Massachusetts has filed a complaint against online broker Robinhood Markets, Inc., accusing the trading app of using predatory marketing tactics on novice investors in the state.
William Galvin, Massachusetts Secretary of the Commonwealth, assailed Robinhood for being a reckless company concerned only with its bottom line, and not with the welfare of its investors.
"This is a very reckless company when it comes to these investors. They're interested in expanding their market base, they're not interested in serving their investors," argued Galvin.
"It's marketing itself to them as a device by which they can become wealthy without having the expertise or the skill," he noted.
"They're taking unsophisticated investors, most of whom have no experience, and basically making this into a game, causing them to suffer losses. They're bringing them aboard on something that these people have absolutely no idea about."
The Massachusetts Securities Division (MSD) had earlier filed a complaint against Robinhood, accusing the trading app of predatory marketing on inexperienced investors. It also claims Robinhood exposed investors to "unnecessary trading risks," thereby violating state laws and regulations, said The Wall Street Journal.
It singled out Robinhood's "aggressive tactics to attract inexperienced investors, its use of gamification strategies to manipulate customers, and its failure to prevent frequent outages and disruptions on its trading platform."
The complaint is the first time the Commonwealth has enforced its Fiduciary Rule, a new new investor-protection rule, which Galvin began enforcing in September. The state regulator's complaint focuses on Robinhood's breach of this new rule.
MSD's enforcement section said Robinhood fell short of protecting its customers and their investments, thus violating state laws governing the securities industry.
It also claims Robinhood left investors in Massachusetts susceptible to trading risks by "falling far short of the fiduciary standard" that requires brokers to act in their clients' best interest.
Robinhood rejected all of the state's accusations.
"We disagree with the allegations in the complaint by the Massachusetts Securities Division and intend to defend the company vigorously," said a Robinhood spokesperson.
"Robinhood is a self-directed broker-dealer and we do not make investment recommendations."
He said over the past several months, the company has made significant improvements to its options offering, adding safeguards and enhanced educational materials.
MSD says Robinhood has nearly 500,000 customers in Massachusetts as of this month, amounting to $1.6 billion in accounts. Robinhood has more than 13 million users in total.
