Robinhood Financial, the online stock-trading app, was fined $70 million by the securities industry’s self-regulator on Wednesday for a series of failures that the agency said hurt Robinhood’s customers.
The announcement came ahead of Robinhood filing an investment prospectus to go public, which is likely to land later this week, a person with knowledge of the matter said. The company’s initial public offering is expected to be one of the highest profile of the year.
The fine, the largest ever imposed by the Financial Industry Regulatory Authority, which is known as FINRA, was the latest legal punishment for Robinhood. The eight-year-old start-up has upended the online brokerage business by introducing fee-free trading and gained prominence this year as the venue of choice for much of the stock-trading mania that boosted shares in companies like GameStop and AMC Entertainment.
The Silicon Valley company has repeatedly been accused of operational and regulatory lapses by regulators and lawmakers that, critics said, left customers exposed to sometimes ruinous losses. Robinhood has already paid tens of millions of dollars in fines, including $65 million to the Securities and Exchange Commission, for misleading customers about its business.
In its announcement on Wednesday, FINRA said that the fine covered issues like false and misleading information and the harm suffered by customers from systems outages in March 2020. The regulator said Robinhood must follow rules that were designed to protect investors and the markets.
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“Compliance with these rules is not optional and cannot be sacrificed for the sake of innovation or a willingness to ‘break things’ and fix them later,” Jessica Hopper, the head of FINRA’s enforcement department, said in a statement.
Jacqueline Ortiz Ramsay, a spokeswoman for Robinhood, said in a statement, “We are glad to put this matter behind us and look forward to continuing to focus on our customers and democratizing finance for all.”
Robinhood, which was founded by Vlad Tenev and Baiju Bhatt, has long had a mission of democratizing finance. It grew by attracting investors — especially younger ones — with its no-fee trading. But the company has faced questions about whether it encouraged overly risky trading with its lack of fees and features such as behavioral nudges and push notifications that critics said created a gambling-like atmosphere.
Last year, a 31-year-old customer died by suicide after discovering a negative $730,000 balance in his Robinhood account, a figure that was somewhat inflated because of incomplete trades.
In recent months, prominent investors have also criticized Robinhood and its practices. This week, Charlie Munger and Warren Buffett of Berkshire Hathaway called for stronger regulation of the app on CNBC, with Mr. Munger calling Robinhood “a gambling parlor masquerading as a respectable business.”
In its announcement of the fine on Wednesday, FINRA said Robinhood had given customers wrong information about how to trade on margin, or with borrowed money. The company also failed to closely scrutinize some customers who were approved to trade in stock options, despite red flags suggesting they were not suited for that kind of high-risk trading, the regulator said.
FINRA also faulted Robinhood for system outages between 2018 and 2020 that locked customers out of their accounts during huge market swings, saddling some traders with thousands of dollars in losses. And the regulator announced a $30 million education initiative for new investors.
The penalty may help lift regulatory uncertainty that had weighed on Robinhood’s plans to go public. The company, which is privately valued at nearly $12 billion, has been expected to officially publish its I.P.O. prospectus for several months.
In a blog post, Robinhood outlined expansions it has made to support investors, including adding customer support employees and a hotline. The company did not have a phone number for customers to call with issues or questions in its early years, which has drawn criticism.
Robinhood also highlighted improvements it has made to help avoid outages, as well as “more rigorous criteria” for risky options trading that it began applying in September.
It still faces other legal challenges, including a lawsuit by the top securities regulator in Massachusetts that seeks to bar the company from operating there. The state’s securities regulator has claimed that Robinhood uses “aggressive tactics” and “gamification” to attract inexperienced investors to trade on its platform. The S.E.C. is separately continuing a review of January’s “meme stock” rally.
At the time, Robinhood halted trades on certain stocks, which enraged customers and prompted nearly 50 customer lawsuits.
Robinhood has raised billions of dollars in funding from investors such as Sequoia Capital and New Enterprise Associates. During the meme stock rally, it raised $1 billion and then another $2.4 billion in quick succession after it was strained by the high volume of trading through its app.
In a February congressional hearing about the meme stock rally, in which Robinhood was cast as the villain, Mr. Tenev took an apologetic tone.
“I’m not going to say that Robinhood did everything perfect,” he said.
Matthew Goldstein contributed reporting.