Robinhood can’t buy a break, or can they?
With its purchase of a majority stake in Bitstamp, Robinhood wades "all in" to the crypto pool and gets expert advice from more than one supposed "gatekeeper".
“In the beginning, there weren’t many crypto companies that had the means to be able to afford us. Now, more and more crypto companies are able to afford high-end legal counsel.” Andrew Ceresney, co-chair of Debevoise & Plimpton’s litigation department, said his firm sees no shortage of paying crypto clients.
In the world of fintech, it often seems foxes are guarding the hen house.
Robinhood announced it is buying Bitstamp, a European crypto trading platform whose business and tax residency is Slovenia. That seems reasonable, even given the recent Wells notice Robinhood received. Competitors such as Coinbase have seen explosive growth in the number of customers who want to trade crypto assets and Robinhood wants in. At one point, both Robinhood and Coinbase were roughly even in customer numbers and then came the pandemic. This acquisition could help Robinhood regain its footing in a competitive retail crypto trading marketplace.
However, the purchase of Bitstamp is full of risk. Robinhood’s purchase of Bitstamp looks like it is following in FTX footsteps, so it’s worth watching closely.
Bitstamp, for all the hype, is an underperforming company. In 2022, Bitstamp auditor Ernst & Young (EY) gave the company a material going concern warning. The underperformance could be related to the tone at the top of Bitstamp. In the last few years, Bitstamp experienced a reduction in staffing and the departure of their former CEO after only 18 months on the job. The new CEO came in roughly around the same time as FTX and Celsius started to implode. The subsequent CEO was formerly Bitstamp’s chief compliance officer which suggests signalling to regulators and other market stakeholders this isn’t FTX or Celsius.
The most recent EY London audit opinion for Bitstamp, filed with UK Companies House, is for the year ending December 31, 2022:
According to EY partner Ludlam’s audit report, Bitstamp was significantly underperforming at that point. Bitstamp swung from a profit of 37 million Euro in 2021 to a loss of 7 million Euro in 2022, based on a significant drop in revenues and, yet, an increase in administrative expenses.
DownloadRobinhood also uses Ernst & Young LLP as its external auditor. The partner who signs the Robinhood audit opinion is Brian Todd Outland, according to audit regulator the PCAOB’s website. Outland also signs the audit opinion for secretive tech company Palantir. Investor Peter Thiel, who founded and still owns 7.2% of Palantir, is a significant investor in European crypto exchange Bitpanda, a Bitstamp competitor based in Vienna. It is unusual for direct competitors to have the same audit firm, let alone the same partner signing the opinions!
What isn’t unusual — as anyone who has been reading The Dig knows — is for audit firms to provide a backchannel matchmaking function for their clients.
Coindesk reported that investment bank Architect Partners said in a June 7 report that Robinhood acquired Bitstamp at a “reasonable” price.
Architect notes that the price paid by Robinhood of $200 million in cash is a significant discount to the $500 million valuation that Bitstamp received in the 2018 majority investment.
Why might Robinhood have been able to drive a hard bargain for Bitstamp, other than the fact that it was financially underperforming? Well, as I wrote previously, EY was on their side!
Knowing who the partners are on these engagements allows us to see the formal and informal networks and how information may be shared between engagements to the benefit of all involved. From the 2014 study:
We anticipate that shared auditors may favor acquisitive clients over targets. This can take place for at least two reasons. First, an auditor’s long-term incentives (even within an auditor’s practice office) are more closely aligned with those of their acquisitive clients. Our intuition follows that applied to shared investment bank advisors who are more likely to favor acquiring firms when representing both a target and acquirer in the same deal (Agrawal et al., 2013). As audit firms and their practice offices likely have an incentive to foster and maintain ongoing relationships with larger, more acquisitive clients, we anticipate shared information at the auditor office level will benefit acquirers more so than targets.
Second, with a shared auditor, target auditors may be more forthcoming in the due diligence process, as target auditors may be more willing to disclose information to co-workers rather than auditors from another audit firm, especially when the information is concentrated within an auditor’s practice. We hence anticipate that bidders that share auditor offices with their targets are likely to gain superior acquisition related information about their targets and to experience reduced competition in bidding for those targets. Both effects would yield favorable transaction outcomes for acquirers.
Furthermore, the 2022 audited financial statements for Bitstamp list banks that either collapsed in 2023, namely Signature Bank and Silvergate Bank, or ran into problems with law enforcement for money laundering such as Deltec. All three had the honor of banking FTX, too!
One other curious and not fully explained aspect to this transaction is that Robinhood may not be acquiring 100% of Bitstamp. The press release, which is the same on both sides and that Robinhood has not yet followed with an 8-K filed with the SEC, does not talk about a piece of Bitstamp potentially still owned by Ripple.
How did that happen?
Back in 2018, Coindesk reported that Bitstamp had been acquired by NXMH, an investment firm based in Belgium and owned by South Korean conglomerate NXC. The firm NXC took only a majority ownership stake in the exchange — Bitstamp CEO Nejc Kodrič retained a minority ownership stake — but according to the article, Pantera Capital retained a 6 percent ownership stake in Bitstamp.
In May of 2023, Ripple announced it had acquired Pantera’s stake in Bitstamp, according to The Block:
"Ripple has a strong balance sheet and we are actively looking for opportunities to continue expanding the business outside of the U.S. and beyond payments, as we further solidify our global leadership position," [Ripple president Monica] Long told The Block.
The company acquired an undisclosed stake in Bitstamp from crypto venture capital Pantera. Galaxy Digital Holdings, who advised Pantera on the deal during the first quarter of the year, disclosed the news earlier this month.
Galaxy Digital prominently displays the recent deal and the prior deal on its website.
So, what happens after Robinhood acquires a majority interest in Bitstamp but Ripple continues to own a small stake? Bitstamp lists Ripple/XRP and also acts a a Ripple Gateway, according to its filing with Companies House.
Gateways provide an entry point for external people or entities who want to join the Ripple network. The gateway acts as a trusted intermediary – usually in the form of banks – to help two parties complete a transaction. They provide a channel to transfer funds in fiat and cryptocurrencies using the Ripple network.
After the SEC’s case against Ripple was resolved, you can now buy XRP via Coinbase in the United States. If Robinhood now lists Ripple/XRP, is this a similar related-party relationship between Coinbase and Bitstamp/Ripple as Coinbase has with Circle and USD?
Who represented Ripple when the SEC sued it? Readers of The Dig know the answer to this question.
Robinhood’s operations rely on retail traders but have never gained the same traction as Coinbase, considering the level of hype. The number of customers using Robinhood’s standard trading platform skyrocketed during the pandemic to 22.5 million customers and then fell back down to pre-pandemic levels of roughly 10 million customers. Robinhood’s management made bets in other fields such as credit cards, retirement accounts, options, and then, of course, cryptocurrency.
The latest figures show Coinbase with close to 100 million customers while Robinhood’s trajectory is on the decline.
Not long after Ripple acquired Pantera’s stake in Bitstamp, the SEC cracked down on Bitstamp’s staking as a service offering. Here’s Bloomberg on the situation:
Staking involves earning rewards by pledging tokens to help run a blockchain and the SEC views some such products as unregistered securities.
In June, the agency in a lawsuit accused Coinbase Global Inc. of breaking its rules by offering staking services. Rival Kraken earlier stopped US staking products after saying it will pay $30 million to settle SEC allegations.
Staking is something the SEC knew about when Coinbase went public, but the SEC allowed the company to say it was not yet material. The SEC belatedly started to squash staking after it became so big it was, of course, going to get a fight about it from everyone.
Who has been providing high level, expensive counsel to Robinhood, which will soon be partners with Ripple in Bitstamp? None other than Ripple’s defender Andrew Ceresney.
Andrew Ceresney led the SEC's enforcement division from 2013 to 2017 — while the agency itself was being led by Mary Jo White, another Debevoise partner — and Julie Riewe cochaired the enforcement division's asset-management unit for three years that party overlapped with Ceresney's tenure. Their names also appear on the FINRA settlement.
Court records indicate Ceresney recently represented McKinsey & Co. in a dispute with Jay Alix, the founder of AlixPartners, over alleged conflicts of interest, and Ripple Labs and its CEO Brad Garlinghouse in a civil lawsuit. And in 2019, Riewe represented Mylan, where Gallagher led the legal department, in a $30 million SEC settlement.
Lest we forget, Robinhood also wields the firepower of former SEC Commissioner Dan Gallagher as its Chief Legal Officer.
Singing for your supper is well paid!
© Francine McKenna, The Digging Company LLC, 2024