Robinhood Markets, Inc. (HOOD Quick QuoteHOOD - Free Report) expects $100 million worth of charges related to regulatory issues to be incurred in the third quarter of 2023. The company will incur the costs to resolve the legal and regulatory matters that have been disclosed previously.

HOOD has had various disagreements and confrontations with regulators in the past.

The brokerage firm was in the limelight during the 2021 meme stock trading mania.

Notably, in early 2021, in the midst of the pandemic, the U.S. stock market experienced the so-called meme-stock trading frenzy. A large number of retail investors on social media purchased shares of highly-shorted stocks such as GameStop and AMC Entertainment, which, over a short period, saw their stock prices surge to stratospheric levels.

Thus, these companies were able to take advantage of the price surge, raising substantial amounts of capital at elevated prices, thereby improving their liquidity positions.

However, at that time, Robinhood as a brokerage firm restricted customers’ ability to buy some of the meme stocks, causing their prices to suddenly drop. This created an outrage among those customers who could not take full advantage of the price surge.

Thus, in a proposed class action, customers who owned stocks of AMC and GameStop claimed that they lost money because of Robinhood’s action.

Nevertheless, this August, HOOD defeated the appeal by investors over its decision to restrict purchases of the meme stocks in the January 2021 frenzy.

In a 3-0 decision, the U.S. Circuit Court of Appeals in Atlanta said that Robinhood’s standard customer agreement specifically authorized the restrictions and did not suggest that HOOD would accept all trade orders.

Also, the court dismissed claims that Robinhood was negligent in failing to keep investors from losing money.

However, in the same month, HOOD was defeated in its case against the Massachusetts Secretary of State, Bill Galvin. The Massachusetts Supreme Judiciary Court ruled that a state fiduciary duty rule, which says that broker-dealers have a fiduciary obligation to provide investment advice without regard to the interests of anyone but their customers, was considered valid.

With its ruling, the Massachusetts court provided victory to state securities regulators in their enforcement action against Robinhood.

In December 2020, the Secretary of State initiated an enforcement action against Robinhood, claiming that the online brokerage firm failed to protect its customers and their money.

Galvin alleged that Robinhood treated trading as a game and implemented strategies to entice young and inexperienced traders to engage in risky trading through its online platform, violating the state’s fiduciary duty rule.

Since then, Galvin sought to have Robinhood’s state broker-dealer license revoked.

However, in March 2022, a trial court reached a decision in favor of Robinhood, saying that federal laws took precedence over the state regulator’s stipulations.

Additionally, the judge who heard the case felt that Galvin overstepped his jurisdiction by implementing a regulation that was at odds with federal legislation.

However, the Massachusetts’ top court’s ruling reversed the lower-court judge’s decision, thus providing victory to Galvin.

Over the past six months, shares of Robinhood have lost 2.3% against the 2.6% rally of the industry.

Image Source: Zacks Investment Research

Currently, HOOD carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Legal Hassles Faced by Other Finance Firms

A couple of months ago, a lawsuit accusing Wells Fargo (WFC Quick QuoteWFC - Free Report) of defrauding its shareholders by making commitments to interview diverse job candidates in its hiring process, while it faked interviews for positions that had already been filled, was dismissed.

U.S. District Judge Trina Thompson said that shareholders failed to prove the conduct of fake interviews. Moreover, no evidence was found that could prove that WFC’s chief executive, Charlie Scharf, and senior diversity executives had knowledge of the sham interviews.

The plaintiffs, through the class action suit, had claimed that Wells Fargo had inflated its stock price by issuing a public statement discussing its guidelines mentioning workplace diversity. The said policy was adopted in 2020 and required at least 50% of candidates, who were interviewed for jobs paying at least $100,000, to be minorities, women or people from other disadvantaged groups.

In another case, CURO Group Holdings Corp.’s subsidiary, Heights Finance Holding Co., was sued by the U.S. Consumer Financial Protection Bureau ("CFPB") for allegedly pushing low-income borrowers to refinance short-term loans. The practice placed nearly 10,000 borrowers in continuous debt between 2013 and 2020.

The lawsuit, filed in federal court in Greenville, SC, stated that Heights Finance violated laws against unfair and abusive lending practices by churning loans through repeated refinancing.

Per CFPB, Heights Finance took advantage of struggling borrowers by not offering them alternatives to refinancing, which carried a fee each time.

However, CURO denied the allegations. In a statement, CURO mentioned that the small loans in consideration were originated by subsidiaries of Heights Finance before it was acquired by the company in late 2021 from private equity firm Milestone Partners.