Robinhood Gets $70M Fine
Popular investing platform Robinhood has agreed to pay nearly $70 million to the financial industry regulatory authority (FINRA) to settle allegations that it caused customers “widespread and significant” harm on multiple different fronts over the past few years. That includes millions of customers who received false or misleading information from the firm, 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 has fined Robinhood Financial $57 million and ordered the firm to pay approximately $12.6 million in restitution, plus interest, to thousands of harmed customers. The sanctions represent the largest financial penalty ever ordered by FINRA and reflect the scope and seriousness of the violations.
“This action sends a clear message—all FINRA member firms, regardless of their size or business model, must comply with the rules that govern the brokerage industry, rules which are designed to protect investors and the integrity of our markets. 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 FINRA’s Department of Enforcement.
FINRA found in its investigation that, despite Robinhood’s self-described mission to “de-mystify finance for all,” during certain periods since September 2016, the firm has negligently communicated false and misleading information to its customers. The false and misleading information concerned a variety of critical issues, 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. One Robinhood customer who had turned margin “off,” 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.
FINRA also found that since Robinhood began offering options trading to customers in December 2017, the firm has failed to exercise due diligence before approving customers to place options trades. The firm relied on algorithms called “option account approval bots”, to approve customers for options trading, with only limited oversight by firm principals. 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 flagsthat should have disqualified them.
Robinhood also failed to reasonably supervise the technology that it relied upon to provide core broker-dealer services, such as accepting and executing customer orders. Between 2018 and late 2020, Robinhood experienced a series of outages and critical systems failures. The most serious outage occurred on March 2 and 3, 2020, when Robinhood’s website and mobile applications shut down, preventing Robinhood’s customers from accessing their accounts during a time of historic market volatility. This resulted in individual customers losing tens of thousands of dollars.
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 Robinhood provided customers with false and misleading information, and that customers suffered losses as a result of the firm’s outages and systems failures.
As it’s usually the case with such settlements, Robinhood neither admitted nor denied the charges, but consented to FINRA’s findings.
