By: Hunter A. Becker
Robinhood Financial LLC is the parent company to the well-known Robinhood app. Robinhood is a company claiming to be a technology for democratizing finance and providing equal access to all consumers through its innovative platform. Although, it has been sanctioned with tremendous fines and penalties over its short history. Founded in 2013, the app launched publicly for the first time in December, 2014. Currently, the app has approximately 21 million customers and over $102 billion in assets, and aims to be “easy, friendly, and approachable” to its customers. About 50% of the users are first-time investors, according to a spokesperson for Robinhood. Robinhood became a publicly traded company in July, 2021 after multiple fundraising rounds. Through Robinhood’s platform, users can buy and sell shares of stocks that are redeemable almost immediately; the stocks offered for purchase on the app are U.S. exchange-listed stocks and ETFs, options contracts for U.S. exchange-listed stocks and ETFs, and American Depository Receipts for over 650 globally listed companies.
Since Robinhood’s inception there have been numerous regulatory challenges against the company. In 2020, Robinhood was hit with a $65 million fine by the Securities and Exchange Commission for misleading customers by failing to disclose an order routing arrangement that led to millions in customer losses. Then in June, 2021, Robinhood was fined $70 million by the Financial Industry Regulatory Authority for outages and misleading customers about their ability to trade on margin and “disable” margin on their accounts. Robinhood displayed inaccurate cash balances to certain customers that were sometimes twice as large as they actually were, issuing erroneous margin calls and margin call warnings to some customers. Finally, Robinhood misrepresented the risks associated with certain options transactions.
Most recently, the Vermont Department of Financial Regulation settled with the company for $640,000 for outages in the app from March 2-3, 2020. As well as for the March 9, 2020, outage, where the platform was inoperable for 45 minutes. The Consent Order that Vermont filed clearly explains that March, 2020 was a time of historic market volatility and that customers could not access their accounts during this time. Therefore, they were unable to enter, modify, or cancel orders. These outages violated Vermont state law, as the broker dealer firm failed to establish and maintain a supervisory system that was reasonably designed to achieve compliance with security laws and regulations. State officials also cited the firm’s lack of supervision when approving option or margin trading customer accounts. Over 40 Vermont residents contacted the state’s Department of Financial Regulation to lodge complaints. Department of Financial Regulation Commissioner Mike Pieciak commented, “That was an unacceptable thing to have the only way people can access their money be your platform and then when a lot of customers go to your account to access their money and they can’t access it and their money was losing value extraordinarily during those days of trading losses.”
This was the first major action and remedy a state government has recovered against Robinhood in the United States, and it could potentially allow other states to seek a similar remedy. The way other states can seek a remedy is if citizens of other states can show direct harm to their trading or financial accounts, and come forward to work with their state regulator. The state regulators can then assert the claims on their behalf for recovery of damages. Every state has a different set of securities law so the recovery will be different than Vermont’s. States have a “floor” of minimum regulations that they must follow, set by federal preempted guidelines, however, every state can choose their “ceiling” of regulations so long as it is within the bounds of the Constitution.
The Commonwealth of Massachusetts is trying to ban Robinhood entirely from use and is attempting to do so through the Secretary of the Commonwealth’s securities regulation branch, the Massachusetts Securities Division. Robinhood is subsequently suing the Commonwealth, alleging that the fiduciary rule the Secretary of the Commonwealth implemented last September violates both state and federal law. Robinhood is claiming that even under the standard, Robinhood is a self-directed broker, and therefore cannot be operating against its customers’ best interests. If the Massachusetts Securities Division gathers enough evidence and proposes action against Robinhood for the outages, then the Commonwealth could seek similar remedies to Vermont. However, it will be up to each state to choose if they want to litigate it further as opposed to seeking a settlement as Vermont did. This is an ongoing battle the states have against Robinhood, in an attempt to seek justice for the injured and remedy the wrongdoings of the company.
Student Bio: Hunter Becker is a second-year law student at Suffolk University Law School. He is a Staffer on the Journal of High Technology Law. Hunter received a Bachelor of Arts Degree in Environmental Science and Policy from Florida State University with a minor in Computer Science.
Disclaimer: The views expressed in this blog are the views of the author alone and do not represent the views of JHTL or Suffolk University Law School.
