The Financial Industry Regulatory Authority (FINRA) has fined online stock-trading app Robinhood Financial $70 million for a series of failures that hurt Robinhood’s customers.
The fine was announced as Robinhood concluded plans to file an investment prospectus to go public. This public offering is reckoned to be amongst Robinhood’s highest-profile events of the year.
FINRA Issues Largest Fine Ever to Robinhood
This latest fine by FINRA – its biggest ever – is just one in a series of punishments Robinhood had faced since its inception eight years ago. Eight years ago, Robinhood upended the online brokerage industry when it introduced commission-less trading. The trading platform soared this year as it was chosen as the preferred platform for the bulk of the stock-trading mania transactions that boosted share prices of so-called “meme stocks,” including AMC Entertainment, GameStop, and Nokia.
While popular, lawmakers and regulators have accused Robinhood of operational and administrative lapses that left users vulnerable to massive losses. The investment platform already has paid heavy fines, an example of which is the $65 million paid to the Security and Exchange Commission (SEC) for misleading customers about the modus operandi of its business.
FINRA’s fine covers various issues, such as the losses suffered by customers due to system blackouts in March 2020 and supplying misleading and/or false information to customers. According to FINRA, Robinhood did not adhere to regulations designed to protect the market, its customers, and investors.
FINRA Alleges Robinhood Is Not Protecting Its Customers
According to a statement by FINRA’s enforcement department, the regulations were not optional. They should not be ignored in the name of being “innovative” or with the intention to “fix them later.”
A Robinhood spokesperson was reported to have said that the startup is glad to move past the matter and is ready to move forward with delivering outstanding value and continuing its mission of “democratizing finance” to its burgeoning customers.
Robinhood Claims to be on a Mission to Democratize Finance
Founded in April 2013 by Baiju Bhatt and Vlad Tenev, Robinhood has been vociferous in its purported mission to democratize finance. Its commission-free trading helped attract millions of young investors who helped it grow. While Robinhood has grown into a well-known trading platform, it has been confronted with several questions on whether it’s commission-free trading, and several “behavioral nudge features” promoted overly risky trading. Critics also accuse Robinhood’s push notification setup of helping to create an atmosphere more fitting for a gambling platform. Robinhood also has been vilified for gamifying securities trading, which has caused many investors to risk money that they cannot afford to lose.
Alex Kearns, a 20-year-old Robinhood client, committed suicide after he discovered a reported negative balance in his account of $730,165. The figure wasn’t accurate, inflated due to improperly calculated trades. His parents sued Robinhood, alleging that Robinhood targeted inexperienced and young clients and then coerced them into engaging in risky trade practices.
Several investors also have joined in criticizing some of Robinhood’s unsafe practices. Warren Buffet and Charlie Munger have called for more stringent regulations of the Robinhood app, with Charlie Munger calling it “a gambling platform pretending to be a reputable business.”
While announcing its fine, FINRA said Robinhood had provided wrong information to its customers on how to enter trades with borrowed funds. The regulatory body also accused Robinhood of not scrutinizing whom they permitted to trade stock options, ignoring red flags, and permitting people not suited for such risky trades.
Robinhood also was faulted by FINRA for numerous system blackouts between 2018 to 2020 that prevented customers from accessing their accounts during significant market movements, resulting in massive losses. FINRA also declared a $30 million education initiative for new investors.
FINRA’s fine is expected to help lift some of the ambiguity that has surrounded Robinhood’s intentions to go public. Valued at $12 billion, Robinhood has expected to publish its IPO prospectus officially for several months now. In a recent blog post, it described various developments that have been made to support customers, such as a hotline and taking on additional customer support operators. It had drawn heavy criticism for not having a hotline for users to reach out for help or other information. The report also highlighted several reforms to ensure there aren’t any more outages and improvements to its scrutiny of users before enabling them to trade high-risk options.
Robinhood still faces several other legal challenges, including a rash of class action lawsuits relating to investment losses in meme stocks and a lawsuit seeking to ban Robinhood from operating in Massachusetts brought by Massachusetts’ top securities regulator. Robinhood has been accused of using “gamification” and several “aggressive tactics” to lure naive traders to its platform.
Investors such as New Enterprise Associates and Sequoia Capital have helped Robinhood raise billions of dollars in funding. It raised an additional $3.4 billion during the meme stock incident after the high trading volume on its app strained its finances.
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