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Robinhood lured inexperienced investors into its free gaming-grade trading app using aggressive marketing techniques, Massachusetts exchange regulators said..
The accusation, spanning twenty-four pages, points to violation of state laws and regulations. Robinhood has failed to take steps to protect its customers and protect its system from the explosive growth that has led to dozens blackouts and outages in 2020.
«The company used strategies such as gamification to encourage and entice continuous and repetitive use of its app.», – said the executive of the Massachusetts Department of Securities, citing game elements designed to increase user engagement.
Robinhood said they disagree with the allegations and plan to do their best to protect themselves and their reputation.. The startup pointed to improvements made to its app, additional guarantees and improved training materials.
«Millions of people made their first investments through Robinhood, and we remain focused on serving them all the time. Robinhood is a stand alone broker dealer and we do not provide investment advice», – stated in the company.
Massachusetts regulators are seeking a range of sanctions against Robinhood, including fines, independent verification of the platform and compensation for investors who have suffered damage.
Trading application has gained many benefits from the pandemic. Only in the period from January to April customer base Robinhood grows 3 million accounts, up 30%. The startup made a splash in the online broker market, and its valuation rises to $ 11.2 billion.
«Robinhood deliberately used advertising and marketing methods aimed at young people with little (or no) investment experience.», – Massachusetts regulators said.
There is no doubt that Robinhood’s free trading business model has expanded access to financial markets for aspiring investors..
Recent events also drew attention to a potential hazard providing new investors with easy access to exotic financial instruments commonly used by experienced market participants.
In June, the family of a 20-year-old student stated that he committed suicide after confusion with a negative balance of $ 730K in his Robinhood account. A student used an app to trade options and his family believes he was misled by the app’s interface.
The Robinhood co-founders have stated that they «deeply saddened by this tragedy», and in response announced a series of changes to their offering and user interface.
Massachusetts complaint states that Robinhood «tirelessly surrounds» users with gamification strategies.
Regulators also pointed out how Robinhood rewards customers who interact with the app on a daily basis by moving them to a waiting list for a new product – cash management features..
The complaint also concerns how often newbie investors trade, suggesting that the app is intended more for short-term trading than long-term investing..
For example, regulators found at least 670 Robinhood clients with little or no investing experience making an average of at least five trades per day.. One client with no previous experience made over 12,700 trades in just six months.
The regulator also points out that between January 1 and the end of November, Robinhood experienced as many as 70 outages or outages on its trading platform.. The complaint states that Robinhood suffered from outages every month in 2020.
«The company knew or should have known that its infrastructure was unable to support its rapidly growing customer base», – regulators said.