Robinhood's new top lawyer, a former SEC commissioner, could help the firm shed its scrappy roots

At the time, market observers interpreted Mylan's hiring of Gallagher as a way to fix its image in Washington, as Ronny Gal, an analyst at Alliance Bernstein, noted.

"I think Mylan was expecting multiple challenges on the D.C. front, so a D.C. guy makes sense," he said.

On to Robinhood

Gallagher joins Robinhood in the midst of its own difficult period. Over the course of the last two years, the firm has drawn the ire of financial media over its business practices and several platform outages. In March, Robinhood experienced a two-day outage at the beginning of the month, which the company said was tied to "stress" on the platform from whipsawing markets.

A user in Sarasota, Florida soon filed a class-action lawsuit. The plaintiff's father – who is also acting as his attorney – described the outage as a "massive failure of their system." The lawsuit seeks more than $5 million in damages.

It is not clear if Robinhood is on the hook from a legal or regulatory perspective. As noted by CNBC, its 44-page user agreement claims that the company isn't responsible for platform failures that are "beyond" its control. Weisberger, for his part, doubts that the outages will lead to any sort of enforcement action since they didn't have a broader impact beyond Robinhood's own user-base.

In any case, the outages were definitely not good from a public relations perspective. And they follow the firm's botched roll-out of a cash management feature in December 2018, the pulling of its bank charter in November 2019, and a $1.25 million fine from FINRA in December 2019.

"The hire of Gallagher shows they are working with the regulators," David Silver, a well-known attorney in the crypto world, said in a phone interview. He added that Robinhood has probably been communicating with regulators about the outages. "He gives credibility to them."

Still, others questioned whether the hire of Gallagher is just another example of the revolving door between financial regulatory agencies and the companies they're tasked with regulating.

It's not clear if Robinhood will have to face the commission on any of the issues it has encountered. But the hiring of Gallagher, one industry source says, makes it clear that Robinhood doesn't want to get caught wrong-footed.

"If you were in trouble with the SEC and you had to settle an action the number one person you would call would be Dan Gallagher," another industry source said.

Robert Hockett, a law professor at Cornell, said the hire of Gallagher reminded him of developments in the software and internet space during the late '90s.

"When the Microsoft antitrust litigation got rolling in the late 90s, commentators remarked on how all the Silicon Valley whippersnappers had had all the arrogance of youth and success, ignoring 'realities' - i.e., lawmakers and power-brokers in D.C., not to mention the law itself," he said in an email. "Not long after that, Microsoft began lawyering up with lots of insider lawyers like David Bois."

Still, some say the hire is not in the public's interest. 
 
"What Gallagher understands more than anyone else is what the SEC takes seriously, how a violation is found, how they will negotiate, he knows all the weaknesses, which are plentiful. That gives Robinhood a deep understanding of its adversary," Jeff Hauser, executive director of the Center for Economic Policy and Research's Revolving Door Project, told The Block. 
 
"Gallagher had input and influence in the SEC...this is a man who knows the SEC inside and outside," he added.

What comes next

To be sure, it's not unusual for a company with deep pockets to bring on someone with a background like Gallagher's.

Regardless of where folks stand on the ethics of former regulators working for companies they would have regulated, there's no doubt that Gallagher will have an impact on policy that affects both Robinhood and the broader brokerage world.

Gallagher might be able to pre-empt any attempts by lawmakers, a new White House administration, or new Democratic leadership in the SEC to examine the practice of payment-for-order flow more closely. The practice is how brokers like Robinhood make the bulk of their revenues. Large trading operations like Citadel Securities and Virtu Financial pay brokers for retail flow, which they then internally match. Robinhood brought in more than 40% of its revenue in early 2018 from selling customer orders to large traders, as reported by Bloomberg. Some market participants have questioned whether such companies have acted in the best interest of clients.

For instance, Citadel Securities in 2017 paid a $22.6 million fine for not executing customer orders at the best price, as reported by The Wall Street Journal.

"If the SEC moves forward with a Transaction Fee Pilot that curbs the use of rebates paid by exchanges then that might then propel them toward banning any payment to a broker, including PFOF," one source said, referring to a pilot that would examine the use of rebates in markets. The pilot was put on hold last year following court challenges by the New York Stock Exchange and Nasdaq.

Whatever Gallagher's ultimate impact is, it's a sure sign that Robinhood is looking for acceptance inside the Beltway. It's also fair to say that Robinhood likely hopes that this choice will signal a desire to play nicely with regulators and be seen as a rule-abider, not a rule-breaker.