When Robinhood files its IPO paperwork as expected in the coming weeks, it might want to leave "paid biggest Finra fine ever" off its list of milestones.
The no-fee trading app has agreed to pay almost $70 million to the Financial Industry Regulation Authority in order to settle a slew of alleged infractions that include distributing false and misleading information to its customers, failed due diligence on its approval of options accounts for novice traders, failure in overseeing its own technology and not providing complete market data to users.
As part of the agreement in which Robinhood neither admits nor denies any wrongdoing, the company will agree to a censure, pay restitution to customers of nearly $12.6 million plus interest, and pony up a $57 million fine, the largest Finra sanction in the regulator's entire history.
"Robinhood has invested heavily in improving platform stability, enhancing our educational resources, and building out our customer support and legal and compliance teams," a Robinhood spokesperson said in a statement on Wednesday. "We are glad to put this matter behind us and look forward to continuing to focus on our customers and democratizing finance for all."
But the money is much less of an issue to Robinhood than the timing and content of the Finra settlement which takes a shot at the ways that the app might have overreached on its mission of "democratizing finance."
Wall Street still expects the company to go public sometime in 2021, but the chaos that Robinhood experienced during January's short squeeze on meme stocks (GameStop (GME) and AMC Entertainment (AMC), plus major ongoing regulatory issues like the ones addressed in the Finra settlement, have hampered that timeline and perhaps undermined its nearly $12 billion private market valuation.) like
In a 122 page document, Finra lays out a detailed investigation into what the regulator alleges were widespread derelictions by Robinhood to properly manage its own technology.
In addition to multiple outages and system failures (2018 and 2020 that kept users from accessing their accounts, Finra found that Robinhood's "customer identification system...was largely automated" which allowed more than 90,000 problematic accounts to be opened despite red flags concerning fraud or other issues. The report also found that Robinhood misled users on whether or not they were trading on margin, violating Finra's rule requiring firms to avoid making "broad generalities" when disclosing how risky it is to trade options.
The Finra document even goes as far as to reference the June, 2020 suicide of 20-year-old Robinhood user Alex Kearns (), who took his own life after his account showed a negative balance of cash balance of more than $730,000. Kearns, who reportedly referenced the perceived debt in his suicide note was actually seeing the result of his account being part of an unsettled options trade.
72 of the pages in the Finra settlement are devoted to detailing erroneous margin notifications the app made to customers between 2018 and 2020.
Robinhood has publicly called Kearns' death a tragedy, and appeared to obliquely address it again on Wednesday in a blog post on its website announcing recent changes the company has made to bulk up it customer support.
"We've enhanced our options offering, education about options, and how information is displayed in the app," reads the blog post.
While Robinhood can now put its options trading and systems oversight issues with Finra behind it, the company disclosed in February (it is being probed by the U.S. Securities and Exchange Commission and New York State regulators on similar concerns.
-Thornton McEnery; 415-439-6400; AskNewswires@dowjones.com
(END) Dow Jones Newswires
June 30, 2021 12:31 ET (16:31 GMT)
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