Robinhood, the self-proclaimed ‘Democratized Finance’ app accused of misleading and ripping off retail investors will have to cough up another $30 million to appease regulators. That raises the company’s overall regulatory penalty and settlement tab well above $100 million.
In a filing Tuesday, the New York State Department of Financial Services ordered Robinhood’s cryptocurrency division to pay the hefty penalty and accused the company of engaging in, “significant anti-money-laundering, cybersecurity, and consumer protection violations.” The financial blow marks just the latest in a string of regulatory headwinds for the company in recent years and the first cryptocurrency enforcement for the New York regulator.
While Robinhood’s best known for its micro stock trading service attractive to casual investors, the company’s crypto division also operates an exchange that lets users buy and sell cryptocurrency. NYDFS investigators, who opened their initial investigation last March, claim Robinhood failed to maintain effective and compliant cybersecurity programs, violated reporting requirements and improperly certified compliance. The agency found “critical failures,” in the company’s cybersecurity program, which it claims did not fully address “operational risks.” In addition to the penalty, Robinhood will have to retain an independent consultant that will perform an evaluation to determine the company’s compliance moving forward.
“As its business grew, Robinhood Crypto failed to invest the proper resources and attention to develop and maintain a culture of compliance—a failure that resulted in significant violations of the Department’s anti-money laundering and cybersecurity regulations,” NYDFS Superintendent of Financial Services Adrienne A. Harris said in a statement.
Responding to Gizmodo’s request for comment, Robinhood’s Associate General Counsel of Litigation and Regulatory Enforcement, Cheryl Crumpton, said the company was “pleased” to make the settlement final.
“We have made significant progress building industry-leading legal, compliance, and cybersecurity programs, and will continue to prioritize this work to best serve our customers,” Crumpton said. “We remain proud to offer a more accessible, lower-cost platform to buy and sell crypto and are excited to continue to grow our business in a responsible manner with new products and services that our customers want.”
Unfortunately, the NYDFS fine was just the beginning of Robinhood’s troubles on Tuesday. Within hours of the fine announcement, Robinhood CEO and Founder Vlad Tenev published a blog post announcing the company was cutting around 23% of its workforce as part of a broader company reorganization.” Tenev, addressing his newly out-of-work staff as, “Robinhoodies,” said the dramatic cuts will impact workers throughout the company, with operations, marketing, and program management teams bearing the brunt of the burden.
The layoffs come around three months after Robinhood announced it would move to ax 9% of its staff following a period of pandemic-fueled “hyper-growth.” Now, Tenev says those cuts, “did not go far enough.” The CEO said growing inflation, mixed with a collapsing cryptocurrency market has reduced its customers’ trading activity significantly.
“Last year, we staffed many of our operations functions under the assumption that the heightened retail engagement we had been seeing with the stock and crypto markets in the COVID era would persist into 2022,” Tenev said. “In this new environment, we are operating with more staffing than appropriate. As CEO, I approved and took responsibility for our ambitious staffing trajectory—this is on me.”
Robinhood was founded nearly a decade ago in 2013 but only entered the collective imaginations of most people last year for its role as the main vehicle for retail investors to pump up Gamestop, AMCand other so-called meme-stocks. While some users made off with millions during the trading frenzy, many more lost money. Robinhood infuriated a portion of its users when it stepped in to stop trading of certain stocks which prevented some users from selling until prices subsided. In the year since, the company’s faced numerous regulatory complaints and investigations. Last June, the Financial Industry Regulatory Authority (FINRA) hit Robinhood with a $57 million fine, the largest penalty the agency has ever issued. Not long after, Robinhood agreed to pay the Securities and Exchange Commission $65 million to settle charges that it misleads customers with claims of being a commission-free method of trading stocks.
Individual investors allegedly burned by Robinhood are beginning to see some payouts too. Earlier this year, an arbitrator for FINRA ruled in favor of a 27-year-old truck driver named Jose Batista, who claimed he’d lost money after Robinhood enacted its trading restrictions. FINRA ordered Robinhood to pay the man $29,500 in restitution. Batista’s far from alone though. The Federal Trade Commission said it received 3,081 complaints involving Robinhood between 2020 and mid-2021 according to a Freedom of Information Act request filed by Gizmodo earlier this year.
“I understand the market can be volatile, but this was Robinhood refusing to honor trades of people who purchased the stock legitimately,” one user who claimed they were forced to sell at a loss because of Robinhood’s intervention said in a complaint. “Since Robinhood has given no response to customer service emails, or tweets, or anything regarding this issue, I have to assume that Robinhood could do this in the future to any other stock they don’t want to pay out.”
Updated at 5:05 pm ET with additional news of workforce cuts.