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Todd Carlisle
So by now you've heard about the $70 million settlement in the Robinhood ($HOOD ) case. I've seen how it's being covered. They cite the outages in March 2020 and some vague wrongdoings involving options, usually focused on approving people who were unqualified. I decided out of boredom to look at the over 100 page filing in the case submitted by FINRA to see exactly what was charged and what evidence they had to support the charges. I found a significant number of shocking details that, at least from what I've seen, hasn't been widely reported. So I'd like to share those with you because I would imagine that most, if not all of us have used them at some point. So here's what the investigation uncovered. ⭐Robinhood has 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. For instance, the firm permitted those customers to enter into options spreads which, if assigned on the short leg, required the use of margin to satisfy the assignment. Robinhood fails to disclose to customers that even if they have an “Instant” account or a “Gold” account with margin “disabled”—they still can make trades that can result in the use of potentially hundreds of thousands of dollars in margin. ⭐ Robinhood published false and misleading information on its website about the risk of loss associated with, in particular, debit spreads, and the firm falsely assured customers who had entered into options spreads that they did not need to take action to mitigate risk heading into options expiration. Many customers who may have relied on Robinhood's statements experienced significant losses. On September 4, 2020, for example, over 130 Robinhood customers who held expiring $TSLA options spreads incurred losses either because they were assigned on their short options after hours while their long options expired worthless, or because Robinhood exercised their long options while their short options were not assigned. On average, these customers lost tens of thousands of dollars, even though Robinhood had informed them that their maximum losses would be a fraction of that amount. ⭐During various time periods between January 2017 and May 2021, Robinhood displayed to millions of customers on its website and mobile applications a variety of other false and misleading information about their accounts. This is broken down into 3 offenses. A. Robinhood displayed inaccurate account information to millions of customers because of delays or errors in the firm's systems, which affected the processing of corporate actions. From January 2017 to May 2021, Robinhood failed to timely process, or made errors in processing, certain corporate actions (including stock splits, dividends, and mergers and acquisitions). This caused Robinhood to display inaccurate account information to customers who held securities subject to the corporate actions, including, for example, inaccurate portfolio balance, cash balance, buying power, and total return. While Robinhood was unable to identify all corporate actions that may have caused it to display inaccurate account information, sample data indicates that millions of accounts were affected. B. From January 2019 to May 2021, Robinhood displayed inaccurate information to nearly six million customers regarding their accounts' historical performance, including the net increase or decrease in the accounts’ total portfolio value. For affected accounts, the chart that Robinhood used to display historical performance either overstated customers' gains or understated customers' losses for a variety of reasons, including because Robinhood mistakenly did not properly account for cash dividends that had been paid to customers, various cash movements in customer accounts, and cash and position movements caused by corporate actions. The amounts by which the historical performance of the affected accounts was overstated or understated varied, and the inaccuracies in the information displayed did not affect the actual portfolio values of the accounts. C. From December 2017 through October 2020, approximately 367,000 customers viewed pages on Robinhood's mobile applications and website in which the firm displayed erroneous margin maintenance requirements or erroneously indicated that the customers were not in margin calls (when they in fact were). ⭐ Although they're all bad this one in particular stands out as just new levels of incompetence and negligence I'm sure if you were around you remember the outages in March 2020 where for a period of 2 days on multiple occasions Robinhood was totally down. FINRA has requirements of brokers maintaining what is known as a business continuity plan (BCP). While Robinhood had plans for instances like fires, natural disasters, and pandemics they did not have a plan for technological failure even though internal documents indicated they were aware it could result in closure of the business permanently. So in March when the app and website failed they literally had no plan on what to do next despite their awareness that it could result in the failure of their business permanently. I mean... No words... ⭐ Although Robinhood's clearing firm had recommended “thorough verification” of applications, Robinhood's customer identification system "overrode” those alerts and approved the accounts without any effort to verify that the information provided by the customers was accurate. Sample testing showed that Robinhood automatically opened (i.e., without any manual review) 94% of accounts that Robinhood's clearing firm had flagged for a “high probability” that the customer's Social Security number belonged to another person. Robinhood also automatically opened more than 100 accounts that were flagged based on a “high probability” that the customer's Social Security number belonged to a deceased person. Robinhood's automatic approval of accounts that had been flagged for potential fraud was contrary to the firm's procedures, which specified that Robinhood "request an ID such as a driver's license or passport" when the firm could not verify a customer's identity using credit reporting agency data. Robinhood did not enforce this requirement, however, and between June 2016 and November 2018, the firm approved more than 90,000 accounts that had been flagged for potential fraud without obtaining any physical form of identification. So here's the TLDR: Robinhood didn't care. They blatantly lied to customers causing enormous losses. They approved accounts that were obviously fraudulent. The data contained in the app regarding your balance, profit, and losses was totally fake. Even if you had margin turned off you were still allowed to use margin incurring hundreds of thousands of dollars in losses. They lied to options users then took over their positions making terrible moves and costing them huge amounts of money. In regards to their outages they literally didn't even have a plan. Even though this report details hundreds of thousands of affected users the majority of the document details individual settlements making up a tiny fraction of the total amount. 500 detailed dealing with options errors and 2,832 in schedule 2. Schedule 2 identifies customers who suffered losses as a result of the firm’s erroneous margin calls and margin call warnings. The total amount is $3,744,938.48 for both. Out of a $70 million settlement. Anyone still interested in buying the IPO? Anyone think justice was done? Over 95% of the money going to FINRA and Robinhood weeks away from cashing in to the tune of billions of dollars. Meanwhile, other than the fine, Robinhood admitted no wrongdoing and submitted a 2 page list of 4 promises including stricter options requirements, new customer support centers, and hiring "experienced lawyers" to oversee their efforts. It's a joke. I can personally attest to the fact that several of these have not changed in the slightest. So there you have it. I'm tired of companies like this suffering fake consequences while the users suffer real ones. If you agree please share this post so that as many as possible know EXACTLY what Robinhood was doing. #robinhood #finra #investing #memestocks
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