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When 20-year-old Alex Kearns died by suicide in 2020, he believed he had lost $730,000 in a margin call while trading on the app Robinhood, many times more than the roughly $16,000 in his account. He emailed the firm, whose app has become increasingly popular among retail investors in recent years, asking if there was some error, believing his losses could not exceed $10,000. In response, he received standardized replies saying the company would look into his request. At one point, he received a notification informing him that in a matter of days he would have to make a deposit of more than $170,000 towards the negative balance.
Two days later Kearns received an automated message informing him his issue had been resolved—he didn’t have to pay anything to Robinhood—but it was too late. In the day between the erroneous margin call and the message resolving it, he “threw himself in front of an oncoming trade,” according to a report by Mother Jones. Kearns, a college sophomore at the University of Nebraska, left his parents a note asking them to take care of themselves, and wondering how his account could have made margin trades when he believed he hadn’t turned on the setting for them. “The amount of guilt I feel as I commit to this is unbearable,” he wrote. “I did not want to die.” His cousin later told Mother Jones that Kearns “died thinking that he was saving his family from financial ruin.”
Kearns’ story is one of many cited in recent sanctions against Robinhood, which securities regulators say exhibited a pattern of systemic failures that resulted in customers receiving false or misleading information. These sanctions have involved penalties in the tens of millions of dollars against the firm—and Robinhood’s own effort to overturn a rule requiring the firm to act in its customers’ best interests.
The Financial Industry Regulatory Authority (FINRA) harshly criticized Robinhood in a 2020 sanction ordering the firm to pay a fine of $57 million and about $12.6 million in restitution “to thousands of harmed customers.” The record-setting fine—the largest one ever ordered by the regulator—arose from findings that “millions of customers received false or misleading information from the firm,” millions were impacted by system outages, and thousands were inappropriately approved for options trading on the firm’s platform.
FINRA cited Alex Kearns in the section of its sanction finding that Robinhood negligently misrepresented to customers that certain accounts were not margin-enabled. Specifically, it found that since December 2017, Robinhood falsely represented to users who had signed up for “Robinhood Instant” that they could only trade unsettled funds up to the amount in their accounts; and that it falsely represented to customers who signed up for “Robinhood Gold” that they could disable margin trading in their accounts.
In reality, FINRA found, the firm “allowed approximately 818,000 customers who had been approved for options trading—either “Instant” customers or “Gold” customers with margin ‘disabled’—to make trades, such as options spreads, that could and often did automatically trigger the use of margin.” At the same time, it didn’t disclose those customers that their trades might automatically trigger margin use. One of those customers was Alex Kearns. Another customer on the “Robinhood Gold” level received a margin call of $271,986.64 even though he too had disabled margin trading in his account. These customers were rightfully confused about their unexpected balances, FINRA wrote, blaming the errors on systemic misrepresentations and omissions by Robinhood.
Between January 2018 and December 2020, tens of thousands of customers made complaints about Robinhood’s misleading information and other system failures—but the firm failed to report them to FINRA as required, the regulator said in its sanction. While Robinhood consented the entry of FINRA’s findings, it did not admit or deny the charges.
About six months before FINRA ordered Robinhood to pay $70 million in penalties, the Securities and Exchange Commission (SEC) ordered the firm to pay $65 million to settle charges it made misstatements to customers and failed to fulfill its duty to seek the best available terms for customer orders. As the regulator described, Robinhood’s customer communications and web content obscured how it made money: from a compensation structure called “payment for order flow.” In essence, trading firms paid Robinhood for customer orders it sent them to execute. At the same time, Robinhood boasted to customers of its commission-free trades; what many customers didn’t realize was that Robinhood was sending their trades to the firms offering the highest payment for order flow rates, not the firms offering the most favorable trading fees. As a result of these misrepresentations, the SEC found, Robinhood cost customers more than $34 million—even accounting for the lack of commission fees.
That same month, the Massachusetts Securities Division filed charges against Robinhood. Secretary of the Commonwealth William Galvin accused the firm of using “aggressive tactics to attract new, often inexperienced, investors” and using gamification—design tactics that made trading a fun activity for users—to encourage “continuous and repetitive use” of the app.
At the same time, he alleged, Robinhood violated its own rules by approving customers for options trading even if they had limited experience with those risky products. According to the complaint, 68% of Massachusetts-based Robinhood users approved for options trading said they had no investment experience or limited investment experience. The charges also alleged Robinhood violated Massachusetts’ fiduciary standard requiring broker-dealers to place their customers’ interests before their own.
“As a broker-dealer, Robinhood has a duty to protect its customers and their money,” Galvin said in 2020. “Treating this like a game and luring young and inexperienced customers to make more and more trades is not only unethical, but also falls far short of the standards we require in Massachusetts.”
Robinhood responded to the lawsuit in April 2021 with a lawsuit of its own, attempting to overturn the fiduciary standard and stop the case against it. Galvin responded in turn by seeking to revoke Robinhood’s license in the state—a move the firm said could drive broker-dealers like it out of Massachusetts.
In July 2021, Robinhood noted in its IPO filing that it had reached an undisclosed settlement with the family of Alex Kearns. The firm’s CEO had previously apologized to Kearns’ family—during a Congressional hearing in which lawmakers criticized the firm’s business model. When Robinhood finally went public in August 2021, CNN described its launch as “lackluster.”
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