Robinhood, the no-fee stock-trading app, had just raised a massive $363 million in May 2018 and co-CEOs Vlad Tenev and Baiju Bhatt were looking for the next product that would make their customers say "wow."

At a company-wide meeting that August, amid champagne toasts and confetti poppers, Bhatt announced the company would launch a "checking and savings" account with a wildly high 3% interest rate.

The problem: Robinhood told customers the accounts would be insured, but no one at the company checked to make sure that was actually true.

Business Insider spoke with 10 former Robinhood employees and contractors who said the company's attitude toward regulations governing the financial industry was to ask for forgiveness later, rather than seek permission first.

When it came to the checking and savings launch, sources said the decision to not reach out to the proper authorities was a deliberate one. When warned by his team, a former executive tells Business Insider, Bhatt's response was: "Fuck it, we're doing it anyways."

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In late 2017 the crypto craze was on. Bitcoin was reaching record highs by the day, turning speculators into overnight millionaires. Robinhood, a four-year-old startup with grand ambitions to upend the financial world by letting investors make trades on their smartphones, wanted in on the action.

Vlad Tenev and Baiju Bhatt, Robinhood's founders and co-CEOs, called an emergency town-hall-style meeting at the company's Menlo Park headquarters that December to lay out the game plan: Robinhood was going to update its app to let users buy and sell cryptocurrencies from their phones. To cash in on the fervor, the team would need to move fast. They had six weeks to meet the end-of-January deadline.

That's an extremely quick turnaround for a complex product that puts real money at stake. Staffers got caught up in the thrill of the cofounders' crypto challenge, but major questions set in as the launch date approached. Would the company's back-end software — which one former executive said was "held together with toothpicks and bubble gum" — hold up under pressure? Was the company pushing its customers toward risky investments without providing proper education? Would Robinhood be exposing itself to an immense risk of fraud?

"Everyone at the company is mad at me," Bhatt acknowledged in one meeting, according to the former Robinhood executive. "Everyone was telling me not to do it, that I was pushing too hard and that we're risking our customers' money on crypto."

But Bhatt didn't let the naysayers change his course. As engineers cancelled holiday travel plans and worked frantically to meet the crypto project's deadline, motivational posters appeared in the office hallways and bathrooms: "Don't Sleep." The phrase would eventually be used to market the product — as in "Don't sleep on crypto" — but some sleep-deprived employees saw the message as a direct order from their frenzied founders.

As Robinhood staff raced to meet a deadline to launch the new crypto-trading tool, "Don't Sleep" signs papered the office. Courtesy of a former Robinhood employee

That manic, hard-charging attitude has helped fuel Robinhood's rapid growth into one of the leading Silicon Valley startups seeking to disrupt the financial industry. Robinhood describes its mission in grandiose terms: It wants to "democratize our financial system" by letting users manage their banking, retirement, and investment accounts with a few simple phone swipes.

With a war chest flush with $539 million in investments from blue-chip venture-capital firms, a valuation of $5.6 billion, and more than 6 million users, Robinhood is poised to become a major new player in the increasingly digitized financial sector. The success of its no-fee-trading approach has caused longtime leaders in the space like Fidelity and TD Ameritrade to slash fees and JPMorgan to launch its own low-cost trading app.

In May reports circulated that Robinhood was raising yet another investment round that would value the company at $7 billion, with plans for an even bigger round soon thereafter that could be as high as $10 billion.

And it got there, according to former employees, by rolling out new products at a breakneck pace with little regard for the safeguards and financial regulations designed to protect its clients' livelihoods. Business Insider spoke with 10 former Robinhood employees and contractors, who agreed to speak anonymously for fear of retaliation. They described a workplace in which Bhatt and Tenev brushed aside regulatory concerns in pursuit of flashy new products to attract users, culminating in the embarrassing debacle in December 2018 of its new checking and savings service, which the company was forced to abandon after its false assurances that the accounts were insured sparked a congressional outcry.

Like Theranos, 23andMe, and Uber before it, Robinhood sought to disrupt a highly regulated industry with the "move fast and break things" startup playbook, only to learn that the rules are there for a reason, and that breaking them has consequences. Business Insider has learned that the company was warned that the checking and savings accounts might not meet regulatory scrutiny but pressed ahead anyway.

Robinhood responded to detailed questions from Business Insider with a statement claiming that this story would be "sensationalized" and "filled with inaccuracies."

"We're disappointed by the reliance on assertions from anonymous sources as fact," the statement said, "without entertaining the possibility that those sources are wrong. We take pride in our ability to move quickly and thoughtfully in building high-quality products that expand participation in our financial system."

Making stock trades as easy as Instagram posts

Robinhood cofounders Vlad Tenev and Baiju Bhatt in 2015. Ben Margot/AP

The buzzy startup has come a long way since its early days, when Tenev and Bhatt's first attempts to secure funding were rejected 75 times.

The pair — insiders describe Tenev as the technical expert while Bhatt, nearly universally called Baiju by his employees, is the "visionary" — became friends and roommates while undergraduates at Stanford. They moved to New York together, knowing only that they hoped to start a company, but unsure what that would look like. Tenev had dropped out of his mathematics doctoral program at UCLA to pursue the startup dream, while Bhatt quit the financial services job he'd held for nine months.

Their first run at a company has been only vaguely described in the years since as a "trading firm." Next, the future billionaires would try building trading software for hedge funds and banks, though details about that business — named Chronos Research — are also hazy. Amid the Occupy Wall Street movement in 2011, when more and more people were losing faith in the market, Tenev and Bhatt got the idea to focus on the consumer side of financial services, making a stock trading on a smartphone as easy as posting a photo to Instagram.

On the day the Robinhood app was announced, in April 2013, the 20-something co-CEOs found themselves taking part in a video interview defending their experience. "This is our third company in the financial space, so in startup standards that makes us very, very experienced," Tenev said. "It makes us actually quite ancient." Being an entrepreneur, Bhatt went on, was "by definition something that you do without knowing what you're doing."

Robinhood's no-fee trading — most competitors charge at least $5 a trade — and the free share of stock it gave away with each new signup made it a popular app, but Bhatt and Tenev were always pushing to differentiate their product from competitors. So more than four years after their idea first hit the App Store, they seized on the idea of making crypto trading as easy as they'd made stock trading.

The initiative was, a former Robinhood contractor told Business Insider, a "last-minute thing" beset by chaos.

"From an operational and managerial perspective," the contractor said, "it was all over the place." The former executive said the technology was not ready for prime time: "People would press 'process' and sometimes you wouldn't even know if the transaction went through."

But externally the February 2018 launch was viewed as a major success. The momentum and new customers acquired through crypto — which, according to a recent Bloomberg report, doubled its overall customer base — helped Robinhood raise a $363 million Series D round that May.

After the new investment, Bhatt told Bloomberg that users should expect to see Robinhood moving from a "full-featured investment platform to full-featured financial-services consumer-finance platform." To do so, he said, Robinhood would need to develop products so superior to those of its competitors that anyone not using the app would say to themselves, "Wow, I've made a mistake." That would take ingenuity. And in a tightly regulated industry, it would also mean pushing the boundaries of what was possible.

'They honestly don't give enough of a shit'

With no trading fees and a relatively easy sign-up process, a good portion of Robinhood's clients are young, first-time investors lacking a deep understanding of the markets. As a result, the company is often inundated with queries from customers about sometimes simple things, such as "Why did I get the stock at a higher price than what I saw it at?," according to a former contractor who handled customer questions.

Unable to keep up with the growing number of customer queries, the company decided to shut down its call center a little over a year and a half ago, according to the contractor. "We were growing so fast, after a while it was ridiculous."

Instead, all customer issues were handled by email. But when it came to employee suggestions on how Robinhood could better handle customers' questions, they were sent "into a black hole," the former contractor added.

Sometimes, the lack of customer service reached a boiling point. The startup faced at least one lawsuit, in a Missouri small-claims court, filed by a customer who claimed to have lost $25,000 from his account for no apparent reason; Robinhood never responded to the claim and a judge entered a default judgment against it in November 2018.

In December, Robinhood's options trading suffered an outage. Customers lashed out online over the company's response, which included offering Amazon gift cards to customers who claimed they lost money when the service went down.

In the fall of 2018, Robinhood also faced scrutiny for its practice of selling its customers' buy-and-sell orders, also known as order flow, to sophisticated high-frequency traders, as opposed to directing them to exchanges to be executed. The practice is legal and not uncommon among retail brokers. E-Trade, Schwab, and TD Ameritrade all do it as well. But some argue that selling order flow can negatively influence the price at which customers' trades are executed when high-speed firms use the information to gain market insight and make an additional profit.

According to a Bloomberg report, the payments Robinhood received for order flow accounted for more than 40% of total revenue. Tenev eventually chose to address the topic directly in a blog post, denying that the practice affects prices and saying Robinhood sells order flow to the firm that is "most likely to give you the best execution quality."

"I think they are so caught up in the engineering and just releasing their product and growing, they honestly don't give enough of a shit about their customers, and we always saw that as a problem," the former contractor said. "It was shitty to feel like they didn't even care."

'Fuck it, we're doing it anyways'

By December 2018, Bhatt found the "wow" moment he'd been looking for. Robinhood announced that it would launch a checking and savings product that paid 3% interest — a huge uptick from the average US savings and checking account interest rates of 0.10% and 0.08%, respectively.

Even digital banks, which have made a name for themselves in recent years as an alternative to nominal rates offered by big banks, fell shy of Robinhood's proposal, at the time topping out at 2.02% and 2.25% for checking and savings accounts, respectively.

The day checking and savings launched, employees celebrated internally, some by posting links to the announcement across their social-media accounts. Like crypto, it had been another all-out sprint, with engineering work starting just months earlier, according to several sources who worked on both projects.

Bhatt had announced the vision for checking and savings to employees in August 2018 to much fanfare. The typical Friday town-hall-style meeting was scrapped for something more festive — a company-wide meeting in its Palo-Alto office courtyard. Ice-cream sandwiches and champagne were served.

When Bhatt took the stage, he told employees that the company's earlier plans to launch a more passive savings account had been abandoned. Instead, Robinhood would reimagine what was possible and offer their customers a 3% interest rate.

Employees near the front row pulled the strings on large poppers when the announcement was made and rainbow colored confetti rained down on the crowd.

"Three percent was a magic number," one former employee told us. "[Bhatt] thought it would make people say 'Wow.'"

But in the weeks following the champagne toasts, reality set in.

During one meeting, the former executive said, product managers raised concerns with Bhatt about naming the product checking and savings. The trouble, they argued, was that the money was not in a checking account or in a savings account: It was in a brokerage account. And unlike traditional bank accounts, brokerage accounts aren't insured by the Federal Deposit Insurance Corp. Pitching the product as bank account could mislead customers.

"Fuck it, we're doing it anyways," Bhatt said in the product meeting, according to the former executive who was in the room. The name, Bhatt said, would resonate with users.

Robinhood's brokerage accounts were already insured by the Securities Investor Protection Corp., but that covers only cash "from the sale of or for the purchase of securities." Using the account as a place to park cash for checking and savings was a far cry from using it to buy stocks.

Created after the bank failures of the Great Depression, the FDIC was meant to strengthen consumer confidence in the safety of bank deposits. As of the end of 2018, the FDIC insures 5,406 financial institutions and over $12.6 trillion in assets. Since 2017 alone, it has stepped in to make account-holders whole at nine failed banks.

The SIPC is not a government agency or regulator, but it plays a similar role, insuring broker-dealer accounts in the case of the firm collapsing. It counts 3,621 members and has distributed nearly $140 billion in cash and securities for customer accounts in its 49-year history.

Robinhood would market checking and savings as insured by the SIPC up to $250,000. But according to the former executive and a former employee who worked with Robinhood's legal team, Bhatt explicitly decided not to contact the SIPC before the checking and savings announcement to confirm that the product would be covered. He thought, they said, that the issues would work themselves out over time and ultimately resolve in his company's favor.

When product managers questioned how Robinhood could say the product was SIPC-insured when they hadn't spoken to anyone there, Bhatt's response was "we're going to be fine," according to the former executive.

The former employee who worked with the legal team said that they heard Bhatt speaking to lawyers on several occasions; when he was questioned about how the accounts would be insured, the cochief executive responded, "Well, we aren't worried."

But the legal team was.

"Our team of lawyers were very nervous about it," the former employee told us. "They were concerned about the amount of time they were given to evaluate it and also that no one had done what we were doing before."

While the lawyers never outright advised against the plan, the former employee said, they repeatedly called it "risky." At one point, the lawyers said they would be more comfortable if they reached out first to SIPC, according to the former employee.

But ultimately, Robinhood's mentality of doing things quickly and apparently semi-secretly won out. The attitude was "do it and beg forgiveness rather than ask permission," the former employee said. "Robinhood had a lot of top-down directives from Vlad and Baiju. They were both confident that if there was a chance, they should try it, basically."

"The more successful everything has been, the more confident the leadership has become in their own decision making," another former employee said. "There are lots of antiquated rules in the brokerage space. You may be going by the word of the law, perhaps not quite the spirit of the law, but it's to build a better product. This has been so successful [at Robinhood] for so long, they wanted to push on this further and further."

'Delete everything you posted'

Within a day of launch, articles began to surface calling into question how the new accounts would be insured.

Stephen Harbeck, the president and CEO of SIPC at the time, told several media outlets that Robinhood had not contacted SIPC beforehand about the product and said unequivocally that Robinhood's claims that the accounts were SIPC-insured were false: The money in the accounts wasn't covered. Hundreds of thousands of users, many of them young, unsophisticated investors, had rushed to sign up for a new account based in part on the understanding that, if Robinhood went belly up, their money would be protected. It wouldn't be.

"Money that is doing nothing but earning interest looks like a loan," Harbeck told Axios. "We do not protect loans to a broker-dealer." Harbeck, who has since left the SIPC, confirmed to Business Insider that Robinhood never reached out before the launch, and that he had referred the matter to the Securities and Exchange Commission.

Many Robinhood staffers had promoted the new product on their social-media feeds and defended it to friends and peers as criticism emerged. But within hours, one source said, a company-wide email instructed staffers to "delete everything you posted" about checking and savings.

Within a day of its announcement, checking and savings was all but dead. The blog post on Robinhood's site announcing the news was deleted. Instead, Bhatt and Tenev published a new post announcing the team was going back to the drawing board.

"We plan to work closely with regulators as we prepare to launch our cash management program, and we're revamping our marketing materials, including the name," the post read.

A week later, a joint letter from several US senators condemning Robinhood for its actions was sent to SEC chairman Jay Clayton, FDIC chairman Jelena McWilliams, and SIPC's Harbeck.

"We are concerned that rebranding Robinhood's original announcement to cash management may simply be a way to circumvent regulatory scrutiny without offering full transparency to its customers," the bipartisan letter, which was organized by Republican Sen. John Kennedy, read.

In a statement to Business Insider, Robinhood acknowledged "mistakes in our Checking & Savings announcement. That's why we moved swiftly to respond to concerns and took down related materials before any product launch. Since then, we've been working on a new cash management feature."

Admitting defeat

At the company all-hands meeting that week, Bhatt told employees that the company probably should have handled the launch differently, but "we were exploring uncharted territory," according to the former employee who worked with the legal team.

To be clear, Robinhood wasn't the first fintech looking to expand its offering to obtain more market share in its clients' wallets. At the time, Acorns had already announced a new debit card for clients. Betterment had recently released a tool that would allow customers to move money between their traditional checking accounts and a low-risk investment product that could serve as an alternative to a savings account.

Off the stage, at least one manager, according to two sources, was spreading information about lawmakers conspiring against Robinhood — a message that became widespread internally. The suggestion was that big banks had leaned on politicians to push SIPC to look at checking and savings following the announcement.

According to other sources familiar with the matter, it was an abundance of inbound inquiries about checking and savings immediately following the announcement that prompted Harbeck to make a call to the SEC, which has regulatory oversight over Robinhood.

Where does Robinhood go from here?

Six months later, Robinhood's pursuit of customers' deposits remains very much up in the air. "Checking and savings" was rebranded "cash management." The product has yet to launch, and users can no longer sign up for the waitlist. Details on how it will function, or be insured, have yet to be released.

In the meantime, checking and savings accounts have become table stakes among startups in personal wealth management. Wealthfront, Acorns, and SoFi are among a number of fintechs that have announced some type of cash-management offering with higher interest rates than traditional banks. The motivation is simple: As fintechs fight to survive in the crowded space, handling more of their clients money is key to their growth.

The SEC and FINRA, which have regulatory oversight of Robinhood, have not formally charged the startup. Several sources contacted by Business Insider have speculated that Robinhood has placed the cash-management feature in a holding pattern on the suggestion of the regulators as they investigate how the process was handled.

Representatives for the SEC and FINRA declined to comment.

Robinhood has made changes of its own internally. In April the startup announced a string of new hires and promotions on the compliance side. Most notably, Scott Friedman, who had served as Robinhood's president and chief compliance officer since the company's inception, transitioned to an advisory role as vice president of compliance affairs. John Castelly, who most recently served as chief compliance officer of Personal Capital, was named the new chief compliance officer.

Robinhood isn't the only one playing the waiting game. A lawyer with a competing fintech said the industry is closely watching the situation to see what type of punishment, if any, Robinhood will receive.

"It's going to come down to what consequences the regulators impose for this," the lawyer said. "The lesson could be, it's easier to say you're sorry and ask for forgiveness if all that happens is they get a slap on the wrist or a fine that is seen as the cost of doing business."

According to the joint letter from the US Senators, over 850,000 users had signed up for checking and savings within the first week of its announcement. With customer-acquisition costs so high for those in the wealth-management space, a minor penalty could be viewed as a worthwhile fee for the ability to cut regulatory corners.

And while all eyes remain on the fate of Robinhood's cash-management service, the startup hasn't remained completely stagnant. In April, Robinhood applied for a national bank charter from the Office of the Comptroller of the Currency, as reported by the San Francisco Business Times.

If approved, Robinhood would be the first fintech to receive such a charter. In its overview of its application to the OCC, Robinhood cited its foundational principles as being simple, honest, smart, safe, and rewarding, adding that banking charter would allow it "to offer banking services in a safe and sound manner to US retail consumers."

Got a tip? Contact Nick Bastone via email at nbastone@businessinsider.com, or Twitter DM at @nickbastone. Contact Dan DeFrancesco via email at ddefrancesco@businessinsider.com or Twitter DM at @dandefrancesco. Email or direct message for Signal/WhatsApp.