Robinhood to pay nearly $70m to resolve sweeping regulatory allegations that the brokerage misled customers, approved ineligible traders for risky strategies and didn’t supervise technology that failed and locked millions out of trading.
The case represents the largest financial sanction ever ordered by the Financial Industry Regulatory Authority (FINRA), a decision that reflects the “scope and seriousness of the violations,” the watchdog said in a statement. It said its investigation found that Robinhood had “negligently” provided false information to its customers about aspects like trading on margin.
The authority wrote, noting “significant harm” to “millions of customers affected by the firm’s systems outages in March 2020, and thousands of customers the firm approved to trade options even when it was not appropriate for the customers to do so.”
FINRA said it fined Robinhood $57m and ordered the stock trading app to pay nearly $13m in restitution to thousands of clients.
Commenting on the case, FINRA Head of FINRA’s Department of Enforcement Jessica Hopper said, “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.
“The fine imposed in this matter, the highest ever levied by FINRA, reflects the scope and seriousness of Robinhood’s violations, including FINRA’s finding that Robinhood communicated false and misleading information to millions of its customers.”
The popular online brokerage also faced criticism over the death of Alex Kearns, who died by suicide after finding a negative $730,000 balance in his Robinhood account from unintentional margin trades. The suicide was mentioned in the FINRA press release. Robinhood neither admitted or denied the charges.
The enforcement action is a blow to the online brokerage, which was launched in 2014 and has won over users with commission-free trades and its mobile app. The company took on millions of new customers and attracted more scrutiny this year as many investors accessed Robinhood to speculate on meme stocks such as GameStop Corp. and AMC Entertainment Holdings Inc.
Robinhood’s growth has continued with its biggest source of revenue stemming from customer trading, more than tripling in the first quarter. It enraged clients earlier this year when it restricted trading in some popular stocks that had become so volatile that Robinhood’s clearinghouse told the brokerage to post billions of dollars in additional collateral.
The penalty comes at a critical time for Robinhood, which plans to hold an initial public offering later this year.
In response to the penalty, Robinhood representative Jacqueline Ortiz Ramsay said, “Robinhood has invested heavily in improving platform stability, enhancing our educational resources, and building out our customer support and legal and compliance teams.
“We are glad to put this matter behind us and look forward to continuing to focus on our customers and democratizing finance for all.”
Robinhood said that it has added live phone support for certain areas, and more than tripled its customer support staff since March 2020, with about 2,700 people working in that area now. The company also said that it improved how it manages its technology to reduce the risk of future outages, and added more supervision for options trading.
The company said it had completed the “restructuring and enhancement of its legal, compliance, and anti-fraud functions; strengthening of its supervisory structure and written supervisory procedures, including with respect to supervision of technology; expansion of customer support, including with respect to options and margin trading; remediation of certain customer communications and data displays at issue in the AWC; and improved supervision of options trading.”
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