SPONSORED:

Robinhood braces for lawmaker outrage at GameStop hearings

Robinhood braces for lawmaker outrage at GameStop hearings
© Getty Images

Executives at the trading app Robinhood are scrambling to respond to congressional backlash over their decision last week to block users from buying shares of GameStop and other quickly rising stocks.

Lawmakers in both parties have blasted the company’s actions amid the frenzy sparked by a Reddit subform that drove shares of GameStop and other poor-performing companies to staggering heights.

Robinhood’s lobbying skills and Washington knowledge will now be put to the test as the company faces two bruising hearings and the potential for regulatory changes that could upend its business model.

ADVERTISEMENT

“This brings in so many populist issues from anti-Wall Street, anti-Big Tech. Those worlds 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 before the House Financial Services Committee at a Feb. 18 hearing that will focus on the GameStop rally, Robinhood’s response and the overall state of the stock market. A separate Senate Banking Committee hearing is in the works.

Rep. Maxine WatersMaxine Moore WatersWhite House readies for Chauvin verdict McCarthy to introduce resolution to censure Waters House GOP's McClain responds to Pelosi calling her 'that woman' MORE (D-Calif.), chairwoman of the Financial Services panel, said Wednesday that she wanted Tenev to testify, along with GameStop and Reddit representatives and Keith Gill, a prominent Reddit trader behind the recent rallies. She said not all invited witnesses have responded yet.

Lawmakers on both sides of the aisle have criticized Robinhood’s decision to stop users from buying shares of GameStop and other skyrocketing companies targeted by a Reddit forum. Hedge funds and other investors, meanwhile, continued to buy the stocks.

The anger even bridged some political divides, with Rep. Alexandria Ocasio-CortezAlexandria Ocasio-CortezOvernight Energy: Treasury creates hub to fight climate change through finance | Sanders, Ocasio-Cortez introduce 'Green New Deal for Public Housing' | White House defends 'aspirational' goal of 62,500 refugees Sanders, Ocasio-Cortez introduce 'Green New Deal for Public Housing' MORE (D-N.Y.) and Sen. Ted CruzRafael (Ted) Edward Cruz15 Senate Republicans pledge to oppose lifting earmark ban 'Real Housewives of the GOP' — Wannabe reality show narcissists commandeer the party Is the antidote to bad speech more speech or more regulation? MORE (R-Texas) finding themselves on the same page.

At the hearings, Robinhood will need to lay out its case before skeptical lawmakers. The company, which was founded in 2013, has argued that its decision to curtail trading of GameStop stock was done in the best interest of its customers at a time when it’s struggling to keep up with rapid growth.

ADVERTISEMENT

“Robinhood appears to have a credible, objectively verifiable explanation for why it did what it did,” said David Slovick, a partner at Barnes & Thornburg and who was senior enforcement attorney at the Securities and Exchange Commission (SEC) from 2000 to 2004.

Tenev’s performance at the hearing, and Robinhood’s fight to quell the backlash, will pose the biggest challenge yet for its recently expanded D.C. team.

The company has been bulking up its Washington office with former SEC officials.

In May, Robinhood hired former Republican commissioner Dan Gallagher, who served from 2011 to 2015, as its chief legal officer. The company also brought on Lucas Moskowitz, former chief of staff to ex-SEC Chairman Jay Clayton from 2017 to 2019, as deputy general counsel.

Robinhood spent $275,000 on lobbying in 2020 and had eight lobbyists on retainer, many of whom have backgrounds at the SEC and on Capitol Hill.

Justin Daly of Daly Consulting Group was commissioner’s counsel from 2007-2010, and Blue Ridge Law & Policy’s Benjamin Brown served as counsel at the agency from 2014-2015.

On the banking and congressional side, Williams Group’s Michael Williams is a former managing director at Credit Suisse, and Blue Ridge Law & Policy’s William Liles served as senior counsel to Republicans on the House Financial Services Committee from 2011 to 2012.

Just recently, Robinhood put out the call for an in-house lobbyist. The job posting said the federal affairs manager would need to prioritize working on federal government relations, primarily focusing on Congress.

On the PR front, Robinhood isn’t retreating from the GameStop controversy.

Speaking on Tesla CEO Elon MuskElon Reeve MuskNASA picks Elon Musk's SpaceX to build spacecraft for manned moon missions Why does Bernie Sanders want to quash Elon Musk's dreams? Hillicon Valley: Intel heads to resume threats hearing scrapped under Trump | New small business coalition to urge action on antitrust policy | Amazon backs corporate tax hike to pay for infrastructure MORE’s podcast this week, Tenev defended the decision to halt trading. The company is also running a Super Bowl ad on Sunday, highlighting how the app is opening the financial system to everyone.

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.

ADVERTISEMENT

Robinhood has hired communications specialists in recent weeks.

Josh Drobnyk, who worked in communications at the Financial Industry Regulatory Authority (FINRA), came on as vice president of corporate communications just days before the GameStop frenzy.

Another recent DC hire was Jacqueline Ortiz Ramsay, former vice president of media relations at the National Association of Federally-Insured Credit Unions, as head of public policy communications.

Anthony Cavallaro, who worked in the financial crimes detection program at FINRA, was hired as head of regulatory services and fraud oversight and is expected to start this month.

While Robinhood may be preparing for enforcement actions, industry experts are doubtful that the hearings will lead to substantive reforms.

“I doubt very much that this saga will result in any changes to the securities laws or the SEC’s rules. Even if Robinhood did what Sen. Warren says it did and improperly restricted individuals’ ability to trade certain stocks, the securities laws already contain the provisions necessary to charge the company,” Slovick said, referring to Sen. Elizabeth WarrenElizabeth WarrenWorld passes 3 million coronavirus deaths Poll: 56 percent say wealth tax is part of solution to inequality Democratic senators call on Biden to support waiving vaccine patents MORE (D-Mass.).

ADVERTISEMENT

Democrats want the SEC to increase capital requirements for brokerages, nail down what it considers to be market manipulation and increase disclosure requirements for hedge funds, particularly when they take large short positions on stocks.

Tenev has also called for changes, saying regulators and the financial system need to create a means to finalize securities transactions immediately, instead of the two-day process that he blamed for some of the company's woes.

Some experts say Robinhood just needs to weather a storm that is likely to blow over with time.

“I’d be surprised if we were talking about the health of our equity markets a year from now,” Oxner said.

Slovick agreed, saying Wall Street critics might not find the kind of smoking gun they’re looking for.

“It’s got the right populist elements: small investor good, big hedge fund bad. But for anyone who wants to dig a little deeper, I think they’ll discover a dry well, not a perfect storm,” he said.