Robinhood, the stock trading startup valued at $7.6B, has seen as much volatility as the equities market it allows its users to trade in over the last two years. The brokerage, previously notorious for its less-than-transparent approach to business, is in hot water over its app’s performance during recent market volatility.
As pressure begins to mount over the recent service outages that prevented users from accessing the app during volatile trading, let’s look at the company’s history of playing fast and loose with regulators, users’ trust, and their money.
12/14/2018 – After rolling out a checking account paying a whopping 3% interest, Robinhood is forced to roll it right back in. Claims that the deposits of users are guaranteed by the SIPC turn out to be less than truthful, and experts observe that the brokerage is trying to enjoy the benefits of being a bank (low risk access to customer deposits) without the requisite and necessary regulation.
11/5/2019 – Users discover and exploit a loophole in the Robinhood app that allows for unlimited leverage when making trades. One trader brags about opening a $1 million position funded by a $4,000 deposit.
12/19/2019 – The Financial Industry Regulatory Authority fines Robinhood $1.25 million for failing to ensure customers were getting the best deal on their orders. Brokerages are required to ensure best order execution on behalf of their clients. Robinhood failed to do so and was forced to settle with FINRA.
3/2/2020 – Robinhood’s platform outage during a hugely volatile day in the equities market prevents users from trading or accessing funds for the majority of trading hours, from 6:30am to 11:00pm Pacific time. Traders lose out on millions in potential profits as the stock indices add more than 4% in gains over the course of the day.
3/3/2020 – At the same time that the platform suffers another outage, from 6:30am to 9:00am Pacific, Robinhood’s co-founders and co-CEOs publish a blog post, placing blame for the outage on stress placed on the app’s infrastructure. The company’s user agreement says it isn’t liable for extended interruptions due to failures beyond the company’s control.
The company offers compensation for users of its premium subscription service, Robinhood Gold, in the form of a free three months. The service allows users to borrow money at 5% per day and have access to Morningstar research reports. The price for the service is $5 per month, for a total of $15 in compensation. On a day the markets gained $1.1 trillion in value.
3/4/2020 – Travis Taaffe, a Robinhood investor, files a class action lawsuit in the US District Court for the Middle District of Florida in Tampa, “seeking recovery of damages that were proximately caused by Defendants’ failure to provide and maintain a suitable platform for its users.”
According to legal filings, Taaffe and the other class members are traders making use of the platform, and were not able to “access their cash, securities and/or other property kept on the Robinhood platform, let alone use Robinhood’s services to buy, sell or trade securities. This breach caused Plaintiff and class members to miss out on some of the highest single-day market gains in recorded history.”
The lawsuit claims the class members are entitled to more than $5 million in damages. The suit lists Robinhood’s 10 million users as potential members of the class. It is clear that the damages could rise substantially if the plaintiff class grows.
3/9/2020 – Robinhood suffers another outage, making the platform inaccessible to one extent or another from 6:30am to 12:30pm. During this time, the Dow Jones Industrial Average was in the midst of a freefall that would see it drop more than 2,000 points, the most since the 2008 financial crisis.
3/26 – Robinhood offers $75 in compensation for traders who claim losses from the outages. $75 is the exact amount users must pay the company should they wish to withdraw their funds or transfer their shares of stock.
4/1/2020 – A federal judge denies a request to stop Robinhood from reaching out to users regarding the $75 goodwill credit because the plaintiff “failed to establish a clear record of abusive communications by Defendants,” according to court documents. To be continued.
As the world and markets continue to reel from the effects of the global coronavirus pandemic, it is becoming increasingly clear that Robinhood’s users should be taking a hard look at the company’s actions. With legal action already underway in Tampa, the possibility for a large class action continues to grow.