Robinhood Financial has been fined $ 65 million for misleading its stock market customers about how the company gets its revenue from its operations, the Securities and Exchange Commission said on Thursday. The SEC fine comes a day after Massachusetts regulators filed a lawsuit against Robinhood for allegedly targeting inexperienced young investors with flashy tricks in their application that treat stock investing like a game.
Federal officials said that between 2015 and 2018 the company only partially explained on its online FAQ page how it makes money, omitting details about its biggest source of revenue: operations. Robinhood takes a user’s stock order and sells it to a larger trading company that conducts the trade, a process known as “order flow payment,” according to the SEC’s order.
Robinhood made no mention of the payment of order flows, federal regulators reported, at a time when the company was growing rapidly. Although Robinhood markets its services as “no commissions,” the SEC claims that customers actually received lower commercial prices that “together deprived customers of $ 34.1 million,” despite the savings they received from paying zero commissions.
“Robinhood provided misleading information to customers about the actual costs of choosing to negotiate with the company,” Stephanie Avakian, director of the SEC’s enforcement division, said in a statement.
Robinhood is now “fully transparent in our communications with customers about our current revenue streams,” a company spokesman said in a statement. The fine comes from “historical practices that today do not reflect Robinhood,” chief legal officer Dan Gallagher said in a statement.
The multimillion-dollar fine marks the second action Robinhood has had this week with government regulators.
On Wednesday, the Massachusetts Division of Securities said in its lawsuit that while Robinhood is marketed as a gateway to the stock market, the company uses “game strategies to manipulate customers” to operate more to increase its commissions. .
“Color confetti”
An example of the lawsuit: To convince customers of its platform to negotiate, Robinhood rewards users “with colored confetti that rains down their screens after running operations,” according to court documents. These and other tactics are Robinhood’s way of turning serious investment into a “game,” Massachusetts Commonwealth Secretary Willian Galvin said in a statement. The alleged tactic “is not only unethical, but it’s also well below the standards we demand in Massachusetts,” he said.
Robinhood said he disagrees with what Massachusetts alleged and intends to fight state officials in court.
“Millions of people have made their first investments through Robinhood, and we remain focused on continuously serving them,” a Robinhood spokesman told CBS MoneyWatch.
The company allows users to transfer money from their bank account to a Robinhood account and then start buying and selling shares for free. The app was launched in 2013 and now has over 13 million users. This includes about 500,000 users in Massachusetts with combined assets of $ 1.6 billion, according to court documents.
Massachusetts also mentioned payment by the order flow system in its claim. State regulators argued that the more business Robinhood users run, the more money the brokerage company receives.
State regulators allege that Robinhood tactics caused hundreds of users to conduct thousands of operations. “As an example, Robinhood allowed an inexperienced client to invest in more than 12,700 transactions in just over six months,” the lawsuit states.
Galvin is asking a state court to demand an undisclosed amount of fines from Robinhood. Regulators also want a judge to order Robinhood to seek an independent consultant to evaluate the company’s application and policies.
Negative advertising chain
Massachusetts demand follows a rash of negative publicity lately for Robinhood. Last year, a problem with the company’s system allowed users to borrow an unlimited amount of money to negotiate. Massachusetts regulators also noted the major disruptions the application experienced earlier this year.
The Robinhood platform crashed in March, temporarily preventing users from accessing its funds. The cut occurred on the same day that the Dow Jones Industrial Average made a historic one-day gain of approximately 1,290 points. Federal regulators are now investigating why the disruption occurred, Bloomberg reported.
In June, an Illinois Robinhood user died by suicide after his account erroneously showed a negative $ 730,000. In October, an undisclosed number of accounts was hacked and users complained of not being able to contact Robinhood customer service to resolve issues.