Robinhood, which "robs the rich to help the poor", was "robbed" again, and 70 million yuan was used to settle the regulatory storm

The Financial Industry Regulatory Authority (FINRA) announced on Wednesday a settlement of allegations of inadequate supervision by Robinhood. Robinhood neither admitted nor denied the allegations and agreed to pay nearly $70 million in restitution, including a $57 million fine and $12.6 million in compensation for harmed investors. Robinhood was caught in a regulatory vortex for misleading customers, approving high-risk strategies for unqualified traders, and failing to oversee technology that led to the locking of tens of millions of accounts.

FINRA said the sanction was the largest financial penalty ever imposed by the U.S. financial regulatory agency and reflected the severity and scope of Robinhood’s violations.

Robinhood, which launched in 2014 and won over users with commission-free trading and its sleek mobile app, has added millions of new customers this year but also drawn more scrutiny as many investors jumped into so-called meme stocks such as GameStop Corp. and AMC Entertainment Holdings Inc. Its upcoming initial public offering is one of the most anticipated this year.

Robinhood’s growth has continued, with its biggest revenue stream coming from customer trading, which more than quadrupled in the first quarter, even as the company’s technology and customer service departments have been criticized by users. Earlier this year, it restricted trading in some popular stocks, angering customers. These meme stocks became so volatile in the short term that Robinhood’s clearinghouse told the brokerage to add billions of dollars in collateral.

“We have no problem with innovation, but it cannot be at the expense of building compliance and oversight systems,” Jessica Hopper, head of FINRA’s enforcement division, told The Wall Street Journal. FINRA is funded by brokerage industry insiders and overseen by the Securities and Exchange Commission (SEC).

Robinhood spokeswoman Jacqueline Ortiz Ramsay said the company was pleased to resolve the investigation and would continue to focus on its mission to make investing easier. “Robinhood has made significant investments in improving the stability of its platform, strengthening its resources and channels, and building a very professional customer support and legal and compliance team,” she said.

FINRA’s complaint against Robinhood alleges that “from 2016 to 2018, Robinhood opened 90,000 new accounts, and despite warnings that these accounts may have identity theft or other fraud, thousands of accounts that did not meet the account opening standards were still able to trade options on Robinhood.”

FINRA cited an example where a 20-year-old new customer was denied options trading after noting he had little investing experience and a low risk tolerance. Three minutes later, the customer changed his risk appetite to "medium" and said he had three years of investing experience. Within seconds, Robinhood approved his options trading privileges.

In another tragic example, a 20-year-old Robinhood customer, referred to as Customer A, committed suicide in June 2020 after seeing a notification that his account had a negative balance of $720,000. According to settlement documents, the customer was frightened by the notification because he thought he had turned off the ability to borrow funds from the brokerage to trade. But in fact Robinhood misled the customer about the value of his position; it was only negative $365,530, half of what the Robinhood system showed.

Customer A’s description matches that of Alex Kearns, whose family sued Robinhood in California state court in 2021, claiming damages for Alex’s death, emotional distress and unfair business practices. The Kearns family’s lawyers notified the court in May that it ultimately settled with Robinhood for an undisclosed amount.

A Robinhood spokesperson said in an email at the time, "We are deeply saddened by the death of Alex Kearns and remain committed to making Robinhood a place to learn and invest responsibly."

FINRA said Robinhood similarly misled other traders into believing they could not invest with borrowed money or margin if they turned off the feature. But in fact, customers who disabled the margin feature could still invest with borrowed money if they made certain types of options trades.

FINRA’s investigation also pointed to a technical glitch that caused Robinhood to disrupt its service in early March 2020, preventing 12.5 million account holders from trading. Ultimately, users of its app were unable to communicate with Robinhood about the glitch because the company’s customer service channels were also down.

Later that month, Robinhood experienced another outage due to an untested update to the way it communicated with trading venues that executed customer orders. Regulators said Robinhood did not adequately audit those systems even though executives knew the outage would threaten the company’s reputation and future growth.

The $57 million fine is the largest ever imposed by FINRA, which employs about 3,700 people and handles most regulatory actions for the SEC. In 2002, FINRA, then known as the National Association of Securities Dealers, fined Credit Suisse First Boston Corp. $50 million for excessive commissions on its initial public offering.

The investment bank, now Credit Suisse, settled the matter without admitting or denying the allegations, and John Mack, then head of CSFB, said the bank was pleased to resolve the matter.

FINRA has sometimes been criticized for its lack of vigour in assessing fines. In recent months, the organization has stressed that it will continue to investigate brokerage platforms that use enticing images and other behavioral cues to reward and encourage trading.

The terms of the settlement also require Robinhood to hire a consultant to review the brokerage’s compliance systems within six months. Robinhood will then have another three months to implement any recommendations made by the consultant.

Also on Wednesday, FINRA said it would launch a $30 million campaign to educate new investors who use apps like Robinhood to trade a variety of risky assets. FINRA said it would seek public and industry input on how to conduct the effort.

Robinhood still faces scrutiny from the SEC and New York state regulators related to options trading, according to regulatory disclosures it filed in February.

Prior to this settlement, Robinhood had already settled two earlier enforcement investigations with FINRA and the SEC.

In 2019, the broker paid $1.5 million to settle FINRA’s allegations that it did not do enough to ensure it was getting the best prices for customer orders. In December, Robinhood agreed to pay $65 million to the U.S. SEC to resolve claims related to its payments for order flow.

Robinhood said after reaching a settlement with the SEC that the issues uncovered through the investigation "do not reflect the situation at Robinhood today." U.S. securities laws allow payment for order flow as long as the brokerage firm allows it and any stakeholders are accurately disclosed.