One-liner: Robinhood Financial will pay nearly $70mn to settle a wide range of allegations, including that it gave customers misleading information and improperly allowed some users to make riskier trades after they lied about their trading experience.
A heavy penalty: The financial penalty is the largest ever ordered by the Financial Industry Regulatory Authority, an NGO that oversees the brokerage industry, and reflects the magnitude of violations.
Misleading customers: Since its 2014 launch, Robinhood has shaken up the brokerage industry with zero-commission trading and an easy-to-use app that’s drawn a new generation of investors into the market.
- It already has more than 31 million customers, however, criticism lay in its encouragement of novice users to choose financially poor choices to their detriment
Silent on accusations: Robinhood neither admitted nor denied the allegations in the settlement announced on Wednesday. In a blog post, Robinhood detailed how it has improved support for its customers, including the ability to contact customer support.
Going ahead: “We are glad to put this matter behind us and look forward to continuing to focus on our customers and democratizing finance for all.” Jacqueline Ortiz Ramsay, Robinhood’s head of public policy communications
Lethal cases: Among the examples cited in FINRA’s settlement was the suicide of a 20-year-old customer last year.
- A note found after his death said he was confused about how he could have used borrowed money to trade. The day before he died, an error lead Robinhood to show the customer that his cash balance was negative $730,165.72 when it was actually negative $365,530.60
One among many: The prior example was also part of the more than 135,000 customers where Robinhood’s website and the mobile app gave inaccurate numbers for their cash balances from Dec 2019 to June 2020.
Misleading AI: FINRA also accused Robinhood of using approval bots, with only limited oversight, to decide whether to allow customers to trade options.
- Such trades can be riskier than simply buying stocks, with the potential for quicker and bigger losses
Insufficient supervision: Past outages at Robinhood were also cited, with FINRA accusing it of failing to reasonably supervise the technology it relied on.
- The most serious occurred on March 2, 2020, and continued into the following day, when Robinhood customers couldn’t get into their accounts
The settlement: In its settlement, Robinhood will pay a $57mn fine and pay another $12.6mn to thousands of its customers.
- It’s not the company’s first settlement with FINRA. In 2019, it agreed to pay $1.25mn following accusations that it didn’t do everything it should to find the best prices for customers trading stocks.
Additional settlements: Last year, Robinhood agreed to pay $65mn to settle accusations by the Securities and Exchange Commission that it failed to disclose the full details of its dealings with high-speed traders and didn’t get the best prices for customers trading on its app.
New investors: With its swelling ranks of younger and more inexperienced customers, Robinhood has been a central player in the rising importance of smaller-pocketed investors on Wall Street.
Noble front: Known in the industry as ‘retail investors’, many are investing their savings for the first time in an attempt to slow the widening gap between themselves and wealthier households.
- Many also have encouraged each other on social media to pile into certain stocks en masse. That’s caused some maniacal moves for “meme stocks.”
GameStop example: GameStop this year has soared from $20 to $483, fallen back to roughly $40, and now trades at around $210, for example.
- Trading got so wild earlier this year that Robinhood and other brokerages temporarily blocked trading in GameStop and a handful of other stocks, raising the ire of many customers
Selling stocks: Robinhood, which says it’s trying to promote investment for everyone, is preparing to sell its own stock on the market in one of Wall Street’s most anticipated IPO.