Although Robinhood bills itself as the gateway for millennials to the stock market, the company uses “gambling strategies to manipulate customers” to negotiate further in order to increase its fees, according to the lawsuit.
“For example, one of those commercials contains a clip of a young adult saying, ‘I’m a bankrupt student and the investments could help my future a lot,’” the lawsuit says. “In another example, another young adult says, ‘I didn’t know anything about the investment until I started using Robinhood. As soon as I created my account, I had free shares, so I immediately became an investor. ”
To further inspire customers of its platform to go into commerce, Robinhood rewards users “with colorful confetti that rains down on their screens after executing transactions,” according to court documents. These and other tactics are how Robinhood turns a serious investment into a game, Commonwealth of Massachusetts Secretary Willian Galvin said in a statement. These tactics are “not only unethical, but they also fall short of the standards we demand in Massachusetts,” he said.
Robinhood did not respond to requests for comment. A Robinhood lawyer did not respond to an email requesting comment.
The company allows users to transfer money from their bank account to a Robinhood account and then start buying and selling stocks for free. The app was launched in 2013 and now has over 13 million users. This includes nearly 500,000 users in Massachusetts with combined assets of $ 1.6 billion, according to court documents.
Massachusetts said in its complaint that Robinhood was making money through so-called “payment for the flow of orders.” In this process, Robinhood takes a user’s share order and sells it to a larger brokerage firm who executes the purchase. Under this system, state regulators argue that the more transactions Robinhood users execute, the more money the company receives from brokerage firms.
State regulators say Robinhood’s tactics have led hundreds of users to make thousands of transactions. “For example, Robinhood enabled a client with no investment experience to complete over 12,700 transactions in just over six months,” the lawsuit says.
Galvin is asking a state court to collect an undisclosed amount of fines from Robinhood. Regulators also want a judge to order Robinhood to find an independent consultant to assess the application and company policies.
Negative advertising channel
The Massachusetts lawsuit follows a wave of negative publicity for Robinhood. Last year, a glitch in the company’s system allowed users to borrow an unlimited amount for trading. Massachusetts regulators also reported major outages 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, the Dow Jones Industrial Average recorded a historic one-day gain of around 1,290 points. Federal regulators are currently investigating the reasons for the outage, Bloomberg reported.
In June, a Robinhood user in Illinois died by suicide after his account falsely showed a negative amount of $ 730,000. In October, an undisclosed number of accounts were hacked and users complained that they could not contact Robinhood customer service to resolve their issues.