FINRA

Has My Brokerage Account Been Churned?

Nov 15, 2021

This past week, regulators at the Financial Industry Regulatory Authority (“FINRA”) fined Aegis Capital Corp and sanctioned its supervisors for allowing its brokers to churn their clients’ accounts.  FINRA’s case resulted from its examination of  Aegis after reviewing  a customer’s FINRA arbitration complaint. FINRA found that during the period between July 2014 through December 2018, Aegis did not implement a proper supervisory system under FINRA’s suitability rule.  Because of this, FINRA found,  Aegis failed to identify its registered representatives’ potentially excessive and unsuitable trading in  its customers’ accounts. Included in this fine was specific trading by eight Aegis brokers who were found to have excessively traded in 31 customer accounts. Further, FINRA found that the trading in those accounts generated average cost-to-equity ratios of 71.6 percent. (This means that the account value must increase by 71 percent  just to cover commissions and other trading expenses). This excessive trading—called “churning”  cost these Aegis  customers more than $2.9 million in trading  expenses and fees. What is Churning? The Securities and Exchange Commission (“SEC”) defines churning  as a broker engaging in excessive buying and selling of securities in a customer’s account primarily  to generate commissions for the broker’s benefit. For a churning violation to occur, the broker must exercise control over the investment decisions in the customer’s account, either by a formal written discretionary agreement, or by having control without such an agreement-especially where the customer always accepts the broker’s investment recommendations. The existence of  frequent purchases and sales of securities that don’t appear necessary to meet the customer’s stated investment goals may serve as evidence that your account has been churned.  Churning is illegal as well as unethical. This conduct violates the securities laws as well as FINRA  industry rules and standards of conduct. It also violates other laws, such as those requiring that brokers act as fiduciaries and always act in their customer’s best interest.  Churning also violates FINRA’s suitability rules. FINRA Rule 2111, which contains the suitability rules that brokers must follow, imposes a “quantitative suitability” obligation that focuses on whether the number of transactions within a certain time period are suitable in light of the customer’s stated financial circumstances and investment objectives. Churning occurs, and is unsuitable, when a broker, while exercising control over a customer account, recommends a level of trading activity that is inconsistent with that customer’s investment needs and objectives.  How Do I know If My Securities Account was Churned? The two measures of excessive trading are the “turnover rate”and  “cost-to-equity ratio”. The turnover rate is measured by looking at the number of times that a portfolio of securities is exchanged for another portfolio of securities. The cost-to-equity ratio measures the amount  that a brokerage  account must increase in value just to cover the commissions and other trading expenses charged—also referred to as the “breakeven point” where a customer can finally begin to make a profit.  Turnover rated and cost-to-equity measures are different depending on the products being sold and type of customer account . Churning Stocks Excessive trading benefits the brokers. It generates commissions for the broker but provides very little if any, the benefit to […]

Read more
crypto scams

How Do I Avoid Crypto Scams?

Nov 8, 2021

Recently, investors in the virtual Squid token (“SQUID”) stood by and watched while the value of their digital currency collapsed from a high of just over $2,860 to effectively a zero value. According to the Washington Post, the token’s creators withdrew approximately $3.3 million in funds, driving the price of the coin to near worthless. SQUID traded on PancakeSwap, a decentralized digital exchange. It quickly gained momentum among users because investors thought that the coin was somehow tied to the recent Netflix hit series, “Squid Game”.  Soon it became apparent that there was no such connection. After climbing to a high value, all of the liquidity was taken out by its developers, leaving the investors holding worthless tokens. What is a Rug Pull in an Initial Coin Offering? In the cryptocurrency world, this type of maneuver is known as a “rug pull.”  In  a rug pull, the coin’s developers abandon a project and run away with investors’ funds. According to cybertalk.org., the most common type of rug pull is a liquidity scam. This fraud involves listing the digital coin on a decentralized exchange (DEX) and pairing it with a top cryptocurrency technology, such as Ethereum (ETH).  According to cybertalk.org, the sequence of events in a typical rug pull would then continue as follows: The token creators copy an existing, public smart contract code and issue a platform token. Then, they create hype for their project and add liquidity of the token to a DEX, like Uniswap, Pancakeswap, or Sushiswap. DEX’s allow users to swap tokens without any intermediaries. The paired tokens are locked in a smart contract called a liquidity pool. Using the DeFi exchanges, customers swap their tokens for the platform token. With the token developers and initial platform users investing in the project, more and more people start seeing it as an opportunity to “get in early.” Once the token becomes popular and increases in value, the project owners dump their stake all at once to make a profit. This pump and dump leaves other investors with worthless cryptocurrency tokens and no option to get their money back. Rug  pull perpetrators like decentralized exchanges such as Uniswap, PancakeSwap, or Sushiswap because these alternative exchanges allow users to list tokens for free and without an audit.   This is very different from centralized cryptocurrency exchanges such as Binance or Coinbase.  Centralized exchanges are similar to a traditional stock exchange where trusted middlemen handle user funds and facilitate trades. They are designed so that one entity manages closed liquidity pools holding large amounts of tokens and unique  digital currency. Centralized exchanges are far more accessible, common, and easier to use. Decentralized exchanges remove this middleman and allow for direct trading between two users. The SEC Warns Investors to Be Wary of Crypotcurrency Investments The U.S. Securities and Exchange Commission (“SEC”)  has warned  investors not to get caught up in new digital currencies for fear of missing out (“FOMO”) on their dramatic rise in value.  It suggests that investors considering a digital asset-related investment  take the time to understand the program  as well as to evaluate its risks.   The market is still […]

Read more
FINRA Investigation

How to File a FINRA Complaint for Investigation?

Oct 18, 2021

Sometimes clients ask us how they  can submit a FINRA complaint against their broker or brokerage firm to begin an investigation into suspicious or fraudulent conduct. There is a mechanism to do this, although it is different from filing a FINRA arbitration claim where you can seek money damages. Through its Investor Complaint Program, FINRA investigates complaints against brokerage firms and their employees. FINRA is empowered to take disciplinary actions against brokers and their firms. Sanctions may include fines, suspensions, a barring from the securities industry or other appropriate sanctions. How to Initiate a FINRA Investigation FINRA has a procedure through which investors and persons acting on behalf of investors can file a complaint when they feel that they have been subjected to improper practices involving their broker or brokerage firm. Through the Investor Complaint Program, investors and others acting on their behalf can immediately alert FINRA to potentially fraudulent or suspicious activities by their brokerage firms or brokers.  Once a Complaint is filed, if a determination is made by FINRA to initiate an investigation, a FINRA examiner might contact you to ask for additional information or documents regarding your complaint. You can submit a complaint online through FINRA’s Investor Complaint Program.  or by mailing your complaint to: FINRA Investor Complaint Program 9509 Key West Avenue Rockville, MD 20850-3329 Fax: (866) 397-3290  According to FINRA’s investor complaint brochure , if you are filing a complaint for investigation, it must contain the following information:  Name of the brokerage firm and the individuals at the firm with whom you dealt;  Names of the security or securities that are the subject of your complaint, or a detailed description of the practice or behavior that is the subject of your complaint;  Date or dates of the problem activity or transaction;   Detailed descriptions of the events as well as the circumstances surrounding the activity that is the subject of your complaint;  Your address and a phone number or email address where you can be reached.  If you decide to send a letter you should include copies of sales confirmations, monthly statements for the relevant time period and all relevant correspondence with the firm.  FINRA  does not have jurisdiction to look at every type of investment activity. It has power over most brokerage firms and their employees and associated persons. To see if this applies to your broker or firm, you can look up whether they are a FINRA member firm on brokercheck.  If you have a problem with an investment adviser, transfer agent, mutual fund or public company, you should try to file a complaint with the SEC or your state securities regulator.  Prohibited Broker Conduct Certain conduct in the securities industry is prohibited. These include, but are not limited to:  Unsuitable Recommendations. Recommending to a retail customer a securities transaction, investment strategy or type of account that is not in the best interest of that customer, given the customer’s age, financial situation, investment objective, risk tolerance, liquidity needs and investment experience. Investment in a particular type of security may not be in the best interest of the retail customer, or the amount or frequency […]

Read more
whistleblower law

What is a Whistleblower?

Oct 11, 2021

Recently, an SEC Whistleblower was awarded $36 million for information and assistance that significantly contributed to the success of an SEC enforcement action as well as actions by another federal agency.  We don’t know the identity of the Whistleblower or the firm or individuals who were sanctioned as a result of the information. That’s because the reporting process is anonymous. There are also anti-retaliation rules in place which prevent targeted firms from retaliating against whistleblowers who make a complaint in writing to the SEC. According to the SEC, this generally means that “employers may not discharge, demote, suspend, harass, or in any way discriminate against an employee in the terms and conditions of employment who has reported conduct to the Commission that the employee reasonably believed violated the federal securities laws.”  The Dodd-Frank Wall Street Reform and Consumer Protection Act established the SEC’s Whistleblower Program.The Act expanded the protections for whistleblowers and broadened the prohibitions against retaliation.  These provisions encourage people to come forward with the information.  Whistleblowers have Received Over $1 Billion  The SEC’s highly successful Whistleblower Program has paid out over $1 billion to anonymous tipsters. The Program grants awards to qualifying whistleblowers who provide significant information leading  to a successful SEC enforcement action. Depending on the circumstances, Whistleblowers receive an award  between 10%-30% of the total monetary sanctions collected by the SEC and by other regulatory or law enforcement agencies. Importantly, the SEC’s Whistleblower Program allows the  whistleblowers to anonymously submit tips if they are represented by an attorney in submitting their tip. Many types of tips qualify for the Whistleblower Program. The Whistleblower Program is important to maintaining the integrity of the financial markets. Information gathered from a whistleblower who has knowledge of possible securities law violations can be a powerful weapon in the law enforcement toolbox of the SEC. A Whistleblower’s special knowledge of the circumstances as well as individuals involved, can help the SEC identify possible fraud  or securities violations much earlier than they might otherwise have. Thus, this allows the SEC to minimize investor harm, better preserve the integrity of the capital markets, and more quickly stop those responsible for the unlawful conduct. In return for this valuable information, the Commission is authorized by Congress to award money to eligible individuals who provide high-quality original information that leads to an SEC enforcement action in which over $1,000,000 in sanctions is ordered. The range for these Whistleblower awards is between 10% and 30% of the collected money. This awards program has been spectacularly successful and has led to many large actions against bad actors by the SEC. The SEC has awarded approximately $1.1 billion to 214 individuals since issuing its first award in 2012. All payments are made out of an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators.   Recent  awards to Whistleblowers have also been quite large. Some of the biggest  awards have been in the hundreds of millions of dollars. The largest whistleblower award to date—for $114 million– was announced by the SEC in October 2020. The next largest–$50 million—was also […]

Read more
Ponzi scheme

Horizon Private Equity Ponzi Scheme Assets Frozen

Sep 27, 2021

On August 20, 2021, the Securities and Exchange Commission (SEC) announced the filing of an emergency action to stop a $110 million Ponzi scheme which it alleges was operated by a former Oppenheimer stockbroker, John Justin Woods and two companies he controls: Livingston Group Asset Management Company, d/b/a Southport Capital (Southport), and Horizon Private Equity, III, LLC (Horizon). The case was filed in the  United States District Court for the Northern District of Georgia, which granted a temporary restraining order which  froze the assets of Woods and Horizon. The Ponzi Scheme Raised over $100 Million from Over 400 Investors According to the SEC’s complaint,  the defendants raised over $110 million from more than 400 investors in 20 states by selling them membership units in Horizon. Woods and other Southport investment advisers allegedly represented to investors – many of whom were elderly retirees – that they would receive returns of between 6-7% in interest, guaranteed for a period of two to three years, for investments in the “Horizon Private Equity” fund. Investors were told that the investments were safe, would pay this fixed rate of return, and that they could get their principal back after a brief waiting period.  Woods and others at Southport generally told investors that Horizon would be investing in such things as government bonds, stocks, or small real estate projects. Instead, in a classic Ponzi scheme, later investors’ funds were used to pay returns to earlier investors. Defendants were only able to pay these guaranteed returns to their existing investors through new investor money. According to the SEC, Horizon has not earned any significant profits from legitimate investment. The SEC complaint also alleges that Woods lied to the SEC during its regulatory examinations of Southport. Woods Began his Ponzi Scheme at Oppenheimer Woods began his career at Lehman Brothers and, in 2003, he moved to Oppenheimer & Co., Inc., where he was a Financial Advisor through 2016.  The SEC complaint alleges that the conduct by Woods occurred “from at least 2008 to the present.” Woods was a Financial Advisor at Oppenheimer during a portion of this time period. Upon information and belief, this conduct began at Oppenheimer and clients were encouraged to transfer their assets to Southport with the promise of high investment returns. According to the SEC, Woods was the President of  Southport as well as its majority owner, and had full control over Horizon, which had no employees. Investors were steered to Horizon through Southport which had Investment Advisors working for it.  The SEC alleges that several Investment Advisor Representatives at Southport sold Horizon Private Equity, III, LLC, including Michael Mooney, John Woods, Jim Woods and Arthur Brown. Woods and his brother, cousin and others, were also former Financial Advisors of Oppenheimer , working in  the Atlanta, Georgia  branch office.  In or around 2015, Oppenheimer became suspicious that Woods was affiliated with Southport or Horizon. A significant number of Oppenheimer’s  customers had invested in Horizon at that time. Because Woods was employed by Oppenheimer, investors were lulled into believing that Oppenheimer approved the product and investment recommendation. In truth, Horizon Private Equity, III, LLC was neither […]

Read more
Teen Investors

Trading Apps are Targeting Teen Investors

Sep 20, 2021

Buckle up folks, the brokerage industry has found an entire new audience—teenagers. While most people know that anyone who is over the age of 18 can open a brokerage account quite easily, you might be surprised that the next phenomenon is the 13-17 year old market.  Yes, that trading app might now appear right next to your child’s Instagram app on their Iphone.  Firms are Encouraging Kids to Trade Stocks Recently, Fidelity has  announced its launch of a special  account geared to kids aged 13-to 17-year, allowing them to save,  spend ,  trade and invest with zero commission. Called the Fidelity Youth Account,  it is touted as “A brokerage account owned by teens 13 to 17 that’s built to start their investing journey. They can trade most US stocks, ETFs, and Fidelity mutual funds in their own accounts.” The app allows parents and guardians to monitor their teen’s account activity. According to Fidelity’s website: Parents/guardians who currently have a Fidelity account can open this account with their 13 to 17 year old. At age 18, your teen’s account will be transitioned to a retail brokerage account for free. Parents are responsible for their teen’s activity and can monitor account activity online, and through monthly statements, trade confirmations, and by viewing debit card transactions. You can also set up alerts to notify you of trades, transactions, and cash management activity. Fidelity is not the only one…….other youth-oriented trading apps are also spouting up. New startups  Greenlight Financial Technology, Stash, and M1 Finance are also seeking to attract young investors, according to Barron’s. Like at Fidelity, using Greenlight kids, with parental approval, can buy fractional shares of securities and start investing with as little as $1 with no trading fees. Greenlight’s website states “Parents approve every trade, right from the app.”  Greenlight also touts that “the all-in-one plan teaches [kids] money management and investing fundamentals — with real money, real stocks and real-life lessons.” But, what exactly are those lessons? Are these Apps Promoting Gamification? While these new  trading platforms for kids spin themselves as educating young investors, some experts argue that these platforms are designed to gamify stock trading, and instead might be detrimental to teens. The SEC is looking into this new world of stock-trading apps, and examining whether they use digital cues and prompts that could be influencing their user’s investment decisions. Indeed, according to Barron’s some critics say that certain stock-trading apps look more like online games or gambling, and that their graphic designs are coercing users into making bad investment decisions. In a new release , the SEC said it was seeking public comment “related to the use of digital engagement practices by broker-dealers and investment advisors.” The SEC may be able to use its power to review some of the underlying technology that brokerage apps use to reach customers and track their actions. These tools include things such as behavioral prompts, game-like features (commonly referred to as gamification), and other features designed to engage with retail investors on digital platforms, as well as the analytical and technological tools and methods to gather information. Young People With No Experience are […]

Read more
Investment Loss

How Can I Sue My Stockbroker for Investment Loss?

Sep 13, 2021

Many investors who call our offices are surprised to learn that if they want to sue their stockbroker or financial advisor that they have waived their right to sue them in court/ This does not mean that you do not have any legal rights.  It simply means that you must bring your claims against your stockbroker through the FINRA arbitration system. FINRA stands for the “Financial Industry Regulatory Authority,” which provides the primary arbitration forum for harmed investors to file their claims. What are Arbitration Clauses and What should Investors Know? If you lost money in your  investment  account at a brokerage firm such as Merrill Lynch, Morgan Stanley, UBS, Charles Schwab and even a self-directed account on an app such as Robinhood , your account agreement likely contains an arbitration agreement requiring that your claims be arbitrated through FINRA.  If you have a brokerage account, you might be surprised to know that  you’ve agreed,  by signing a new account form, to arbitrate your claims regarding your brokerage account. Buried in your account agreement is something called an “arbitration clause.” This clause creates a contractual agreement between you and your brokerage firm which requires that all disputes be resolved through the FINRA arbitration process. There is really no way around this clause, which mandates FINRA arbitration instead of litigation in court.   The U.S. Supreme Court has ruled that these clauses are enforceable, meaning that you can’t get out of them because they found that FINRA arbitration is just as fair to consumers as being in court. One significant difference between FINRA arbitration and court litigation is that there’s  an extremely limited  and narrow right of appeal. In fact, in some states like Florida, you can be sanctioned and have to pay money to the opposing side for even trying to appeal a FINRA arbitration award without adequate grounds. Basically, the FINRA decision is final and binding in just about every case. A lot of folks mistakenly believe that arbitration is just the first step, and that then they can complete their case in a  court. This is a wrong assumption. FINRA arbitration is generally your one shot to have your investment fraud or negligence case heard and that’s it. Because of this, it’s crucial that  you hire a FINRA attorney who knows the ins and outs of this practice. How Do I Start a FINRA Arbitration?  First: Hire a FINRA Arbitration Attorney Like going to a doctor who specializes in your illness or condition, it is important to hire an experienced  FINRA attorney who  knows how to  represent investors in FINRA arbitration cases. Investor claims filed in FINRA are subject to the FINRA Code of Arbitration Procedure which provides the procedures which must be followed. Hiring an investment fraud lawyer who knows these rules, as well as one who is familiar with the arbitration process, can maximize any recovery you might get in your case. When looking to hire an  investment fraud attorney, it is helpful to ask the following questions to be sure that the lawyer you have found is experienced enough to  help recover your investment fraud losses. You should ask about that attorney’s […]

Read more
securities and exchange commission

Tell the SEC About Your Experiences with Online Trading Apps

Sep 6, 2021

The Securities and Exchange Commission (“SEC”) has just posted a “request for information and comments” seeking  information  concerning the  “digital engagement practices” that are used by online and app based brokers. The SEC reports that it is looking into the methods by which  brokerage firms are using digital tools designed to  appeal to their investors’ behavioral tendencies. In particular, the regulator is looking into game-like engagement (commonly referred to as “gamification”) which online firms use to encourage investor activities on their websites, portals and mobile apps. The SEC is focusing on  behavioral prompts, differential marketing, and other elements or features which are specifically designed to engage with retail investors on digital platforms as well as the analytics and technology behind them.  These are called digital engagement practices or “DEPs”  In his remarks regarding this request for comment, the new SEC Chairman, Gary Gensler, states “In the last few years we’ve seen a proliferation of trading apps, wealth management apps, and robo-advisers that use these practices to develop and provide investment advice to retail investors.” Chairman Gensler  notes that “In many cases, these features may encourage investors to trade more often, invest in different products, or change their investment strategy. Predictive analytics and other DEPs often are designed with an optimization function to increase revenues, data collection, or customer time spent on the platform. This may lead to conflicts between the platform and investors. I’m interested in the varied questions included in the Request for Comment, and I’m particularly focused on how we protect investors engaging with technologies that use DEPs.” The SEC Asks for Investor’s Real Life Trading Experiences  The SEC’s request for comments specifically asks for input from investors  in a “feedback flyer” regarding their experiences with these trading platforms. Some of the more interesting questions include the following: 1. What would you like us to know about your experience with the features of your online trading or investment platform? (Examples of features are: social networking tools; games, streaks, or contests with prizes; points, badges, and leaderboards; notifications; celebrations for trading; visual cues, like changing colors; ideas presented at order placement or other curated lists or features; subscription and membership tiers; or chatbots.) 2. If you were trading or investing prior to using an online account, how have your investing and trading behaviors changed since you started using your online account? (For example, the amount of money you have invested, your interest in learning about investing and saving for retirement, the amount of time you have spent trading, your knowledge of financial products, the number of trades you have made, the amount of money you have made in trading, your knowledge of the markets, the number of different types of financial products you have traded, or your use of margin.) The deadline to complete the SEC’s Feedback Flyer is October 1, 2021.  After the deadline for comments, the SEC might create new regulations governing these trading apps. Interestingly , the question looms as to whether, by encouraging users to buy and sell securities, platforms such as Robinhood might actually be making “recommendations” to their customers.   No Such Thing as “Free”  […]

Read more
Stockbroker

How Long Do I Have to Sue my Stockbroker?

Aug 23, 2021

Like having milk in your refrigerator, it’s not a good idea to let your securities fraud case sit too long. There are strict time deadlines for filing your securities fraud claims. The most common legal deadline is called a statute of limitations. This is a legal rule that may bar your claim if it is not filed on time. If the time clock on the statute of limitations runs out in your case, you will most likely lose your right to take any legal action. The best thing that you can do to avoid losing the right to bring your claim is hiring an attorney as soon as you learn of the harm or the bad conduct causing you harm. In a securities case, this can be as soon as you discover a loss, or as soon as you learn of a misrepresentation by your stockbroker, investment advisor or your brokerage firm. Statutes of limitation or other time bars apply in various areas of criminal and civil law, including in some FINRA arbitration actions. Time limits and other sensitive time deadlines in investment fraud cases are often very complicated. This is why you need to consult with an experienced investment fraud attorney as soon as possible once you think you might have a case. Investment Fraud: There are Two Separate Time Issues If you are thinking about suing your stockbroker or brokerage firms, your claims are generally subject to mandatory FINRA arbitration. FINRA is the Financial Industry Regulatory Authority, and it has a dispute resolution department that handles the arbitration claims between brokerage firms and their customers. Instead of having a court hear your complex securities matter, the FINRA arbitration forum appoints arbitrators who have the necessary securities or business expertise to understand the particular legal issues surrounding allegations of investment fraud or negligence. Because almost all investors at brokerage firms are subject to this mandatory FINRA arbitration, most securities fraud and broker negligence claims are resolved this way. If you believe you have been a victim of securities fraud or any other type of broker misconduct, you have a limited amount of time to file your arbitration claim. Figuring out exactly how much time you have to sue your stockbroker or the brokerage firm can be quite complicated. First, there are two separate timing issues that must be considered: Eligibility under the FINRA Rules; and Applicable statutes of limitation. Be Sure to File Your FINRA Arbitration Claim on Time Unlike court, FINRA arbitration has an “eligibility” rule, requiring that all claims must be brought within six years of the occurrence or event giving rise to the claims. If you fail to take action within this time, you may lose the ability to take action at all. This seems like a simple rule, but it’s not. While the brokerage firms like to measure the six years from the date a stock or investment is purchased, there are a number of other events that may trigger a later date for the running of the six year rule. For example, an unsuitable recommendation to hold a stock, or an ongoing fraud in […]

Read more
money trading

Did You Lose Money Trading Options At Robinhood?

Jul 12, 2021

Robinhood was recently ordered by FINRA to pay almost $70 million —the largest single penalty FINRA has ordered to date—in part as a result of its widespread misrepresentations concerning the potential risk of loss to its customers who were engaged in trading options spreads. FINRA found that between January 2018 and March 2021 Robinhood published false and misleading statements concerning  the “risk of loss”  with respect to debit spreads. It also found that Robinhood falsely reassured its customers who had engaged in options spreads that they need not take steps in order to mitigate their risk as they approached the options expiration date. Robinhood was found to have provided customers with false information about the actions Robinhood would take with respect to those spreads on their expiration date. In another portion of the order, Robinhood was sanctioned for improperly approving clients under 21 for risky options trading.  FINRA found that, as a result of these misrepresentations and omissions on the risk of options spreads, that at least 630 customers incurred losses totaling over $5.73 million. The order requires that Robinhood pay $5,731,520.67 as restitution for losses that its customers suffered as a result of these negligent misrepresentations and omissions. Robinhood states  that it already has paid or that it  intends to pay $3,639,948.70 of that amount to 134 of its affected customers.  Robinhood Mislead Customers about Options Risks The regulator found that Robinhood’s reassuring statements were false and misleading because they failed to account for the risk its customers faced in either of these two alternative scenarios:  Options Trading Scenario 1– A short option that is held to expiration is assigned and the long option expires worthless; or  Options Trading Scenario 2– A short option is not assigned and the long option is exercised, whether by Robinhood or by the customer.  FINRA found that despite Robinhood’s assurances to its customers about risk, in each of these two scenarios a customer can incur losses far exceeding the premium  amount the customer paid to enter into the options spread transaction. Below is the risk statement Moreover, through its website and in direct customer emails, Robinhood falsely assured customers that it was not necessary for the customer to act  in order to mitigate risk in the days and hours leading up to the options expiration date. Robinhood informed its customers through its website that, if at expiration,  the stock price went “below the low” (in call credit spreads) or “above the high” (in put credit spreads), Robinhood would “automatically let both options expire worthless, so you don’t need to worry about checking the app.”  However, what these statements did not disclose was that if the customer,  relying  on Robinhood’s statements,  chose not to close their positions prior to expiration, that their short options could still be assigned (for example by going in the money after hours)—thus resulting in losses. Other misrepresentations were found in  Robinhood’s emails to customers emails during the week that their options contracts expiring, representing that, for short options positions, “[y]ou’ve already set aside the appropriate collateral for assignment.”  This statement was false as well since it failed to account […]

Read more