Can $30 Million Solve Robinhood’s Legal Issues?

Robinhood Markets Inc., which filed this month for permission to sell shares to the public, has no shortage of legal and political issues. The Financial Industry Regulatory Authority and the Securities and Exchange Commission have both fined it for misleading customers, among other things; SEC Chairman Gary Gensler criticized it for the gamification of stock trading; the SEC is looking into the order-flow payments that comprise most of its revenue; Massachusetts regulators are trying to ban it; prosecutors have executed a search warrant for Chief Executive Officer Vlad Tenev’s personal cell phone; legislators have publicly grilled Tenev; famed investor Charlie Munger has described the company as “sleazy” and “beneath contempt.”

So perhaps it shouldn’t be surprising that Robinhood has hired enough former employees of both Finra and the SEC to field a baseball team and still have three extra players — at exorbitant cost. Still, while it’s not the first company seeking to buy its way out of trouble, the speed and scale of its endeavor strike me as particularly brazen.

Digging through LinkedIn, I found at least 12 Robinhood employees who had significant experience at either Finra or the SEC, and who were responsible for key legal and regulatory issues. That’s not counting those who left in a recent spate of departures — including Smeeta Ramarathnam, who had spent a decade at the SEC, including as chief of staff to former Commissioner Luis Aguilar, and subsequently risen to deputy general counsel at the company. Around the time of the exits, Robinhood redoubled its efforts to recruit lawyers and other executives with extensive regulatory resumes.

The first big hire was former SEC Commissioner Dan Gallagher, who joined the company as its first independent director in October 2019 and was named chief legal officer in May 2020. Gallagher’s former chief of staff at the SEC, Lucas Moskowitz, joined Robinhood in August 2020. Four more came straight from Finra.

Both the SEC and Finra have “revolving door” policies, which are supposed to prevent former employees from approaching them on behalf of new employers for certain periods of time. A spokesman for Finra said the agency is “really strict about this,” and keeps track of former employees for at least 12 months to make sure no violations occur. In the almost 13 years the policy has been in place, Finra hasn’t formally disciplined anyone for violations, the spokesman said.

Given Robinhood’s legal and regulatory challenges, fielding a team of former regulators makes sense. Gallagher, in particular, is known for his connections in regulatory and political circles. Perhaps that’s why the company agreed to pay him a $4.2 million signing bonus, along with an unusually large number of options and restricted shares. In its IPO filing, the company estimated Gallagher’s compensation for 2020 at $30 million, even though he started only in May. The hefty compensation has had SEC attorneys past and present buzzing. The more typical path for a former SEC commissioner — take former SEC Chair Mary Jo White, for example — is to become a partner at a major law firm, or to land at a law school, as did Kara Stein, who overlapped with Gallagher at the SEC.

“It’s hard to argue that you need to spend $30 million to bring a company into compliance unless they’re wildly out of compliance,” said Tyler Gellasch, a former senior attorney at the SEC who now serves as executive director of the Healthy Markets Association. “The compensation reflects the desire to stay out of regulatory problems without changing the business model.”

When I sent an email to Robinhood seeking comment, another Finra alum responded: Josh Drobnyk, who joined Robinhood as vice president of corporate communications in January from a similar job at the self-regulatory organization. Drobnyk had nothing to say publicly, citing the company’s pre-IPO quiet period, but pointed to a blog post noting that the company was beefing up its legal, compliance and risk functions.

Robinhood must disclose Gallagher’s pay because he’s a named executive. There hasn’t been any disclosure on what the company is paying the 11 other former Finra and SEC employees. Chances are it’s not insignificant.

All told, Robinhood appears to be making a big bet that highly paid former officials, with their extensive contacts, can help keep it in business and reduce its regulatory costs. Given that the company has already been fined $135 million by Finra and the SEC and potentially faces additional regulatory and legal hurdles, the investment might actually be worth it. Whether that’s OK is another question entirely.

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