In a legal action filed on Wednesday, 16th of December, the Massachusetts Securities Division has accused popular online brokerage platform, Robinhood of violating state laws and regulations.
What You Should Know About Robinhood
Robinhood or Robinhood Financial LLC is a popular online brokerage. The company was founded in 2013 by Vlad Tenev and Baiju Bhatt. A good percentage of its growth was recorded in 2020 following a boom in retail trading. The online brokerage currently has a customer base of 13 million people, with over 3 million signing up in the first quarter of the year.
The company which employs over 1,200 individuals is on a mission to make investing available to all. Unlike other competing platforms where trades are difficult to place, on Robinhood, trades can be placed with a quick swipe.
The Charges Filed Against Robinhood
According to the state securities division, Robinhood has been engaging in aggressive marketing in the state “without regard for the best interests of its customers”. According to the regulators, a vast majority of investors and traders on the platform in the state had next to no investment knowledge.
In granting such traders access to trades, Robinhood not only violates its own policies but that of the state of Massachusetts. In the 23-paged administrative complaint, the regulator stated that a total of 12,700 trades were placed on the online brokerage by inexperienced traders in a period of six months.
In a statement explaining the administrative complaint, William Galvin, the secretary of Massachusetts Securities Division stated that:
As a broker-dealer, Robinhood has a duty to protect its customers and their money. 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.
The regulator also alleged that Robinhood had failed to develop an infrastructure capable of supporting its swelling customer base. According to a cited report, there have been as many as 70 disruptions or outages between January and November.
According to the state regulatory body, Massachusetts has more than 486,000 Robinhood customer accounts with a total value of about $1.6 billion.
Robinhood Reacts to the Charges
Following the charges leveled against the company, Robinhood has released a statement disagreeing with the allegations in the administrative complaint and plans to defend itself in court. The company has stated that:
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. We’ve also made significant improvements to our options offering, adding safeguards, and enhanced educational materials.
No Stranger to Legal Actions
In December 2019, FINRA fined Robinhood $1.25 million over how it routed customer orders. Robinhood is currently facing an investigation from the Securities and Exchange Commission and the Financial Industry Regulatory Authority in its handling of March outages. If it loses this court battle, the online Brokerage is likely to pay a $65 million fine to settle the SEC claims.