Massachusetts regulators accuse Robinhood of exposing novices to ‘unnecessary trading risks’

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Robinhood Markets has attracted millions of users to invest with a colorful app that makes trading more stimulating than intimidating.

That very call pushed him back into the regulatory sights on Wednesday.

Massachusetts securities regulators filed a lawsuit against Robinhood Financial LLC, alleging that the popular online brokerage was aggressively marketed to novice investors and did not have controls in place to protect them.

According to a 23-page administrative complaint from the Commonwealth Secretary’s Office, Robinhood exposed Massachusetts investors to “unnecessary business risks” by “failing to meet the fiduciary standard” which requires brokers to act in the best interests of their clients. . William Galvin.

He focuses on the tactics Robinhood employs to keep consumers engaged, saying he encourages them to use the platform through what he calls “gamification.” A Robinhood client with no investment experience completed more than 12,700 transactions in just over six months, according to the complaint.

“As a broker, Robinhood has a duty to protect its clients and their money,” Galvin said in a statement. “Treating it like a game and getting young and inexperienced customers to do more and more transactions is not only unethical, but also far from meeting the standards we demand in Massachusetts.”

The company said it disagreed with the allegations and planned to defend itself.

“Robinhood is a self-directed broker and we do not make investment recommendations,” the company said in a statement. “Over the past several months, we have worked diligently to ensure that our systems scale and are available when people need them. We have also made significant improvements to our option offering, adding guarantees and improved educational material. “

The Wall Street Journal reported on the complaint earlier Wednesday.

Galvin has built a reputation for targeting financial firms over the past two decades, including suing large mutual fund companies for alleged trading abuse, enforcement actions accusing banks of Wall Street to sell clients with securities at auction during the height of the 2008 financial crisis and even fined Morgan stanley $ 5 million on its management of Facebook 2012 IPO of Inc.

Massachusetts is home to several leading asset managers, including Fidelity Investments and State street Corp., both of which are based in Boston, and was the birthplace of the mutual fund.

Robinhood, founded by Vlad Tenev and Baiju Bhatt, has exploded in popularity this year amid a retail boom. Stock indexes crashed in March as the world was locked down to contain the spread of Covid-19, to rebound. As self-guided investors tried to cash in on the chaos, Robinhood topped 13 million users, of which 3 million signed up in the first four months of 2020 alone.

Tenev and Bhatt said they are on a mission to make investing accessible to everyone, while critics argue that the app encourages users to experiment with financial instruments and risks that they may not fully understand. . Exchanges can be placed with a quick swipe and can be announced with a flurry of virtual confetti.

“There is a legitimate concern about the impact of gamification on financial decisions,” said Charles Rotblut, vice president of the American Association of Individual Investors. “To speculate is not to invest and is often very dangerous for your financial health.”

Technical issues and growing pains accompanied Robinhood’s successful growth. In March, the company was hit by a service disruption that lasted more than a full day of trading. Months later, a hacking attack caused outrage among users. At one point in October, access to over 10,000 email credentials linked to Robinhood accounts was available on the dark web.

Massachusetts passed rules earlier this year that require brokers to uphold a level of fiduciary care with clients. As of last week, Massachusetts had more than 486,000 Robinhood accounts receivable with a total value of about $ 1.6 billion, according to the state. Approximately 68% of Massachusetts Robinhood clients approved for options trading identified as having little or no investment experience.

Robinhood is already under intense scrutiny from federal regulators. The Securities and Exchange Commission and the Financial Industry Regulatory Authority, which oversees brokerage houses, are investigating the company’s handling of March disruptions in service following a deluge of customer complaints that it failed not addressing their concerns, Bloomberg reported in August.

The SEC is separately investigating whether Robinhood correctly informed brokerage clients that it sold their stock orders to high-frequency traders and other Wall Street companies. The investigation focuses on Robinhood’s revelations before 2018, when it changed its website to make it easier for customers to find information.

Finra fined Robinhood $ 1.25 million last December for the way it routed customer orders. Known as payment for order flow, the controversial practice is employed by almost all retail brokers and involves selling client trades to outside firms who execute them.

More to read absolutely financial cover of Fortune:

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