On June 30, 2021, the Financial Industry Regulatory Authority (“FINRA”) announced that it ordered Robinhood Financial LLC to pay approximately $70 million for systemic supervisory failures and significant harm suffered by millions of customers. The sanctions included an order to pay a $57 million fine and $12.6 million in restitution, plus interest, to thousands of harmed customers. According to the FINRA press release, the sanctions represent the largest financial penalty ever ordered by FINRA and reflect the scope and seriousness of the violations.
Robinhood agreed to the sanctions to settle broad regulatory allegations that the firm misled customers, approved ineligible traders for risky strategies, and did not supervise technology that failed and locked millions out of trading.
In determining the appropriate sanctions, FINRA stated that it “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 enforcement action is another hit for Robinhood, which has faced scrutiny, lawsuits, and securities arbitration complaints, after it restricted customers from purchasing “meme stocks,” such as GameStop (NYSE: GME), AMC (NYSE: AMC), Blackberry (NYSE: BB), Nokia (NYSE: NOK), Koss Corporation (NYSE: KOSS), and Express, Inc. (NYSE: EXPR), on January 28, 2021.
As the trading restrictions were put into place by Robinhood, retail investors watched helplessly as the value of their positions plummeted with no potential to remediate the positions given the wrongful sale pressure initiated by Robinhood and others.
Many retail investors felt cheated and wronged by the actions of these brokerage firms and are filing lawsuits in the form of securities arbitration complaints to recover losses from Robinhood as a result of its unprecedented decision to place trading restrictions on stocks of publicly traded companies on January 28, 2021, amid a rise in stock prices.
Recently, a 26-year-old truck driver from Connecticut, represented by Iorio Altamirano LLP, filed a securities arbitration claim alleging that Robinhood’s decision to halt the purchase of securities by retail investors caused the share prices of the publicly traded companies to fall, resulting in losses.
FINRA Letter of Acceptance, Waiver, and Consent No. 2020066971201
FINRA and Robinhood Financial LLC entered into a Letter of Acceptance, Waiver, and Consent No. 202006671201 on June 30, 2021, after FINRA alleged 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. Specifically, FINRA alleged:
- Despite Robinhood’s self-described mission to “de-mystify finance for all,” during certain periods since September 2016, the firm has negligently communicated false and misleading information to its customers. The false and misleading information concerned a variety of critical issues, including whether customers could place trades on margin, how much cash was in customers’ accounts, how much buying power or “negative buying power” customers had, the risk of loss customers faced in certain options transactions, and whether customers faced margin calls.
- For instance, one Robinhood customer who had turned margin “off,” tragically took his own life in June 2020. In a note found after his death, he expressed confusion as to how he could have used margin to purchase securities because, he believed, he had not “turned on” margin in his account. As noted in the settlement, Robinhood also displayed to this individual (and certain other customers) inaccurate negative cash balances.
- Additionally, due to Robinhood’s misstatements, thousands of other customers suffered more than $7 million in total losses.
- Since Robinhood began offering options trading to customers in December 2017, the firm has failed to exercise due diligence before approving customers to place options trades. The firm relied on algorithms—known at Robinhood as “option account approval bots”—to approve customers for options trading, with only limited oversight by firm principals. Those bots often approved customers to trade options based on inconsistent or illogical information. As a result, Robinhood approved thousands of customers for options trading who either did not satisfy the firm’s eligibility criteria or whose accounts contained red flags indicating that options trading may not have been appropriate for them.
- From January 2018 to February 2021, Robinhood failed to reasonably supervise the technology that it relied upon to provide core broker-dealer services, such as accepting and executing customer orders.
- Between 2018 and late 2020, Robinhood experienced a series of outages and critical systems failures. The most serious outage occurred on March 2 and 3, 2020, when Robinhood’s website and mobile applications shut down, preventing Robinhood’s customers from accessing their accounts during a time of historic market volatility. Although the firm had a business continuity plan at the time of the March 2-3 outage, it did not apply it because the plan was unreasonably limited to events that impacted the firm’s physical location. Robinhood’s inability to accept or execute customer orders during these outages resulted in individual customers losing tens of thousands of dollars.
- Between January 2018 and December 2020, Robinhood failed to report to FINRA tens of thousands of written customer complaints that it was required to report. Robinhood’s reporting failures included complaints that Robinhood provided customers with false and misleading information and that customers suffered losses as a result of the firm’s outages and systems failures. Robinhood’s reporting failures were primarily the result of a firm-wide policy that exempted certain broad categories of complaints from reporting, even though those categories fell within the scope of FINRA’s reporting requirements.
The settlement also resolved numerous other charges against Robinhood, including the firm’s failure to have a reasonably designed customer identification program and its failure to display complete market data information.
The settlement terms also call for Robinhood to hire a consultant to review the brokerage company’s compliance systems within six months. Robinhood would then have another three months to implement any recommendations made by the consultant.
Iorio Altamirano LLP
Iorio Altamirano LLP pursues individual FINRA arbitration claims nationwide on behalf of investors to recover financial losses from brokerage firms’ wrongful conduct.
Iorio Altamirano LLP is a bilingual law firm, fluent in both English and Spanish.