Robinhood Financial will pay a record $70-million penalty to settle allegations from the United States’ brokerage regulator that it misled millions of customers, had lapses tied to a March 2020 outage and that it let thousands of clients trade options that might not have been appropriate for them.
The case represents the largest financial sanction ever ordered by the Financial Industry Regulatory Authority, a decision that reflects the “scope and seriousness of the violations,” the watchdog said Wednesday in a statement. Finra said its investigation found that Robinhood had “negligently” provided false information to its customers in certain periods dating back to 2016.
The penalty comes at a key time for Robinhood, which plans to hold an initial public offering this year. The Menlo Park, Calif., brokerage firm has faced criticism from lawmakers and regulators over its ties to the meme-stock frenzy that has roiled markets this year and for claims that its popular app hooks neophyte investors on trading.
The Finra sanction includes a $57-million fine and a demand that Robinhood pay about $12.6 million to wronged customers. In settling the case, Robinhood neither admitted nor denied the regulator’s allegations.
“Robinhood has invested heavily in improving platform stability, enhancing our educational resources, and building out our customer support and legal and compliance teams,” company representative Jacqueline Ortiz Ramsay said in a statement.
In a Wednesday blog post, Robinhood said that it has added live phone support for certain areas and that it has more than tripled its customer support staff since March 2020, with about 2,700 people working in that area now. The company also said it has improved how it manages its technology to reduce the risk of future outages and has added more supervision for options trading.
Robinhood struggled at times to keep up with demand for its free app since the pandemic began to shake financial markets last year. The company said in a February filing that it was in talks with Finra to resolve an inquiry about its March 2020 outages and practices involving options trading, which could cost at least $26.6 million; the sum it agreed to pay was more than twice that amount.
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 when he thought he had turned off that feature. The day before he died, Robinhood showed him that his cash balance was negative $730,165.72 when it was actually negative $365,530.60.
Finra said he was one of more than 800,000 customers that Robinhood allowed to make certain kinds of trades that could automatically trigger the use of borrowed money even if they had turned off the ability to trade “on margin.” The regulator said he was also an example of the more than 135,000 customers where Robinhood’s website and mobile app gave inaccurate numbers for their cash balances from December 2019 to June 2020.
The regulator 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. Finra said those bots often approved customers based on “inconsistent or illogical information.” For example, they gave the OK to some customers who were younger than 21 but also said they had more than three years of experience in trading options.
In citing outages, the regulator accused Robinhood of failing to reasonably supervise the technology it relied on. The most serious outage occurred March 2, 2020, and continued into the following day, when Robinhood customers couldn’t get into their accounts as the pandemic caused upheaval across markets.
The Associated Press was used in compiling this report.