Massachusetts regulators accuse Robinhood of luring inexperienced investors, putting their ‘assets at risk’

Allianz chief economic adviser Mohamed El-Erian argues apps like Robinhood are reducing the barriers to retail entry. He also provides insight into the coronavirus pandemic, initial jobless claims, earnings and how to allocate capital in the current market environment. Robinhood, the online trading platform that saw its popularity surge during the […]

Robinhood, the online trading platform that saw its popularity surge during the pandemic, may be too popular.

Massachusetts securities regulators have filed an administrative complaint against the company, accusing it of deploying “aggressive tactics to attract new, often inexperienced, investors” and acting “without regard for the best interests of its customers.”

The Massachusetts Securities Division is now seeking an order for the California-based company to “provide restitution to fairly compensate investors for those losses attributable to the alleged wrongdoing” and to engage an independent compliance consultant to review its infrastructure, platform and policies, among other demands.

ROBINHOOD ON HIRING RAMP UP

“As a broker-dealer, Robinhood has a duty to protect its customers and their money,” William Galvin, the secretary of the Commonwealth of Massachusetts, said in a statement shared with FOX Business.

“Treating this like a game and luring young and inexperienced customers to make more and more trades is not only unethical but also falls far short of the standards we require in Massachusetts.”

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The statement from Galvin’s office adds that “Robinhood, which earns revenue for trades executed by its customers, gave customers with no investment experience the ability to make a potentially unlimited number of trades, without properly screening them to be approved for options trading.”

TRADING APP ROBINHOOD RAISES $660 MILLION IN LATEST FUNDRAISING ROUND 

In the 24-page complaint, the Massachusetts Securities Division alleges that Robinhood violated state laws and regulations by “aggressively marketing itself to Massachusetts investors without regard for the best interests of its customers and failing to maintain the infrastructure and procedures necessary to meet the demands of its rapidly growing customer base.”

The complaint alleges that the trading platform suffered as many as 70 outages or disruptions between January and the end of November this year.

DOW JONES INDUSTRIAL AVERAGE: YTD

“One of the most notable outages occurred [on] March 2 and 3” when the “Dow Jones Industrial Average experienced what was the largest point gain in its history at that time,” it states. “However, Robinhood’s trading platform collapsed at market opening on March 2… leaving its millions of customers unable to benefit from the historic market gains.”

“The collapsed platform remained inoperative for the entire day of March 2, 2020, and part of the day on March 3, 2020,” it continued.

“Despite its inability to maintain an adequate infrastructure, Robinhood continues to invite more and more customers to open accounts, and once these accounts are open, encourages customers to use the platform constantly,” the complaint adds.

In a statement to FOX Business, a Robinhood spokesperson denied the allegations set forth in the complaint and vowed that the company will defend itself “vigorously”.

“Robinhood is a self-directed broker-dealer and we do not make investment recommendations. Over the past several months, we’ve worked diligently to ensure our systems scale and are available when people need them,” the spokesperson said.

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“We’ve also made significant improvements to our options offering, adding safeguards and enhanced educational materials,” the spokesperson added. “Millions of people have made their first investments through Robinhood, and we remain continuously focused on serving them.”

But the complaint argues that “as a broker-dealer in Massachusetts, Robinhood has an obligation to protect customers and their assets.”

“However, its business model and lack of adequate procedures has put both customers and their assets at risk,” it added. “By doing so, Robinhood has failed to comply with recently adopted standards of conduct for Massachusetts-registered broker-dealers.”

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