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Robinhood’s regulatory headaches pile up

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By Allison Morrow

Editor’s Note: A version of this story appeared in CNN Business’ Nightcap newsletter. To get it in your inbox, sign up for free, here.

TSK TSK

A Wall Street regulator ordered Robinhood to pay about $70 million for “systemic supervisory failures” and hurting investors by giving them “false or misleading information.”

That’s big. In fact, it’s the largest penalty ever imposed by Wall Street’s self-regulating body, the Financial Industrial Regulatory Authority, or FINRA.

THE BACKSTORY

Robinhood’s less than a decade old, but its “no-fee” model has fundamentally disrupted the investing world.

But the bigger it gets, the bigger its headaches.

  • OUTAGES: Robinhood experienced a series of outages and system failures between 2018 and 2020. A March 2020 outage caused individual customers to lose tens of thousands of dollars, FINRA said.
  • HIGH-RISK TRADES: Its popularity among young, often inexperienced investors has also landed Robinhood in trouble. FINRA specifically pointed to Alexander Kearns, the 20-year-old trader who died by suicide last June after he saw a negative balance of $730,000 in his trading account and mistakenly believed he owed that sum. The tragedy drew attention to the gamified nature of the Robinhood platform and its customer service shortfalls.
  • OY, GAMESTOP: Robinhood set off a firestorm in January when it temporarily banned users from buying shares of GameStop and other stocks driven up by an army of traders on Reddit. Congress even hauled Robinhood’s CEO, Vlad Tenev, in to testify about the scandal, which he blamed on a demand from its clearinghouse to put up as much as $3 billion.

In total, FINRA said, customers suffered more than $7 million in losses “due to Robinhood’s misstatements.”

WHAT’S NEXT?

Robinhood’s gearing up for what some expect to be a blockbuster IPO this year. Now it can head into that without the specter of the FINRA sanctions hanging over it. But Robinhood is still facing scrutiny from regulators and politicians. CNN Business’ Matt Egan has more.

NUMBER OF THE DAY

$150 million

The prestigious Yale Drama School is now tuition-free following a $150 million gift from Hollywood mogul David Geffen. Free! All right, y’all, I’m off to Connecticut to walk in Meryl Streep’s path — it’s been a blast, byeeeeeee.

STATE OF STOCKS

The Biden-era stock market is well ahead of expectations. (Remember when President Trump said the stock market would “crash” if Joe won? Lol, good times.)

We’re just half-way through the year, and the S&P 500 has already reached the target some analysts set for the entire year, my colleague Anneken Tappe writes. Check it out:

  • The S&P 500, the broadest measure of the US stock market, is up more than 14% in 2021, and just a few points below the 4,300 mark — a target Goldman Sachs had set for the end of the year.
  • Both the S&P 500 and the Nasdaq (up 13%) are at or near record highs.
  • The Dow is the relative laggard of the three: up more than 12% and inching toward the 35,000 mark, also a new all-time high.
  • The Scrappy Doo of indexes, the small-cap Russell 2000, is doing even better, up 17%.

That’s all despite serious concerns about inflation (which investors dislike because it saps corporate profits), tax hikes, and the increasingly worrying Delta variant of Covid-19.

WILL IT LAST?

A lot of that will depend on the pandemic. Even though vaccination rates are up, coronavirus could still jeopardize the reopening of the economy. And there’s a bit of tug-of-war happening over inflation: The Fed insists it’s “transitory,” but prices are still rising, and the central bank can’t ignore that. It’s only a matter of time — and no one knows how long it will be — before the Fed has to take its foot off the gas.

QUOTE OF THE DAY

“Overdraft fees disproportionately harm lower-income residents, often minorities. If you want to address inequality, cutting out unfair, deceptive and abusive fees is a fair thing to do.”

New York Congresswoman Carolyn Maloney reintroduced legislation that would crack down on overdraft fees, making it illegal for banks to charge more than one fee per month. Each year, banks rake in more than $11 billion worth of overdraft and related fees when consumer accounts go negative. And a Consumer Financial Protection Bureau study found that just 9% of all accounts pay a staggering 79% of all overdraft and non-sufficient fund fees.

WHAT ELSE IS GOING ON?

  • Didi, China’s massive ride-hailing service, went public Wednesday in the biggest US share offering by a Chinese company since Alibaba debuted in 2014. At its closing price, Didi is valued at nearly $70 billion.
  • Amazon has formally requested that newly appointed Federal Trade Commission chair Lina Khan be recused from all Amazon-related antitrust cases before the agency. The company claims that Khan — an outspoken tech critic who has played a key role in driving antitrust scrutiny of the industry and Amazon in particular — lacks objectivity.
  • China is in the middle of a huge power crunch as extreme weather, surging demand for energy and strict limits on coal usage deliver a triple blow to the nation’s electricity grid. It could last for months, and it has huge implications for global trade.

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