FINRA to Robinhood Financial LLC $70,000,000.00 fine - largest fine in FINRA’s history
In December 2019 Robinhood Financial agree to a AWC -FINRA No. 2017056224001 that Robinhood violated FINRA Rules 5310(a), 5310.09, 3110(a), 3110(b), and 2010 by not exercising reasonable diligence
You know one Federal Enforcement Agency that doesn’t get as nearly as much credit/press as it should…
Financial Industry Regulatory Authority - FINRA
FINRA welds immense power and it’s their sole charter to hold Brokers and Brokerage Firms accountable and enforcement of the rules . FINRA was authorized and chartered by Congress to oversee nearly ALL US based stockbrokers and brokerage firms. Below are a few factual bullet points;
protect America’s investors by making sure the broker-dealer industry operates fairly and honestly
oversee more than 624,000 brokers across the country—and analyze billions of daily market events. use innovative AI and machine learning technologies to proactively monitor the market, provides support to investors, regulators, policymakers and other stakeholders.
FINRA is the largest self-regulatory organization (SRO) in the securities industry.
FINRA v SEC - not really a competition - Congress vested FINRA with certain authority and enforcement tools.
SEC is responsible for ensuring fairness for the individual investor.
Should there be an “enforcement” dispute - between FINRA and said Stock/Investment Company - then each can file an appeal with the SEC - this is important because something in my gut tells me that Robinhood Financial might contest this fine. Which means the SEC would act as an “arbiter”…but don’t hold me to that because it’s possible I’m wrong that Robinhood won’t object to the fine.
FINRA & SEC Enforcement Background & History as to Robinhood Financial -December 2019-
Robinhood entered into an AUTHORITY LETTER OF ACCEPTANCE, WAIVER, AND CONSENT (AWC) with FINRA
FINRA Case NO: 2017056224001…through which it consented to findings that, from October 1, 2016, through November 9, 2017, the firm violated the following FINRA Rules
Robinhood did not exercise reasonable due diligence to ascertain that the broker-dealers to which it routed customer orders for payment for order flow provided the “best execution quality as compared to other execution venues and by not having a reasonably designed supervisory system and procedures to achieve compliance with its best execution obligations under FINRA’s rules”
Robinhood Financial consented to the FINRA censure, plus a $1,250,000 monetary fine, and argree to an retain an independent consultant to conduct a comprehensive review of the adequacy
-December 2020- SEC Enforcement Action
On December 17, 2020 the Securities and Exchange Commission announced that they charged Robinhood Financial LLC for litany of pretty alarming business practices.
repeated misstatements that failed to disclose the firm’s receipt of payments from trading firms for routing customer orders to them, and
with failing to satisfy its duty to seek the best reasonably available terms to execute customer orders.
Robinhood agreed to pay $65 million to settle the charges.
Without admitting or denying the SEC’s findings, Robinhood agreed to a cease-and-desist order prohibiting it from violating the antifraud provisions of the Securities Act of 1933 and the recordkeeping provisions of the Securities Exchange Act of 1934, censuring it, and requiring it to pay a $65 million civil penalty. Robinhood also agreed to retain an independent consultant to review its policies and procedures relating to customer communications, payment for order flow, and best execution of customer orders, and to ensure that Robinhood is effectively following those policies and procedures.
FINRA Orders Record Financial Penalties Against Robinhood Financial LLC
Firm Ordered to Pay Approximately $70 Million for Systemic Supervisory Failures and Significant Harm Suffered by Millions of Customers
Robinhood Financial LLC $57 million and ordered the firm to pay approximately $12.6 million in restitution, plus interest, to thousands of harmed customers.
The sanctions represent the largest financial penalty ever ordered by FINRA and reflect the scope and seriousness of the violations. In determining the appropriate sanctions, 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.
During the course of the FINRA investigation - starting in September 2016 and sporadically but during protracted periods of time Robinhood Financial;
…negligently communicated false and misleading information to its customers…
FINRA ascertained that Robinhood Financial’s false and misleading information directly and adversely impacted customer decision on numerous critical issues,
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.
♦️Trigger warning ♦️one of Robinhood’s customer took his own life - so please proceed reading with caution.
FINRA’s investigation unearthed a litany of actions and inactions that caused some of Robinhood’s customers extreme distress. In one horribly sadly case FINRA found that one Robinhood’s customer had turned margin “off,” tragically took his own life in June 2020. And he cited this in his suicide letter.
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. As part of this settlement, Robinhood is required to pay more than $7 million in restitution to these customers.
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.
The catastrophic March 2020 Outage
Pardon my language but how the bleep do you NOT have a continuity of service plan? It is absolutely insane to me - that based on FINRA’s investigation - Robonhood Financial didn’t have a back up or a tertiary backup plan for their freaking infrastructure. Read page 4 closely because it is mind blowing that Robinhood would be so unbelievably careless.
Failure to create a reasonably designed business continuity plan – At the time of the March 2-3 outage, Robinhood’s business continuity plan (BCP) was not reasonably designed to allow the firm to meet its obligations to customers in the event of a significant business disruption, as required by FINRA Rule 4370. Robinhood’s BCP was limited to events that physically prevented employees from working from the firm’s premises.
As such, the firm did not consider applying its BCP to technology-related business disruptions, including the March 2-3 outage, which Robinhood considered an “existential” threat to its business.
Robinhood Finacial’s failure after failure:
It’s one thing for a financial institution to have a blip or an unintended error in conforming to the regulatory rules - but what FINRA’s investigation uncovered was a kin to a systemic rot at the core of Robinhood - the reasons rules are in place - they safe gaurd both the investor and the firm. The egregious nature of Robinhood Financial violations is on a scale of proportionality that make it unconscionable.
Failure to report customer complaints to FINRA – Between January 2018 and December 2020, Robinhood failed to report to FINRA tens of thousands of customer complaints that it was required to report…
Failure to have a reasonably designed customer identification program – From June 2016 to November 2018, Robinhood failed to establish or maintain a customer identification program that was appropriate for the firm’s size and business.
The firm approved more than 5.5 million new customer accounts during that period…Robinhood’s customer identification system “overrode” those alerts and approved the applications without any review. In all, Robinhood approved more than 90,000 accounts from June 2016 to November 2018 that had been flagged for potential fraud without further manual review
Robinhood Gold - Margins On or Off
Robinhood’s product “Robinhood Gold” gives individual investors the option to turn margin investing “On” or “Off.” If an investor “opts into margin” then Robinhood purportedly offers him/her the option to “Disable Margin Investing”…or does it?
Customer A, a 20-year-old “Robinhood Gold” customer who had turned margin “off,” 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 upon assignment of the short leg of an options spread because, he believed, he had not “turned on” margin in his account.
Robinhood “negligent misrepresentations and omissions of material”
The negligence- let’s just call it what it really is Robinhood’s criminal negligence resulted in the untimely death by suicide for one of its customers. There has to be a meaningful punishment. Like what is the cost of a human life. Because their customer was that despondent that he felt the only way out was to commit suicide. Clearly there might be underlying mental health issues but the fact Robinhood and “margin calls” were explicitly stated in his suicide note is just horrific.
Between December 2019 and June 2020, Robinhood displayed on its website and its mobile applications inaccurate cash balances to more than 135,000 customers. Robinhood either doubled these customers’ actual negative cash balances or inflated their cash balances by displaying buying power as “cash.”The Robinhood Customer who committed suicide in June of 2020 -
Customer A died, Robinhood displayed to the customer a cash balance of –$730,165.72…actual cash balance was –$365,530.60. Customer A had incurred the –$365,530.60 balance after being assigned early on the short leg of an options spread transaction.
“F_CK IT - WE WILL DO IT LIVE”
…during a live demonstration to FINRA staff of trading activity in a mock account, the firm’s website displayed the account’s cash balance as a positive value, $2,311.44—a figure reflecting the account’s buying power due to the account’s ability to use margin. In fact, the account’s actual cash balance was negative: -–$609.
…at least 630 customers incurred losses totaling over $5.73 million…
the Footnote is exceptionally important - “already paid or intends to pay” that is a conflicting statement but the fact FINRA appears to be assuaged that Robinhood pinky promises that it will stop lying to customers - yes I can see that being satisfactory <—said no sane person EVER. JFC Robinhood has repeatedly lied to its customers and regulators. Their mendacity has already had a fatal consequence - how many more suicides will it take for Robinhood to either; change management or be forced into shutting down? Yes I’m aware the latter seems drastic but if your business model is to help investors make sound decisions but you fail to be forthcoming…
This AWC requires Robinhood to pay as restitution the $5,731,520.67 in losses that customers suffered as a result of its negligent misrepresentations and omissions about options spread transactions. Robinhood has represented to FINRA that it already has paid or intends to pay $3,639,948.70 of that amount to 134 customers.
Robinhood also falsely told customers…
it is one thing to make an informed and calculated risk when investing—but what FINRA is unequivocally stating is Robinhood repeatedly mislead customers, provided customers with misleading communications and then failed to take any mitigation action to remediate the adverse impact on their customers. Fiduciary duty something - something.
Robinhood negligently misrepresented to customers the conditions under which it would exercise the long legs of options spread positions instead of closing them…
This is just atrocious and there’s no other way to describe the financial malfeasance by Robinhood…also the irony is not lost on me…
Robinhood also falsely told customers who had entered into options spread transactions that the firm would sell, rather than exercise, their long options if they did not have the buying power (or underlying shares) necessary for exercise.10 In fact, Robinhood exercised many of those customers’ long options, causing the customers to incur significant losses.
100K customers subject to erroneous margin calls and margin call warnings…
-sidebar on the long versus short options - Robinhood made a bet but in some cases they betted against their own customers. Who in turn suffered substantial losses because they didn’t have enough stocks invested “to meet or exceed the short option” trigger. Yet Robinhood decided to exercise their own long option. Which in of its self is infuriating…
Math isn’t my strong suit - but based on the amounts it’s equivalent to $16.50 per customer -
October 2016 to September 2019, Robinhood issued several erroneous margin notifications to customers. The two most significant events occurred within a three-month period in 2018 and affected more than 100,000 customers. Collectively, Robinhood’s erroneous margin calls and margin call warnings caused customers to suffer losses of $1.65 million
…the firm did not issue any corrective notices informing affected customers that the margin calls had been sent in error. Approximately 6,600 accounts sold securities within three business days of receiving the erroneous margin calls.
Robinhood had no internal mechanism setup
to alert management that their was a glitch in their network - FINRA’s investigation concluded that the only way Robinhood found out about the erroneous margin calls is after customers complained…
No internal system at Robinhood triggered any alerts regarding these events despite the abnormally high number of margin notifications sent to customers. Instead, the firm learned about the errors only after customers complained, either informally or to the firm.In both instances, the errors were caused by system failures following the firm’s introduction of a new technology feature.
…Robinhood displayed inaccurate account information to millions of customers…
January 2019 to May 2021, Robinhood displayed inaccurate information to nearly six million customers regarding their accounts’ historical performance, including the net increase or decrease in the accounts’ total portfolio value
For affected accounts, the chart that Robinhood used to display historical performance either overstated customers’ gains or understated customers’ losses for a variety of reasons, including because Robinhood mistakenly did not properly account for cash dividends that had been paid to customers, various cash movements in customer accounts, and cash and position movements caused by corporate actions.
No kidding the June 30, 2021 AWS is 120+pages long of a detailed recitation of facts discovered by FINRA’S investigation
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 resolves 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.
Always read the last paragraph of a Press Release, like always…
…In settling this matter, Robinhood neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
Now I think you have a sufficient picture of the recent AWS - and no this isn’t personal nor does it bring me any joy in being this critical of Robinhood…
At any rate today is Tuesday but it more like my Monday -so I’ll be out of pocket for most of the morning -plus I’m researching the entities mentioned in last week’s indictment because there were a few notable change in status via various State Corporation Commission filings -directly impacting Weisselberg & Trump’s adult children…
This area of the universe is well beyond my understanding but holy hell I didn’t know robinhood is this bad. The only thing I had ever heard about them in MSM was when that group of people bought up all that stock.
This area of the universe is well beyond my understanding but holy hell I didn’t know robinhood is this bad. The only thing I had ever heard about them in MSM was when that group of people bought up all that stock.