
Justin Daly of Daly Consulting Group, was an adviser to the commissioner from 2007 to 2010. On the banks and Congress’s side are former U.S. Rep. William Lacy Clay (D-Mo.), a member of the House Oversight and Government Reform Committee, and former House Financial Services Committee Chairman Barney Frank (R-Mass.). Former SEC Commissioner Michael O’Rourke, a Republican, was the company’s chief financial officer from 2011 to 2012 and its chief executive from 2014 and 2015. Former Securities and Exchange Commission Commissioner John Ketchum, also a Democrat, was an adviser to the agency from 2014 to 2015, according to his LinkedIn profile.
Robinhood recently called for a lobbyist in its own house, and the job advertisement says that a federal affairs manager must prioritize work in relations with the federal government, focusing primarily on Congress.
On the PR front, Robinhood has not put the GameStop controversy behind it: on Sunday, the company released a Super Bowl commercial that underscored the app’s opening up of the financial system. Tenev defended the decision to halt trade and spoke at a news conference in Washington, D.C. on Monday, the day before the hearing.
Slovick said the out-front approach is a smart one. “Burying your head in the sand is typically the route chosen by people who don’t have a plausible explanation for their conduct,” he said.
In recent weeks, Robinhood has hired a communications specialist, and the new recruit in DC is insured. Josh Drobnyk, who worked in communications for the Financial Industry Regulatory Authority (FINRA), became GameStop’s vice president of corporate communications just days after the uproar. Anthony Cavallaro, who works for the Financial Crime Uncovering Programme, has been hired to head the Financial Fraud Supervisory Authority and is expected to start this month.
NOTE: The entire highlighted paragraph is either factually inaccurate or misleading. Josh Drobbyk did not become GameStop’s vice president. He became Robinhood’s vice president of communications. Anthony Cavallaro is also ex FINRA and joins Robinhood as head of regulatory services and fraud oversight at its financial subsidiary. Therefore you need to rewrite the entire paragraph as: Josh Drobnyk, who worked in communications for the Financial Industry Regulatory Authority (FINRA), became Robinhood’s vice president of corporate communications just days after the uproar. Anthony Cavallaro, another former FINRA veteran, has been hired as head of regulatory services and fraud oversight at Robinhood’s financial subsidiary.
While Robinhood may be preparing for enforcement action, industry experts doubt that the hearings will lead to substantial reform, according to a recent report by the Financial Industry Regulatory Authority.
Democrats want the SEC to increase disclosure requirements for hedge funds, which they say should be increased if they hold large short positions in stocks. “If Robinhood does what Senator Warren says and trades in certain stocks, the securities law contains the necessary provisions to burden the company,” Slovick said, referring to Sen. Elizabeth Warren (D-Mass.). But will any of this lead to changes in securities laws or SEC rules?
Tenev has called for changes, saying regulators and the financial system need to create a means to close securities deals immediately, rather than the two-day process he blames for the company’s woes.
Experts say Robinhood will only have to weather the storm, which is likely to take some time. Oxner said he wouldn’t be surprised if we talk about the health of the stock market in a year’s time.
“But for anyone who wants to dig a little deeper, I find a dry well, not a perfect storm,” he said. Slovick agreed, saying that Wall Street critics may not find what they’re looking for in Robinhood, but they have their eyes on the company’s long-term future.