The directors of Robinhood Markets face a derivative lawsuit over their alleged misconduct which caused damage to the company and its investors. The lawsuit was brought by Robert Zito, a stockholder of Robinhood.

The complaint, seen by FX News Group, is for the benefit of nominal defendant Robinhood Markets, Inc., and is against Robinhood’s Board of Directors and certain of its executive officers. The plaintiffs seek remedy of defendants’ breaches of fiduciary duties and violations of federal law. The action seeks to remedy alleged wrongdoing committed by the company’s directors and officers in their management and control of the company.

The list of defendants includes Vladimir Tenev, Co-Founder, Chief Executive Officer (CEO), and President of Robinhood, as well as a director on the Company’s Board of Directors. There are several other defendants too, such as Baiju Bhatt, Co-Founder and Chief Creative Officer of Robinhood, as well as a director on the Board.

On July 1, 2021, Robinhood filec a draft registration statement on Form S-1, which would be used for the company’s Initial Public Offering (IPO) following a series of amendments in response to SEC comments.

On July 25, 2021, the company filed its final amendment to the registration statement (“Registration Statement”), which registered 60.5 million Robinhood shares for public sale. The SEC declared the Registration Statement effective on July 28, 2021.

On July 30, 2021, the IPO was priced at $38 per share and the defendants filed the final Prospectus for the IPO, which formed part of the Registration Statement (the “Offering Documents”).

According to the investors’ complaint, the Offering Documents were false and misleading and omitted to state that, at the time of the Offering, Robinhood’s revenue growth was, indeed, experiencing a major reversal, with transaction-based revenues from cryptocurrency trading serving only as a short term, transitory injection, effectively masking what was stagnating growth.

On October 26, 2021, after the markets closed, the company reported its third quarter 2021 financial results, revealing that its total net revenue for the period between July 1, 2021 through September 30, 2021 — the same period during which the Company conducted its IPO — came in at $365 million, badly missing analyst estimates by nearly $73 million, and declines in its monthly active users (“MAUs”), funded accounts, assets under custody (“AUC”), and average revenue per user (“ARPU”).

The Company also disclosed that third-quarter transaction-based revenue from cryptocurrency trading, which in the lead up to the IPO had been the bulk of the Company’s revenues, was only $51 million, significantly below the $233 million the Company earned from crypto trading in the second quarter.

At the same time, Robinhood’s net losses increased from $11 million to $1.32 billion due to a $1.24 billion stock-based compensation expense that was tied to the stock’s post-IPO performance, and its initial rally – which increased its shares to an all-time high of $85 a share on August 4, 2021 and triggered a massive payout to Defendants Tenev and Bhatt.

To make matters worse, the company also guided for “less than $1.8 billion” in revenue for the full year, implying a maximum 85% growth, which fell well short of analyst expectations of 111%.

On this news, Robinhood’s stock dropped 10.5%, falling from $39.57 per share on October 26, 2021 to close at $35.44 per share on October 27, 2021.

Moreover, the plaintiffs alleged that Robinhood has repeatedly neglected to fully inform customers regarding the nature and scope of data security failures and unauthorized activity. For example, after it was revealed in 2019 that Robinhood stored customer login credentials in cleartext, the company refused to reveal how many customers’ credentials were involved, how long their credentials had been maintained in that format, and who had access to the unencrypted data.

Further, the widespread security breach of 2020 was only disclosed by Robinhood after reports were leaked by anonymous sources to news outlets.

Then, on November 8, 2021, after the markets closed, Robinhood disclosed that it had suffered another “data security incident” on November 3, 2021, admitting that an “unauthorized third party” had obtained email addresses for approximately five million users and the full names of a different group of about two million users, indicating that the attack potentially affected nearly 40% of the Company’s MAUs.

On this news, the Company’s stock dropped over 3% on November 9, 2021 to close at $36.70 per share, before then falling another 6% to close at $34.49 the very next day.

The complaint claims Vlad Tenev was responsible for most of the false and misleading statements and omissions that were made, including those contained in the Company’s SEC filings.

The complaint further alleges that Tenev, Bhatt, Loop, Rubenstein, Sandell and Zoellick breached their fiduciary duties of loyalty by allowing improper statements concerning the Company’ revenue growth and security breaches. Tenev, Bhatt, Loop, Rubenstein, Sandell and Zoellick all possessed material, nonpublic company information. The complaint says that defendants Tenev, Bhatt, Loop, Rubenstein, Sandell and Zoellick face a substantial likelihood of liability for breach of their fiduciary duty of loyalty.

The complaint alleges that the defendants engaged in a sustained and systematic failure to properly exercise their fiduciary duties. Among other things, the defendants allegedly breached their fiduciary duties of loyalty and good faith by permitting the use of inadequate practices and procedures to guide the truthful dissemination of Robinhood’s news to the investing public and to the Company’s shareholders, allowing or permitting false and misleading statements to be disseminated in the Company’s SEC filings and other public disclosures and, otherwise failing to ensure that adequate internal controls were in place regarding the serious business reporting issues and deficiencies described above.

As a direct and proximate result of Defendants’ failure to perform their fiduciary obligations, the Company has sustained significant damages, the complaint says.

Also, the defendants allegedly wasted corporate assets by, inter alia:

• (a) paying excessive compensation, bonuses, and termination payments to certain of its executive officers;
• (b) awarding self-interested stock options to certain officers and directors; and
• (c) incurring potentially millions of dollars of legal liability and/or legal costs to defend and/or settle actions addressing Defendants’ unlawful actions and the multiple data breaches occurring under their watch.

The complaint alleges that the defendants were unjustly enriched at the expense of, and the detriment of, Robinhood Markets. They either benefitted financially from the improper conduct, or received bonuses, stock options, or similar compensation from Robinhood that was tied to the performance or artificially inflated valuation of Robinhood or received compensation or other payments that were unjust in light of Defendants’ bad faith conduct.

The plaintiff, as a shareholder and representative of Robinhood, seek restitution from the defendants and seek an order from the Delaware District Court disgorging all profits, including from insider transactions, the redemption of preferred stock, benefits, and other compensation, including any performance-based or valuation-based compensation, obtained by the defendants due to their wrongful conduct and breach of their fiduciary and contractual duties.

In addition, the defendants allegedly violated section 10(b) of the Exchange Act and SEC Rule 10b-5 in that they:

1. employed devices, schemes, and artifices to defraud;
2. made untrue statements of material facts or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and/or
3. engaged in acts, practices, and a course of business that operated as a fraud or deceit upon the Company in connection with the Company’s purchases of the Company’s stock during the period of wrongdoing.

As a result of the defendants’ alleged misconduct, the Company has and will suffer damages in that it paid artificially inflated prices for its own common stock and suffered losses when the previously undisclosed facts relating to the wrongdoing was disclosed.

Plaintiff demands judgment against all Defendants and in favor of the Company for the amount of damages sustained by the Company as a result of Defendants’ breaches of fiduciary duties.

He also seeks a judgment directing Robinhood to take all necessary actions to reform and improve its corporate governance and internal procedures to comply with applicable laws and to protect the company and its shareholders from a repeat of the damaging events described herein, including, but not limited to, putting forward for shareholder vote resolutions for amendments to the company’s By-Laws or Articles of Incorporation and taking such other action as may be necessary to place before shareholders for a vote a proposal to strengthen the Board’s supervision of operations and risk management, and develop and implement procedures for greater shareholder input into the policies and guidelines of the Board.

Finally, the plaintiffs pushes for an order awarding the company restitution from the defendants and ordering disgorgement of all profits, benefits and other compensation obtained by the defendants.