Robinhood Fined $70M For Causing “Significant Harm” To Customers
Robinhood has been fined by FINRA and the finance company will have to pay roughly $70 million in penalties. The company was fined for causing what was described as “widespread and significant” harm to customers.
FINRA announced that it had fined Robinhood $57 million. And ordered the company to pay $12.6 million in damages to customers, plus interest. Bringing the total amount to roughly $13 million to be paid in damages.
This penalty is the largest penalty ever ordered by the Financial Industry Regulatory Authority. FINRA is a non-governmental, self-regulatory organization that oversees the brokerage industry.
What Triggered This?
FINRA cited that Robinhood had caused customers significant harm by showing them incorrect balances.
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One of such cases had led to the suicide of a 20-year-old customer. In the suicide note left behind, the customer says that they did not believe they had turned on margin trading. And yet somehow, Robinhood had let them trade with borrowed money. Leading to massive losses for the customers.
The platform had shown the customer that he had a negative balance of $730,165. Losses that were incurred from using the margin trading feature. When in fact, the customer had a balance of $365,530.60.
There have been numerous allegations of Robinhood showing customers wrong balances.
According to FINRA, the 20-year-old was not the only victim of this. More than 800,000 Robinhood customers had been allowed to make trades that automatically triggered margin trading. Allowing users to trade with borrowed money. This would happen regardless of whether they had turned on the margin trading feature or not.
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According to them, Robinhood had failed to establish and maintain an adequate system for complying with regulations.
“Compliance with these rules is not optional and cannot be sacrificed for the sake of innovation and willingness to ‘break things’ and fix them later.” – Jessica Hopper, Head of FINRA’s Enforcement Department
The creation of fraud accounts on the platform was also another issue cited. Apparently, Robinhood had authorized the opening of accounts even though they were warned that these accounts might be fraudulent.
There were more than 100 accounts that had social security numbers that may belong to deceased people.
Containing on further, FINRA also alleged that Robinhood had failed to report tens of thousands of complaints that the company was obligated to report.
Robinhood has neither confirmed nor denied the allegations levied by FINRA. But the company did reply to the action being taken by FINRA against them. The company ensured that Robinhood had invested heavily to improve the platform.
“Robinhood has invested heavily in improving platform stability, enhancing educational resources, and building out customer support and legal and compliance terms. We are glad to put this behind us and look forward to continuing to focus on our customers and democratizing finance for all.” – Jacqueline Ortiz Ramsay, Head of Public Policy Communications at Robinhood.
Robinhood was founded in 2013 and has been in operation ever since. Headquartered in Menlo Park, the American financial company offers commission-free trades on stocks and exchange-traded funds. They do this through the mobile app that they released in 2015.
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Robinhood rose to prominence with the explosion of “meme stocks” during the pandemic. Stocks like GameStop were traded based on social media sentiment and Robinhood was the primary medium for most investors.
Robinhood had already set aside $26.6 million in preparation for the fine which they predicted was coming. But the fine turned out to be more than double the amount they had speculated.
This will not be the first time the company is getting fined by FINRA. Robinhood had been fined $1.25 million earlier in 2019 for best execution violations.
It is not yet known when Robinhood will pay out the fines and settlement. But the company looks ready to move forward from this as quickly as possible.
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