The online trading app passed misleading information to users on whether they can trade on borrowed money, says US regulatory body Finra.
Robinhood, the online brokerage that has revolutionised stock trade, will pay a record $70 million in penalties to settle charges it harmed thousands of consumers through "false and misleading" communications and other lapses.
Regulators took the fast-growing investment platform to task for falling short of its pledge to "demystify finance for all," charging the company "negligently" misled consumers, regulatory body Finra said on Wednesday.
READ MORE: Robinhood says facing US regulator inquiries
Robinhood communicated "false and misleading" information to consumers on whether customers could place trades on margin and displayed wrong information about specific accounts, said Finra, a nonprofit organisation that regulators US brokerage firms.
In one notorious example, an Illinois college student committed suicide after reading that his account had a negative cash balance of $730,165, an inaccurate sum, said Finra.
Following rules to protect investors "is not optional and cannot be sacrificed for the sake of innovation or a willingness to 'break things' and fix them later," said Jessica Hopper, head of Finra's enforcement division.
Robinhood, which has filed preliminary papers with US securities regulators to go public, was also charged with weak due diligence in approving customers to place options trades.
Robinhood's reliance on bots resulted in approval for thousands of customers who did not meet requirements or had red flags, Finra said.
Lapses in oversight also led to a series of outages on the platform in March 2020, harming customers, said Finra.
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Robinhood - which did not admit or deny Finra's allegations - said it has taken a number of steps to improve its service, such as hiring thousands of customer support staff and improving system redundancy to reduce outages.
"We are glad to put this matter behind us and look forward to continuing to focus on our customers and democratizing finance for all," a Robinhood spokeswoman said.
After the GameStop saga
Robinhood and other online trading platforms have allowed retail investors to buy and sell stocks by sidestepping the high costs associated with traditional brokerage houses.
The retail investors have often traded in beaten down stocks, which are cheap and speculative but can offer high return if too many investors prop up their price.
READ MORE: Democratisation of finance has limits
Robinhood was at the heart of the rally earlier this year in which the price of GameStop, the troubled American video game retailer, shot up to unexplainably high level.
The app was launched in 2014 by two former Stanford students, Baiju Bhatt and Vlad Tenev, a little after the Occupy Wall Street Movement as a way to give small investors means to dabble in the stocks.
“Having worked in finance for a few years, we had the realisation that capital markets were ones that were not letting a lot of people be a part of them, and the $10 trade commission was a major [reason],” Bhatt told a conference in 2018.
Unlike the big brokerages, Robinhood banks on the younger generation. Both Bhatt and Tenev themselves were born in the mid-80s.
Its employees don’t wear suits to work. The company’s website is as lively as its name. Bhatt has long hair and has mostly been seen wearing t-shirts. In pictures, employees can be seen working on wooden chairs against a backdrop of murals where monkeys don spacesuits.
Robinhood has over 13 million users.