Robinhood: Adverse Ruling by FINRA Arbitrator Could Have Significant Negative Implications

A well-known axiom in the investing world is that the best time to buy is when the news becomes uniformly bad. In other words, “buy when there is blood in the streets.” Robinhood Markets, Inc. (NASDAQ: HOOD) is facing mounting financial and business risks, so it would seem to be a candidate for such a “buy low” approach; however, the stock market seems intent on recognizing these issues in such a grudging fashion that it still looks too early to bottom fish.

On January 6, 2022, an arbitrator for the Financial Industry Regulatory Authority (FINRA) ruled that Robinhood was liable for nearly US$30,000 in compensatory damages to a retail investor. In the U.S., an arbitrator’s ruling is final and binding on both parties.

In May 2021, the investor filed a complaint with that regulatory body which claimed he suffered marked and tangible investment losses in January 2021 when the online trading platform restricted trading in a number of meme stocks. This investor specified that he wanted to sell shares in headphone maker Koss Corporation (NASDAQ: KOSS) and fashion retailer Express Inc. (NYSE: EXPR) on January 28, 2021, but could not for a number of days costing him substantial money.

Robinhood shut down trading in such meme stocks due to increased capital requirements from its clearinghouses, most prominently Citadel Securities. Indeed, Robinhood was required to raise US$3.4 billion in early 2021 to bolster its balance sheet.

Clearly, a US$30,000 liability by itself is a small amount for Robinhood, which has a US$13 billion stock market value and US$6.2 billion of cash on its balance sheet as of September 30, 2021. However, it seems very possible that many other Robinhood investors — noting the success of the retail investor who, with the aid of his attorney, specified the losses he incurred and did not discuss hard-to-prove conspiracy theories — will file detailed complaints as well.

If a substantial number were to file, a very real possibility as a single Reddit thread discussing this outcome of the case had 30,000 up votes, Robinhood’s prospective exposure could be enormous. Indeed, the winning attorney in the US$30,000 Robinhood case, Iorio Altamirano LP, put out a press release trumpeting its success and encourages other Robinhood customers to contact them for a free consultation. As of December 31, 2020, Robinhood had 12.5 million cumulative funded accounts (with an average account balance of US$5,040), about 11.7 million of which were considered monthly active users.

Excerpts from Iorio Altamirano LLP January 7, 2022 press release.

Note that in late June 2021, FINRA fined Robinhood US$69.6 million, including US$12.6 million as restitution to customers, for providing false and misleading information to its clients. This faulty information traced as far back to 2018 and related to margin trading, customers’ buying power in their accounts, and offering options trading ability to customers without performing sufficient due diligence on them. The fine is the largest ever imposed by FINRA.

Separately, on January 13, 2022, Bloomberg reported that two cryptocurrency exchanges, FTX US and Bitstamp USA, may offer stock trading capabilities to their customers. If either or both do so, the crypto exchanges could take away some of Robinhood’s customers (and perhaps also those of other mobile stock trading apps like E*Trade) or cut into Robinhood’s future customer growth. FTX US and Bitstamp USA have approximately one million and four million customers, respectively. As of September 30, 2021, Robinhood had 22.4 cumulative funded accounts.

 Robinhood Markets, Inc. last traded at US$15.17 on the NASDAQ.

Information for this briefing was found via Edgar and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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