An American financial services company, Robinhood Financial LLC has been ordered to pay nearly $70 million to resolve “systemic supervisory failures” that resulted in “significant harm” to millions of customers after the brokerage misled them, exposed them to risky trading tools and failed to supervise its technology, a failing that led to trading outages, an industry regulator said Wednesday.
The online brokerage will pay a $57 million penalty and
nearly $13 million in restitution to thousands of harmed clients. It was the
largest penalty ever issued by the Financial Industry Regulatory Authority,
according to the agency. The organization, which is overseen by the Securities
and Exchange Commission, regulates brokerage firms.
Robinhood misled consumers and exposed them to excessively
risky trading tools, and also failed consumers when its services suffered
multiple outages, the regulator said. The firm approved thousands of customers
for options trading, but those customers did not satisfy the firm’s eligibility
criteria, FINRA added.
Robinhood neither admitted nor denied the allegations.
“FINRA considered the widespread and significant harm
suffered by customers, including 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 said in a statement.
In the beginning of the pandemic, Robinhood suffered
multiple days of outages in March 2020 that left clients unable to trade
stocks, options or cryptocurrencies when financial markets suffered a swift
decline.
The settlement, however, is not related to the meme-stock
frenzy from earlier this year when Robinhood temporarily restricted customers
from buying shares of several companies, including high-flying stocks like
GameStop.
Robinhood also came under scrutiny over the death of Alex
Kearns, a 20-year-old customer who killed himself after believing he lost a
significant amount of money on the trading platform. FINRA said it found that
the firm "negligently communicated false and misleading information to its
customers" about how much cash was in customer accounts and the risks of
loss.
"Robinhood also displayed to this individual (and
certain other customers) inaccurate negative cash balances," FINRA said,
adding that as part of the settlement, the firm is required to pay more than $7
million in restitution to these customers.
Critics say the simple and intuitive trading app that
Robinhood created steers customers into risky investments that make the company
and its trading partners the most money.
The app itself makes it extraordinarily easy for investors
to buy and sell stocks. Within minutes, users can be online and trading up to
$1,000.
Robinhood's website says that it “has always sought to put
you – our customers– first."
Robinhood, which has 31 million customers, had 18 million
funded accounts, according to a settlement document made public Wednesday.
Robinhood is expected to go public in the coming months with
a valuation that tops $30 billion.
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