The Financial Industry Regulatory Authority has slapped the investing app Robinhood with the biggest fine in their history. The $70 million fine is for “systemic supervisory failures,” according to the oversight board, which has accused Robinhood of giving “false or misleading” information to investors.
“The fine imposed in this matter, the highest ever levied by FINRA, reflects the scope and seriousness of Robinhood’s violations,” FINRA enforcement head Jessica Hopper asserted in a prepared statement. The first $57 million of what the investing app will pay is a fine to FINRA, while an additional $12 million is earmarked for restitution for customers harmed by Robinhood’s practices.
What Did Robinhood Do?
FINRA claimed that the startup used false and misleading information that caused users to make bad choices on the stock market. The regulator even took a dig at Robinhood’s brand identity, saying that its app was misleading even while Robinhood’s marketing claims that the app “demystifies” investing.
A specific case called out by FINRA was the tragic June 2020 death of Alexander Kearns. Kearns was an amateur trader using Robinhood who opened the app one day to see a negative balance of $730,000 in his account. Thinking this was money he now owed, the young man took his own life, fearing he’d otherwise be living the rest of his days with crippling debt.
The investigation launched by FINRA also notes that other customers had lost a combined $7 million due to poor communication from Robinhood. That’s before the regulator even got into the app’s troubled architecture.
Another major sticking point for the regulator was the frequency with which Robinhood’s app experiences outages and failures. Failures on the back-end of the software have cost individual customers tens of thousands of dollars due to errors while executing trades, according to FINRA.
This was because Robinhood “failed to reasonably supervise” the technology that underpins its apps, the regulator claims. Similarly, the app reportedly allowed thousands of customers to engage in complicated options trading without offering them sufficient information or oversight.
Robinhood CEO in the Spotlight… Again
Robinhood CEO Vlad Tenev is probably not relishing the spotlight on him this year. Back in January, during the unbelievable GameStop short squeeze, Robinhood temporarily disabled the option to buy stock of the company. This swiftly drew the ire of the social media crowd that made GameStop a trending name and led to accusations that the establishment was trying to stop the Reddit-fueled rally.
Tenev was even brought before Congress to testify about his platform’s decision to pause the purchases. For his own part, the Robinhood CEO claimed that GameStop was paused due to Robinhood’s clearinghouse demanding a massive amount of cash as collateral for the high volume of stock purchases being made over a short period of time.
Has Robinhood Weathered the Storm?
In spite of all of the movement from regulators and lawsuits against them, Robinhood is still poised to take full advantage of the current boom in amateur investing. The company never admitted to any wrongdoing. Robinhood quietly accepted the fines levied by FINRA and issued a statement insisting that it now just wants to move forward.
“We are glad to put this matter behind us and look forward to continuing to focus on our customers and democratizing finance for all,” Robinhood said in a statement. The language of “democratizing finance” is critical to Robinhood’s advertising: the company even named itself after the famous folk hero who steals from the rich and gives to the poor.
Robinhood has also stated that it’s looking to shore up its educational offerings for amateur investors on the platform. Other updates, like customer service and stability improvements, will supposedly help future investors encounter fewer costly errors.
The company filed for an initial public offering back in March of 2020, and they could still be on track to fully capitalize on the boom in amateur investing. However, regulators aren’t entirely sold on their business model. Robinhood doesn’t charge any fees for transactions; instead, they get paid for order flow. Regulators worry that this means the application might not have its investors’ best interests at heart.
Another issue facing the controversial trading app is its extreme unpopularity on Reddit, the main hub for retail investors. Users on the social media platform appear to despise Robinhood for their aforementioned role during the GameStop short squeeze, making them a common punching bag for jokes among the site’s users.
So, while Vlad Tenev and his company seem to be perfectly positioned to make the most of the current appetite for retail investing, they’ve got a lot of hurdles to overcome before they’re able to actually rake in the cash. With their bottom line now missing a cool $70 million, the controversial startup has learned a hard Silicone Valley lesson: just because you’re new to the scene doesn’t mean you get to break the rules.