Robinhood Outages, False Statements Will Cost It $70M in Federal Fines

(CN) — Robinhood Financial agreed Wednesday to pay $57 million in fines and more than $12 million in restitution to settle claims that it misled customers and inappropriately allowed them to trade.

Jessica Hopper, executive vice president and head of Department of Enforcement at the Financial Industry Regulatory Authority, called it the highest-ever fine in the agency's history — a reflection of what she called "the scope and seriousness of Robinhood’s violations, including FINRA’s finding that Robinhood communicated false and misleading information to millions of its customers."

The news is the latest damage the app has seen on the road to an initial public offering originally predicted to value the business at more than $20 billion.

Robinhood uses payment for order flows to profit from its fee-free trading platform, but authorities say that model, as well as gimmicks like using confetti to celebrate usage, downplays the risks of trading. The company reached a $65 million settlement last year to settle Securities and Exchange Commission charges that its “payment for order flow” practice caused users to pay more for stock they buy — and get less money for stock they sell — than they otherwise would have. Massachusetts brought a state suit against the company around the same time for failing to protect investors from unsuitable trades.

Launched in 2014 with the mission statement that it would “democratize finance for all,” Robinhood has seen its popularity skyrocket in recent years, particularly among millennials. Last year, however, as coronavirus-shutdown orders took hold in March 2020 and wreaked havoc on international markets, the company experienced several outages, notably on days with high trading volumes.

FIRNA says problems arose when Robinhood began relaying false or misleading information to customers, particularly about whether customers could place trades on high margin, how much money they had in their accounts and how much buying power they had.

By FIRNA's count, this caused customers to lose over $7 million — an amount Robinhood will now pay back and then some.

One customer, 20-year-old Alex Kearns, took his own life last June after he believed he had a negative cash balance on the app of more than $700,000. FINRA mentions this tragic case in the settlement announcement, noting that a note by Kearns found after his suicide showed him expressing confusion about the misleading negative balance on his account.

Kearns’ family sued Robinhood earlier this year, claiming that Kearns attempted to reach out to customer service about his balance three times but was unable to reach anyone.

Robinhood announced Wednesday that it has tripled the number of support staff since last March to 2,700, while also enhancing in-app educational support and strengthening the supervisory structure for its technology.

Failure to supervise the technology that Robinhood relied on was something FINRA also pointed out, stating that bots were approving customers for trading options they had no business being approved for. Further, FIRNA says technology used to take customers' orders for trading failed during the outages, resulting in thousands of dollars lost.

“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,” said Hopper. “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.”

Though Robinhood has accepted the settlement, FIRNA notes that it has neither admitted nor denied the allegations.

Head of public policy communications for Robinhood Jacqueline Ortiz Ramsay says the company is committed to their customers.

“Robinhood has invested heavily in improving platform stability, enhancing our educational resources, and building out our customer support and legal and compliance teams,” Ramsay said in a statement. “We are glad to put this matter behind us and look forward to continuing to focus on our customers and democratizing finance for all.”

Lawmakers on Capitol Hill are also exploring ways to step in. At a March 2021 hearing, senators considered amending existing rules, like those that regulate the time it takes transactions to process and clear between financial institutions.

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