Massachusetts regulators on Wednesday filed a complaint against Robinhood, accusing the popular trading app of not acting in the best interest of its users.
The complaint refers to Robinhood’s “aggressive tactics to attract inexperienced investors, using gamification strategies to manipulate clients, and not avoiding frequent outages and disruptions on its trading platform.”
The complaint is the first enforcement of Massachusetts’ fiduciary rule, which Commonwealth Secretary William Galvin began to enforce in September.
“Robinhood, which generates revenue for trades executed by its clients, gave clients with no investment experience the ability to execute a potentially unlimited number of trades without properly screening them to be approved for options trading” , a statement released in conjunction with the complaint reads. According to the regulator, 68% of Massachusetts-based Robinhood clients were approved for options trading after reporting limited or no investment experience.
“Treating this like a game and enticing young and inexperienced customers to make more and more transactions is not only unethical but also falls far short of the standards we require in Massachusetts,” Galvin said in a statement.
“We have not seen the complaint, but we have and will continue to work closely with all of our regulators,” a Robinhood spokesperson said in a statement to CNBC. “Robinhood has opened financial markets to a new generation of previously excluded people. We strive to operate with integrity, transparency and in compliance with all applicable laws and regulations.“
Massachusetts’s complaint, first reported by The Wall Street Journal, follows a reported investigation by the Securities and Exchange Commission in September.
Robinhood has pioneered the commission-free trading model since its inception in 2013 and has seen its user base explode during the Covid pandemic. In the first four months of the year, the company said it saw a record 3 million new customers when the stock hit a bear market. The app has attracted a lot of attention from Wall Street and since then stock swings in popular names like Tesla have been attributed to these new investors in the market.
Robinhood said it saw 4.3 million daily average turnover transactions in June, better than any listed, established broker. Robinhood said its DARTs more than doubled in the second quarter from the previous three months.
This year’s success has also caused growing pains. Robinhood has had several outages, including a multi-day outage in March that left some clients unable to trade during a historic day for the markets.
In August, the company announced a $ 200 million Series G funding round, raising the valuation to $ 11.2 billion. Robinhood, widely expected to go public in 2021, has hired Goldman Sachs to lead preparations for the IPO, Reuters said, citing sources.
– CNBC’s Kate Rooney contributed to the reporting.
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