Robinhood to pay states $10.2 million over outages prior to meme stock frenzy

Editor’s note: This story has been corrected to reflect that the state settlement involves violations that occurred before Robinhood’s platform outages during the 2021 meme-stock trading frenzy. A reference to Robinhood’s 2021 Finra settlement also was corrected.

Robinhood Financial agreed Thursday to pay up to $10.2 million in penalties to state securities regulators over outages on its platform in 2020 and lax approval of customers for risky trading that state officials say harmed investors.

The settlement was the result of a multistate investigation into the operational problems Robinhood experienced in March 2020. In early 2021, Robinhood would experience similar problems during the meme-stock trading frenzy.

The state probe cited Robinhood for violations regarding platform outages, options and margin approvals, and customer support. The state regulators found the firm gave customers inaccurate margin and risk information on options spreads, failed to conduct proper due diligence before approving certain option accounts, and was deficient in supervising platform technology that provided broker-dealer services and fielded customer complaints.

The state investigation was led by regulators in Alabama, Colorado, California, Delaware, New Jersey, South Dakota and Texas. The settlement was announced by the individual states as well as the North American Securities Administrators Association, the umbrella group for state regulators.

“Today’s multistate agreement represents states at their best — working together for the benefit of Main Street investors,” NASAA President Andrew Hartnett said in a statement. “Robinhood repeatedly failed to serve its clients, but this settlement makes clear that Robinhood must take its customer care obligations seriously and correct these deficiencies.”

Robinhood did not admit or deny the findings outlined in the state orders. A Robinhood official said the firm has taken steps to mitigate the problems the state regulators uncovered.

“We are resolving this matter with the states and are pleased to put it behind us,” Lucas Moskowitz, deputy general counsel and head of government affairs at Robinhood Markets Inc., said in a statement. “The settlement relates to past issues that Robinhood has since invested heavily in improving, including the launch of 24/7 chat and phone support, expanding our library of educational materials, and strengthening the way we supervise our technology. We remain focused on continuing to break down barriers to the markets for those who were previously kept out.”

The problems Robinhood experienced on its platform in March 2020 also resulted in $70 million settlement with the Financial Industry Regulatory Authority Inc. in June 2021.

The Securities and Exchange Commission reached a $65 million settlement with Robinhood in December 2020 over charges that the firm failed to disclose that it received payments from trading firms for routing customer orders to them. The regulator also alleged that Robinhood failed to get the best prices for customer orders.

In its statement, NASAA said that state regulators found no evidence of willful or fraudulent conduct by Robinhood and that the firm cooperated with the investigation.

“Today’s agreement reflects the ongoing efforts by state securities regulators to protect investors and make sure that they are treated fairly by financial services firms,” Joseph Borg, director of the Alabama Securities Commission, said in the NASAA statement.