Robinhood faces legal challenge as stock market roars

Bushfire riprap

Agents of Influence may line up on the trail.

by Chris Chmiel

CPM Media

LONDON (RPRN) 01/23/2018-Agents of Influence from across the globe sent the stock market reeling Tuesday, as Chinese stock regulators and the US Securities and Exchange Commission hounded trading giant Robinhood with a legal accusation accusing the firm of misrepresenting its verification of customers.

The SEC and the People’s Bank of China jointly alleged that Robinhood, a popular online trading platform that doesn’t register its customers’ information with regulators, had employed “deceptive, unfair, and manipulative practices” in its bid to sway consumers into making their investments via Robinhood’s platform.

“Robinhood did not disclose the unsubstantiated appearance of Stockpile as an investment option, thus deceiving consumers about the truth about investment opportunities,” said assistant attorney general John Cruden, of the Justice Department’s financial crime division.

The SEC’s lawsuit, filed at a federal court in Manhattan, accused Robinhood of several breaches of laws that bar unfair competition and tender financing. In the spring of 2016, Robinhood acquired Stockpile, a Y Combinator startup that allowed users to invest in non-stock penny stocks while bypassing the commission’s registration requirements. The agency also accused Robinhood of misleading customers about its use of the Stockpile platform.

The SEC’s actions were a particularly brazen way of unseating a great success story among so-called “over-the-counter” trading firms that thrive in the middle of a stock market regulatory gray area. Robinhood markets such non-registered stocks, which can include penny stocks, to customers without allowing them to buy the stocks themselves.

Stockpile’s founders claimed the startup provided its customers — albeit in a less formal and more opaque way than through Robinhood — with a simple way to buy investment opportunities in penny stocks that were not available through traditional exchanges. Though Stockpile’s platform did not require its customers to confirm their identities, Stockpile’s slogan — “The Only Place for Stockpiles” — conveyed a more formal banking relationship.

Robinhood argues that the startup misled stock buyers. The firm found that about four out of every five Stockpile customers opened brokerage accounts with Robinhood within an 18-month period. It calculated that 0.43 percent of the accounts have transferred money out of Stockpile to Robinhood. Based on this sample, Robinhood contends that more than 900,000 funds transferred to and from Stockpile in 18 months — and that all but 46 of the transfers were for Robinhood-approved stocks. Robinhood says Stockpile misled its customers by allowing them to trade publicly held, $100 billion market cap companies at almost no cost. In a statement to the SEC, Robinhood founder and CEO Baiju Bhatt explained that the firm has only “reached a select number of verified, over-the-counter (OTC) stocks” and has always followed the rules.

Is it legal to sell stocks to investors? The SEC says no. Every time Stockpile sold a stock to a customer, the company gave the brokerage firm a commission. Robinhood will fight the SEC in court on both counts, said its lawyers.

After the lawsuit was filed on Tuesday, Robinhood’s stock price fell more than 10 percent. The SEC’s case is the latest in a string of challenges to the company, which has done very well in the biz world, raising $165 million in recent years.

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