Robinhood’s Sketchy Past Affects Its IPO

Investors and fans have been waiting for the Robinhood Initial Public Offering (IPO) for a while now. Ever since the company announced that it would debut its stock on exchanges, there has been noticeable excitement.

Robinhood’s Sketchy Past Affects Its IPO

However, now that the IPO is here, Robinhood - trading under the HOOD ticker - has been underwhelming so far. It definitely doesn't help that the company is dealing with significant fines and the consequences of several actions.

GameStop and Tenev Bite Robinhood Hard

The long-awaited Robinhood occurred last week. Everything seemed ready and set until the company announced a probe into its chief executive, Vlad Tenev. The announcement - which came right on the eve of the IPO - confirmed that the Financial Industry Regulatory Authority (FINRA), self-regulatory agency for exchange markets and brokerage firms, had launched a probe into whether Tenev had been registered.

The probe alleges that Tenev hasn’t been registered by the FINRA - and neither has Baiju Bhatt, the company's co-founder.

Reports also confirmed that FINRA and the Securities and Exchange Commission (SEC) had launched an investigation into Robinhood and its role in the GameStop saga. Recall that online investors had banded together in January to pump stocks like GameStop and AMC after hearing that a hedge fund had shorted it.

What followed was one of the most interesting Wall Street stories in history. These stocks went up incredibly high, and investors continued to buy-in. All of a sudden, Robinhood canceled these stocks and suspended trading out of the blue.

The authorities are now looking into whether the trading suspension was lawful or not - as well as the company’s activities during that time. Robinhood caught a great deal of flack for its handling of the GameStop saga, and an official investigation definitely won’t help the company’s case.

A Long History of Things Like These

The news of these investigations is beginning to turn into a pattern for Robinhood. For a long time, the company has been on the receiving end of investigations and criticism from many ends.

Robinhood just got a $70 million fine from FINRA in June. In a statement, the agency explained that it had fined the company for its system-wide outages and the use of “misleading communication and trading practices.”

The settlement was especially regarding technical failures on Robinhood that occurred back in March 2020. In one of the busiest trading days in Wall Street history, Robinhood was down for hours, causing investors and traders to miss out. Trading activity had been incredibly high due to the coronavirus pandemic, and Robinhood essentially wasn't working at this point.

The company eventually rewarded customers with some funds, but that paled in comparison to the opportunities they issued. FINRA confirmed that it fined the company $57 million, while the company also paid $13 million in restitution to thousands of customers.

“FINRA considered the widespread and significant harm suffered by customers, including millions of customers who received false or misleading information from the firm, millions of customers affected by the firm’s systems outages in March 2020, and thousands of customers the firm approved to trade options even when it was not appropriate for the customers to do so,” the agency said in its statement.

The $70 million fine was a record for FINRA. Besides that, Robinhood Crypto - Robinhood’s cryptocurrency subsidiary - was also recently ordered to pay $15 million in fines to the New York Department of Financial Services (NYDFS).

According to a regulatory filing, Robinhood Crypto was ordered to make the payment concerning related to anti-money laundering (AML) and cybersecurity issues. The filing didn’t reveal any additional details, and both parties refused to give details to the media.

Besides the payment, Robinhood was obligated to submit to and engage a monitor. Essentially, the monitor will be an individual who will check the company and its activities. The primary objective is to offer a sufficient assessment of the company’s compliance with different regulatory protocols. In this case, the monitor will check Robinhood's cybersecurity and AML practices.

Looking to the Future

With all of these fines, it was no surprise that Robinhood started trading rather sideways. The IPO, which had been hotly anticipated, saw HOOD shares drop as Low as 8 percent on the debut day on the NASDAQ. Robinhood started trading at $38 a share, giving the company a valuation of $32 billion. That number was shy of the $35 billion that the company expected.

An 8 percent drop meant that Robinhood had the worst first trading day of all 51 firms in the United States that raised as much or more money than Robinhood.

The company’s stock has so far risen again, but it is important for Robinhood to know that things are changing. The company is now set to face much more scrutiny, and things like app freezes and abrupt stock suspensions won’t be allowed.

It’s a whole new world, and Robinhood will need to be on top of its game to stand out.

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