Robinhood, the zero-fee trading platform that rocketed to outer space as the COVID-19 pandemic unleashed a stock market craze, has now been grounded by financial regulators.
On Wednesday, the Financial Industry Regulatory Authority ordered the company to pay $70 million to settle an investigation that alleged a series of failings, spanning service outages to offering false information to customers. The penalty is the largest ever issued by the group, and includes a $57 million fine and $12.6 million in restitution to those who experienced “significant harm.”
Robinhood enjoyed massive growth in the past year, welcoming millions of new customers as it surfed a wave of social media popularity amid the meme-stock investing fad (see: GameStop, AMC). However, according to FINRA, the firm violated its supervisory duties to those customers by purveying misleading information about options like margin buying, and approving thousands of users for risky bets that they would not typically be cleared for. The platform also suffered multiple outages during the early days of the pandemic in March 2020, a high-stakes time when millions were locked out of trading amid the fastest-moving market in recent history.
The failings proved especially damaging as many first-time traders joined Robinhood last year. It faced criticism after a high-profile tragedy in June 2020, when a 20-year-old customer new to the platform committed suicide after receiving a notice that his account had a negative balance of $720,000. According to the settlement document, the trader believed he had turned off the option that would have allowed him to rack up such a debt. His notice, however, was incorrect; his balance was actually negative $365,530, or half of what Robinhood’s systems displayed.
Reached for comment, Robinhood sent the following statement about the settlement from Jacqueline Ortiz Ramsay, its head of public policy:
“Robinhood has invested heavily in improving platform stability, enhancing our 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 democratizing finance for all.”
Although many are optimistic about Robinhood’s potential to revolutionize trading—empowering retail investors to wage war with the Wall Street establishment—”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,” FINRA executive Jessica Hopper said in a statement.
In accepting the terms of the settlement, Robinhood did not admit or deny the charges.
Robinhood has been readying a much-hyped IPO this year at an estimated valuation of over $30 billion. Despite the hefty fine, some analysts believe FINRA’s settlement will bolster its debut, as it lends regulatory certainty to the platform’s operations.