RobinHood slammed with $70m fine for negligence and misleading customers

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RobinHood, an online stock brokerage company, has been fined $70 million for its lack of due diligence and promoting misleading financial information to its users. The lack of due diligence on the firm’s part cost its customers severe losses.

The penalty imposed by the Financial Industry Regulatory Authority (FINRA), constituted a $57 million fine and an estimated $13 million in restitution to affected customers. The FINRA is a self-regulatory organisation that oversees brokerage firms in the US.

“FINRA considered the widespread and significant harm suffered by customers, including millions of customers who received false or misleading information from the firm, millions of customers affected by the firm’s systems outages in March 2020, and thousands of customers the firm approved to trade options even when it was not appropriate for the customers to do so,” the organization said in a statement.

Biggest-ever fine by FINRA

The fine slapped on RobinHood represents the highest ever levied by FINRA which has regulated brokerage activities since its establishment in 2007. The humongous fine lays emphasis on the seriousness of RobinHood’s violations. These violations include approvals to its customers from the firm to trade unfavourable options.

RobinHood slammed with $70m fine for negligence and misleading customers
FINRA
Credit: Investmentnews

The firm remained offline on days where the market experienced high volume trades thus depriving customers the opportunity of leveraging the market’s bearish nature at the time.

These outages, spanning several days cost clients millions in profit. The inability to trade equities and options caused an uproar after the death of a 20-year old Alex Kearns who killed himself after believing he accrued losses on the online platform.

This was due to a negative cash balance of $720,000 in his wallet, a figure later discovered to be false after his value position was verified to be only half of what the account displayed.

Investigations carried out by FINRA revealed that RobinHood consistently suffered customer service issues. An example of such issues includes the failure of RobinHood to report thousands of customer complaints as obligated to FINRA between 2018 and 2020.

Representatives of the firm neither admitted nor denied the charges levelled against them. However, the company’s Head of Public Policy and Communicattions, Jacqueline Ortiz Ramsay said, “RobinHood has invested heavily in improving platform stability, enhancing our educational resources, and building our customer support and legal and compliance teams.”

What this means for RobinHood

The stockbroking company has planned to hit the bourse in July with an Initial Public Offering valued at $40 billion. Although the release date and prices haven’t been finalized, investors should look towards the second quarter of the year for information pertaining to the IPO.

The confidential IPO is aimed at young retail investors to enable them to use CFDs to speculate on the firm’s stock future price movements. The IPO allows for small deposits to open positions while still getting exposure to the full value of the trades.

The shortcomings of the firm may affect credibility rates as potential customers who seek financial information as well as an opportunity to invest may be more inclined to find it elsewhere. This turn of events may also cause a setback on the company’s profit projections at its official public release.

Robinhood’s Head of Public Policy downplayed the situation while suggesting that the company has put the ugly situation behind it.

“We are glad to put this matter behind us and look forward to continuing to focus on our customers and democratizing finance for all,” she said.

The California-based company also seems to have been prepared for incidents like this, having set aside $26.6 million for settlements, according to its annual audit filing with the SEC. While this fine is way more than double its projection, it nonetheless serves as a cushion.

This isn’t the first time RobinHood would find itself at the wrong end of Finra’s hammer. The firm was fined $1.25 million in 2019 for best execution violations. But this current hit is way harder than the former and it remains to be seen the extent of damage RobinHood has suffered.


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