Robinhood Financial has been fined $ 65 million for misleading its exchange clients about how the company derives its income from their transactions, the Securities and Exchange Commission said Thursday. The SEC fine comes a day after Massachusetts regulators filed a lawsuit against Robinhood for allegedly targeting young, inexperienced investors with flashy in-app tricks 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 main source of income – transactions. Robinhood takes a user’s inventory order and sells it to a larger trading firm that executes the transaction, a process known as “payment for order flow,” states the SEC order.
Robinhood did not report payment for order flows, federal regulators said, at a time when the company was growing rapidly. While Robinhood markets its services as “commission-free,” the SEC claims that customers actually received inferior trading prices that “robbed customers in total $ 34.1 million,” despite the savings they received by paying zero commissions .
Robinhood provided misleading information to customers about the true cost of dealing with the company, Stephanie Avakian, director of SEC Enforcement Division, said in a statement.
Robinhood is now “fully transparent in our communications with customers about our current revenue streams,” a company spokesperson said in a statement. The fine stems from “historical practices that do not reflect Robinhood today,” legal chief Dan Gallagher said in a statement.
The multi-million dollar fine marks the second move Robinhood has had with government regulators this week.
On Wednesday, the Massachusetts Securities Division said in its lawsuit that while Robinhood markets itself as millennials’ gateway to the stock market, the company is “using gaming strategies to manipulate customers” to trade more to increase fees.
“Colorful confetti”
An example from the lawsuit: In order to further persuade customers to trade on its platform, Robinhood rewards users “with colorful confetti that rain on their screens after executing transactions,” court documents said. These and other tactics are Robinhood’s way of turning serious investment into a “ game, ” Willian Galvin, Secretary of the Commonwealth of Massachusetts, said in a statement. The alleged tactic is “not only unethical, but also falls far short of the standards we demand in Massachusetts,” he said.
Robinhood said it disagrees with what Massachusetts has claimed and plans to fight state officials in court.
“Millions of people have made their first investments through Robinhood and we continue to focus on serving them,” a Robinhood spokesperson told CBS MoneyWatch.
The company lets users transfer money from their bank account to a Robinhood account and then buy and sell stock for free. The app was launched in 2013 and now has more than 13 million users. That includes nearly 500,000 users in Massachusetts with a combined net worth of $ 1.6 billion, court documents said.
Massachusetts also mentioned payment for the order flow system in its complaint. Government regulators argued that the more Robinhood trades made, the more money the company receives from brokers.
State regulators claim that Robinhood’s tactics have resulted in hundreds of users completing thousands of transactions. “Robinhood, for example, allowed a client with no investment experience to complete more than 12,700 transactions in just over six months,” the lawsuit said.
Galvin asks a state court to impose an undisclosed amount of fines on Robinhood. Regulators also want a judge to order Robinhood to find an independent consultant to evaluate the app and company policies.
String of negative publicity
The Massachusetts lawsuit follows a wave of negative publicity recently for Robinhood. Last year, a glitch in the company’s system allowed users to borrow an unlimited amount to trade. Regulators in Massachusetts also pointed to major glitches the app experienced earlier this year.
Robinhood’s platform crashed in March, temporarily preventing users from accessing their funds. The outage occurred on the same day that the Dow Jones Industrial Average posted a historic gain of about 1,290 points in one day. Federal regulators are now investigating why the outage occurred, Bloomberg reported.
In June, an Illinois Robinhood user died of suicide after his account falsely showed negative $ 730,000. In October, an undisclosed number of accounts were hacked and users complained that they could not reach Robinhood customer service to resolve their issues.