Robinhood fined $70 million in record settlement over outages and misleading customers (2024)
Robinhood Financial 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 notsatisfy 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. Withinminutes,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.
In its announcement on Wednesday, FINRA said that the fine covered issues like false and misleading information and the harm suffered by customers from systems outages in March 2020. The regulator said Robinhood must follow rules that were designed to protect investors and the markets.
If you still have a Robinhood account, you'll get a direct credit on that account. If you no longer have an account you'll, get a payment by check. You can also opt to receive the payment digitally.
Robinhood to Pay Up to $10.2 Million to Settle Outage Probe
The investigation, conducted by state securities regulators, found that the Menlo Park, California-based brokerage, which pioneered free stock trades for retail customers, had deficiencies in many parts of its operations.
Robinhood Markets says it's being investigated for its trading execution, the latest in a string of regulatory and legal proceedings faced by the online brokerage. “The New York Attorney General is conducting an investigation into brokerage execution quality.
Stocks take 2 trading days to settle and options take 1 trading day to settle. In a margin account, you can instantly trade with funds from unsettled stock and option sales.
Under the terms of the Robinhood settlement, class members can receive a cash payment based on their experiences following the data breach. Class members can receive up to $100 for out-of-pocket expenses related to the data breach, including communication charges, unreimbursed account losses, bank fees and more.
Robinhood Users' Attys Get $2.97M In $9.9M Outages Deal
A California federal judge approved Robinhood's $9.9 million deal to compensate about 146,000 users for service outages on the platform in 2020 on Thursday and signed off on $2.97 million in fees for the plaintiffs' counsel.
Robinhood hasn't admitted any wrongdoing but agreed to a $9.9 million class action lawsuit settlement to resolve these allegations. Under the terms of the Robinhood settlement, account holders can receive a proportional cash payment based on the economic losses they sustained as a result of the outages.
The trading app saw its number of monthly active users slide 34%, by roughly 7 million, to 14 million over the past year, according to a second-quarter earnings report released Tuesday. Retail investors have struggled during a punishing 2022, with recessionary fears and rising interest rates hitting their portfolios.
Robinhood was accused of concealing how its business relied heavily on "payment for order flow," with the Menlo Park, California-based company collecting "unusually high" fees from outside broker-dealers who processed customer trades.
Robinhood's range of offerings is extremely limited in that it only offers stocks, ETFs, options, and cryptocurrency trading. Robinhood doesn't support mutual funds or fixed-income products, and you can't trade commodities, forex, or futures.
Robinhood employs a risky business strategy to make money
Robinhood's significant earnings from option bets give it an incentive to push inexperienced investors to trade those risky securities -- and potentially lose all their entire investment on a single trade.
Robinhood is a good platform for active trading and provides commission-free trades on all investments. But it's lacking in some areas, such as the number of accounts it offers and the fact it doesn't let you invest in certain popular asset classes such as bonds and mutual funds.
In May 2020, it was announced that Robinhood had raised $280 million in venture funding at a pre-money valuation of $8.3 billion led by Sequoia Capital, and 3 months later, the company announced a $200 million Series G funding round from a new investor, D1 Capital Partners, on August 17.
The company's largest shareholder is Index Ventures SA, with ownership of 8.3%. With 7.5% and 6.8% of the shares outstanding respectively, Baiju Bhatt and Vladimir Tenev are the second and third largest shareholders.
Since Robinhood is a member of SIPC, you are covered for up to $500,000 worth of securities, including $250,000 which can cover cash. So, if Robinhood somehow went out of business and lost customer assets, the SIPC would step in. Your assets would be safe regardless of what happens to the brokerage.
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