Online brokerage Robinhood Financial is targeting young, inexperienced investors, prompting them to make thousands of transactions on its platform, Massachusetts securities regulators allege in a lawsuit filed Wednesday.
Although Robinhood markets itself as the gateway to the stock market for millennials, the company is using “game strategies to manipulate customers” to trade more to increase fees, the lawsuit said.
“One such ad, for example, contains a clip of a young adult saying, ‘I’m a broke student, and investments can greatly help my future,'” the lawsuit said. “In another example, another young adult says,” I knew nothing about investing before I started using Robinhood. Once I created my account, I had a free share, so I was an investor right away. “
To further entice clients of its platform to trade, Robinhood is rewarding users “with colorful confetti that rain on their screens after executing transactions,” court documents said. These and other tactics are Robinhood’s way of turning serious investment into a game, Willian Galvin, Secretary of the Commonwealth of Massachusetts, said in a statement. These tactics are “not only unethical, but also fall far short of the standards we demand in Massachusetts,” he said.
Robinhood did not respond to requests for comment. A Robinhood attorney did not respond to an email requesting comment.
The company lets users transfer money from their bank account to a Robinhood account and then buy and sell stock for free. The app was launched in 2013 and now has more than 13 million users. That includes nearly 500,000 users in Massachusetts with a combined net worth of $ 1.6 billion, court documents said.
Massachusetts said in its complaint that Robinhood makes money through a so-called “payment for order flow.” In that process, Robinhood takes a user’s inventory order and sells it to a larger brokerage firm that executes the purchase. Under this system, government regulators claim that the more transactions Robinhood users make, the more money the company receives from brokers.
State regulators claim that Robinhood’s tactics have resulted in hundreds of users completing thousands of transactions. “Robinhood, for example, allowed a client with no investment experience to complete more than 12,700 transactions in just over six months,” the lawsuit said.
Galvin asks a state court to impose an undisclosed amount of fines on Robinhood. Regulators also want a judge to order Robinhood to find an independent consultant to evaluate the app and company policies.
String of negative publicity
The Massachusetts lawsuit follows a wave of negative publicity recently for Robinhood. Last year, a glitch in the company’s system allowed users to borrow an unlimited amount to trade. Regulators in Massachusetts also pointed to major glitches the app experienced earlier this year.
Robinhood’s platform crashed in March, temporarily preventing users from accessing their funds. The outage occurred on the same day that the Dow Jones Industrial Average posted a historic gain of about 1,290 points in one day. Federal regulators are now investigating why the outage occurred, Bloomberg reported.
In June, an Illinois Robinhood user died of suicide after his account falsely showed negative $ 730,000. In October, an unknown number of accounts were hacked and users complained that they could not reach Robinhood customer service to solve their problems.