#SEC slaps Robinhood app with $65M fine for misleading users

Robinhood, the free stock-trading app aimed at millennials, will pay $65 million to settle charges from the feds that it misled users about how it was making money and failed to deliver the best execution it had promised on trades.

Between 2015 and 2018, Robinhood neglected to mention to its app users that it was making massive profits by selling their trade data to the highest bidder instead of finding the best price, according to a complaint filed by the Securities and Exchange Commission on Thursday.

That practice, known as “payment for order flow,” undermined Robinhood’s famous “no-commission” trading sales pitch by inflating what users paid for shares.

The SEC says Robinhood users were cheated out of more than $34 million by this practice, even when taking into account the lack of commissions, while the company made most of its revenue by selling order flow to financial titans like Citadel Securities, Virtu Financial and mega-hedge fund Two Sigma.

“Robinhood provided misleading information to customers about the true costs of choosing to trade with the firm,” said Stephanie Avakian, director of the SEC’s Enforcement Division. “Brokerage firms cannot mislead customers about order execution quality.”

The settlement comes as Robinhood has seen rampant growth this year as cooped-up, bored millennials have turned to its app. During the first four months of the year, Robinhood added a record 3 million new customers.

“The settlement relates to historical practices that do not reflect Robinhood today,” the company’s chief legal officer, Dan Gallagher, said in a statement. “We recognize the responsibility that comes with having helped millions of investors make their first investments, and we’re committed to continuing to evolve Robinhood as we grow to meet our customers’ needs.”

While Robinhood does not admit any wrongdoing, Thursday’s SEC deal comes one year after the $12 billion startup was slapped on the wrist by the Financial Industry Regulatory Authority for the same violation.

On Wednesday, Massachusetts regulators filed a lawsuit against Robinhood alleging that it pushed its inexperienced users to buy and sell stocks to increase order flow and failed to enact controls to protect them.

While a Robinhood spokesperson assured The Post on Thursday that the company has “significantly improved our best execution processes, and have established relationships with additional market makers to improve execution quality,” the barrage of regulatory punches is coming at a terrible time for the company.

It has been widely reported that Robinhood intends to go public in 2021 and has even hired Goldman Sachs to lead its IPO, but that process will be complicated if the company keeps paying out millions in fines to justify its business model.

And it seems unlikely that things will stay calm on that front. Robinhood is still under investigation by the SEC and Finra for service outages in March that locked customers out of their accounts as the pandemic sent markets into a death spiral.