The trading app Robinhood has been fined $70 million by the Financial Regulatory Authority (FINRA), the largest in the organization's history. According to the terms of the settlement, Robinhood will pay a $57 million fine and $12.6 million, plus interest, in restitution distributed to affected customers.
The fines were for a series of violations over the course of a few years, including communicating false and misleading information to customers around how options and margins trading works. It also found that the firm offered options trading to customers with limited oversight, allowing thousands of customers to do potentially risky options trading even though they did not meet the requirements for doing so. The agency also found that Robinhood suffered a series of serious outages that cost its customers money between 2018 and late 2020. Finally, Robinhood failed to report tens of thousands of customer complaints to FINRA, a violation of regulations.
The fines were not associated with GameStop’s historic run in January 2021, during which Robinhood halted trading.
“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,” Jessica Hopper, Executive Vice President and Head of FINRA enforcement, said in a press release.
Robinhood is an app based brokerage platform where millions of users log on to trade stock and take a shot at high stakes financial investment. It became popular among /r/WallStreetBets and meme stock traders who shorted GameStop and AMC. In January, 2021 it shut down access to those stocks for retail investors. The move was only the beginning of a long list of issues Robinhood’s investors would face over the next few months.
“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,” FINRA said in a press release.
One Robinhood customer killed himself after losing more than $730,000 on the app. “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 said as it detailed Robinhood’s misdeeds. “As noted in the settlement, Robinhood also displayed to this individual (and certain other customers) inaccurate negative cash balances.”
In addition to lying to customers, FINRA found that “the firm relied on algorithms—known at Robinhood as ‘option account approval bots’—to approve customers for options trading, with only limited oversight by firm principals,” and “failed to reasonably supervise the technology that it relied upon to provide core broker-dealer services, such as accepting and executing customer orders.”