Robinhood Markets Inc. (NASDAQ:HOOD), a California-based financial services company, can sigh in relief after the US judge decided to dismiss a lawsuit accusing the company of misleading retail investors during an initial public offering (IPO) almost two years ago.
Robinhood Wins 2021 IPO Lawsuit
Judge Edward Chen of the US District Court in San Francisco found no evidence that the information published by Robinhood in its prospectus and disclosure materials was incorrect, false or misleading. He also rejected accusations that key financial metrics examining the company's health had fallen precipitously moments before the IPO in July 2021.
Referring to the individual warnings issued by Robinhood, the judge states that they were not "particularly robust", but were "sufficient to negate a claim of misleading omissions."
"Plaintiffs thus failed to plead that Robinhood did not disclose 'material factors' that would make an investment in Robinhood speculative or risky," the judge added in its decision published on 10 February 2023.
The charge against Robinhood came before the court on 17 December 2021 and was filed by Philip Golubowski. The plaintiff purchased Robinhood shares and claimed to have suffered a loss due to information made available by the company that may have been misleading.
The misleading information purportedly related to the number of active users, the value of assets under management, revenue generated and the volume generated by cryptocurrency trading. Robinhood's shares lost 82% in June last year, falling to $6.81 from an IPO price of $38.
Additionally, the judge dismissed charges against Vladimir Tenev, the CEO of the company, and the IPO underwriters led by JPMorgan and Goldman Sachs.
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Robinhood's Court Skirmishes
Robinhood is a company that shot to fame coincided with the Covid-19 pandemic, near-unprecedented rises in the financial markets and intense speculation among retail investors. This explosive mix has resulted in Robinhood facing legal action for potential misconduct on several occasions in the past.
In October 2021, a group of traders had concerns about repeated service outages in the spring of 2020, when the market was gripped by covid volatility . Up to 7 million clients were said to be affected.
Earlier the same year, the family of a 20-year-old student, who committed suicide thinking he incurred losses of over $700,000 in his Robinhood account, sued the trading platform. Alex Kearns had misread financial statements and thought he had lost over $730,000 on options trading. However, the negative balance referred to available buying power in his trading account.
In 2021, Robinhood became a participant in regulatory investigations on multiple fronts. The SEC and FINRA were investigating the 2020 service outage and the suicide of the trader mentioned above. At the time, the firm secured $26 million to cover potential settlements or fines. In December 2020, Robinhood paid $65 million to settle the charges relating to misleading customers about revenue sources.
Robinhood Published Q4 2022 Financials
Last week, Robinhood reported that in the three months that ended December 2022, it increased its total net revenue by 5% to $380 million. However, transaction-based revenues slid 11% to $186 million, and cryptocurrency revenues fell 24% to $39 million.
The most substantial decline was reported in equities trading, where revenues shrank 32% to $21 million. In contrast, options revenue remained unchanged at $124 million. Finally, positive growth in total revenue was provided by net interest revenue, which grew to $167 million, which is up 30%.
"We stayed focused in the fourth quarter on serving customers, growing our business, and driving long-term shareholder value," said Robonhood's CFO, Jason Warnick. "We continued to deliver on our product roadmap and kept our costs lean."
Meanwhile, the board of Robinhood agreed to repurchase 55 million shares in the company bought by an entity controlled by Sam Bankman-Fried (SBF), Emergent Fidelity Technologies, in May 2022. SBF held a 7.6% stake in Robinhood, having bought $648 million worth of shares, which are now valued at $578 million.
