Robinhood Charged And Asked To Pay 70 Million Fee For Misleading Customers

Robinhood is set to pay about $70 million as settlement for a wide range of allegations, including one that it gave users misleading information and wrongly let some users make riskier trades after they lied about their trading experience.

This $70 million penalty is the largest ever to be ordered by the Financial Industry Regulatory Authority (FINRA), a non-governmental organization in charge of the United States brokerage industry. According to the organization's head of enforcement department, Jessica Hopper, it reflects the scope and seriousness of Robinhood's violations. 

Since its launch in 2014, Robinhood has disrupted 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 currently has over 31 million users but has faced criticism and penalties from a range of regulators over allegations that it encouraged amateurs to make overly risky trades. 

Robinhood has so far neither admitted nor denied the allegations in the settlement. The company has, however, published a blog post to share upgrades to its operations and how it has improved support for its customers, including a new feature that allows you to call in and talk with a service representative.

“We are glad to put this matter behind us and look forward to continuing to focus on our customers and democratizing finance for all,” said Jacqueline Ortiz Ramsay, Robinhood’s head of public policy communications.

One of the examples cited in the settlement was the suicide of a 20-year-old user in 2020. In his suicide note, the user explained how borrowed money was used to trade even after he thought he had turned off the feature. The day before he died, Robinhood showed the customer that his cash balance was negative $730,165.72 when it was negative $365,530.60.

FINRA said the user was only one of over 800,000 users 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 trade “on margin” feature. He was also an example of over 135,000 customers to whom Robinhood’s website and the mobile app showed inaccurate numbers for their cash balances from December 2019 to June 2020.

FINRA also accused Robinhood of deploying “approval bots”, with only limited oversight, to decide whether to allow customers to trade options. Such trades are usually riskier than simply buying stocks, with the potential for larger losses. According to FINRA, these bots often approved customers based on inconsistent or illogical information. 

Past issues at Robinhood were also brought up, one of such was that the company failed to supervise the technology it relied on. The most serious incident being on the 2nd and 3rd of March 2020, when its users were denied access into their accounts during the pandemic.

In the final settlement, Robinhood is set to pay a $57 million fine, as well as another $12.6 million to thousands of users. This is, however, not the company’s first settlement with FINRA. In 2019, Robinhood accepted to pay $1.25 million after accusations that it didn’t give its users the best prices for trading stocks. The company neither admitted nor denied the allegations.

In 2020, Robinhood also agreed to pay $65 million to settle accusations by the US Securities and Exchange Commission which claimed that it failed to reveal the full details of its dealings with high-speed traders and didn’t get the best prices for users.

Having a large number of very young and inexperienced user-base, Robinhood has been a major player contributing to the rise of less-wealthier investors. These young investors are investing their savings in a bid to create wealth for themselves and reduce the gross wealth inequality.

Robinhood, which claims to be trying to promote investment for everyone, is currently making plans to list its stock on the market in a widely anticipated IPO.