Robinhood to pay record $70 million in Finra settlement

Robinhood Financial has agreed to pay a total of $70 million in fines and restitution to settle allegations that the online brokerage brought significant harm to millions of customers as a result of false or misleading information, system outages and approval of trade options when it was not appropriate. 

The settlement announced Wednesday includes the largest financial penalty ever ordered by the Financial Industry Regulatory Authority Inc. Robinhood will pay a $57 million fine and $12.6 million in restitution, plus interest, to thousands of harmed customers, according to Finra. 

“Compliance with these rules is not optional and cannot be sacrificed for the sake of innovation or a willingness to ‘break things’ and fix them later,” said Jessica Hopper, executive vice president and head of the enforcement unit at Finra. “The fine imposed in this matter, the highest ever levied by FINRA, reflects the scope and seriousness of Robinhood’s violations.”

Robinhood’s record settlement comes during a tough year for the commission-free trading platform, which has experienced dramatic growth from fewer than 500,000 customers in 2015 to more than 31 million today, according to Finra. Of those millions of accounts, 18 million were funded as of the first quarter 2021. While Robinhood’s market share has grown, its strength in digital channels and value for fees were offset by poor performance on trust, people and problem resolution, according to J.D. Power

With Robinhood’s growth came a flurry of regulatory woes, including being charged by William Galvin, secretary of the Commonwealth of Massachusetts, with manipulating its users’ trading activity via gamification tactics. Following the GameStop stock surge and social media mayhem in January, Robinhood’s decision to block retail investors from trading GameStop Corp., AMC Entertainment Holdings Inc. and other shorted stocks while hedge funds were freely able to trade the stocks as they saw fit was met with outrage and skepticism from customers and even U.S. political leaders

Finra identified a string of alleged failures by Robinhood. Despite Robinhood’s self-described mission to “de-mystify finance for all,” the firm communicated false and misleading information to its customers, including whether customers could place trades on margin, how much cash was in customers’ accounts, how much buying power or “negative buying power” customers had, the risk of loss customers faced in certain options transactions, and whether customers faced margin calls.

In one example, Finra noted a Robinhood customer who had turned margin “off” and tragically took his own life in June 2020. In a note found after his death, he expressed confusion as to how he could have used margin to purchase securities because, he believed, he had not “turned on” margin in his account. Robinhood also displayed inaccurate negative account balances to this customer. Finra’s example matches the tragic death of Alex Kearns, a Robinhood customer who took his life in June 2020 after mistakenly thinking he had lost some $730,000. 

As a result of Robinhood’s misstatements, thousands of customers suffered more than $7 million in total losses, according to Finra. 

The investigation also found that since Robinhood began offering options trading to customers in December 2017, the firm allegedly failed to exercise due diligence before approving customers to place options trades. 

Robinhood relied on algorithms known at the firm as “option account approval bots” to approve customers for options trading, with only limited oversight by firm principals, according to Finra. Those bots often approved customers to trade options based on inconsistent or illogical information. 

As a result, Robinhood approved thousands of customers for options trading who either did not satisfy the firm’s eligibility criteria or whose accounts contained red flags indicating that options trading may not have been appropriate for them.

Robinhood allegedly failed to “reasonably supervise” the technology that it relied upon to provide its broker-dealer services, such as accepting and executing customer orders, from January 2018 to February 2021. Finra noted the series of outages and critical systems failures that Robinhood experienced, with the most serious outage occurring on March 2 and 3, 2020, when its website and mobile applications shut down, preventing Robinhood’s customers from accessing their accounts during a time of historic market volatility.

Additionally, between January 2018 and December 2020, Robinhood failed to report to Finra tens of thousands of written customer complaints that it was required to report. 

Robinhood’s reporting failures included complaints that it had provided customers with false and misleading information and that customers suffered losses as a result of the firm’s outages and system failures.

“Robinhood’s reporting failures were primarily the result of a firm-wide policy that exempted certain broad categories of complaints from reporting, even though those categories fell within the scope of FINRA’s reporting requirements,” according to the settlement. 

After a bleak 12 months, Robinhood has attempted to cushion the blow from its multiple lawsuits and negative publicity ahead of the startup’s initial public offering with moves that included halting the confetti animation on its app that had led to heavy criticism of its gamification tactics.

“Robinhood has invested heavily in improving platform stability, enhancing our educational resources, and building out our customer support and legal and compliance teams,” Robinhood spokesperson Jacqueline Ortiz Ramsay said in a statement. “We are glad to put this matter behind us and look forward to continuing to focus on our customers and democratizing finance for all.” 

Restarting firm culture post-pandemic

The post Robinhood to pay record $70 million in Finra settlement appeared first on InvestmentNews.

Andrew is half-human, half-gamer. He’s also a science fiction author writing for BleeBot.

Andrew Vincent
Andrew is half-human, half-gamer. He's also a science fiction author writing for BleeBot.
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