A Wall Street regulator has ordered the retail trading platform Robinhood to pay more than $70m in penalties for causing what it described as “widespread and significant” harm to its customers.
The Financial Industry Regulatory Authority (Finra) announced on Wednesday that it was fining Robinhood $57m and ordering it to pay $12.6m plus interest in restitution to its customers—the largest penalty ever ordered by the regulator.
Among a litany of failures alleged by Finra, widespread technical problems on the platform during periods of high volatility cost some traders tens of thousands of dollars, it said.
Robinhood also allowed thousands of customers to trade risky derivative products when it was “not appropriate” for them, according to the regulator, and gave customers false or misleading information about how much cash was in their accounts, their ability to trade on margin, and the risk of losses on derivatives trades.
Finra cited the death by suicide of a young Robinhood customer last year, who mistakenly believed he had incurred $730,165 in losses on a margin trade. In fact, his account had a balance of $16,000. In a note found after his death, he indicated he did not believe that he had “turned on” margin trading on his account.
For more than five years, Robinhood had “failed to establish and maintain” a system for complying with securities regulations, Finra said.
“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,” said Jessica Hopper, head of Finra’s enforcement department.
In response to Finra’s action, the company said: “Robinhood has invested heavily in improving platform stability, enhancing educational resources, and building out our customer support and legal and compliance teams. We are glad to put this matter behind us and look forward to continuing to focus on our customers and democratising finance for all.” (Later in the day, the company also published a blog post outlining how it is trying to better “meet our responsibility to our customers.”)
The penalties come as Robinhood plans a stock market listing to capitalize on a period of explosive growth. The broker dealer has become synonymous with the rise of retail day trading since the start of the pandemic and the boom in “meme stock” trades. It has more than doubled the number of users on its platform in the past year, from 13 million at the end of March 2020 to 31 million currently, according to Finra.
The opening of dubious accounts was another issue flagged by Finra. In the period up to the end of 2018, Robinhood automatically opened many accounts despite warnings of potential identity fraud, including more than 100 accounts where there was a “high probability that the customer’s social security number belonged to a deceased person”. Robinhood also failed to notify Finra of tens of thousands of customer complaints that it was required to report, the regulator said.
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