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Massachusetts regulator accuses Robinhood of failing to protect investors

Published 12/16/2020, 12:24 PM
Updated 12/16/2020, 12:25 PM
© Reuters.

By Nate Raymond

BOSTON (Reuters) - Massachusetts securities regulators on Wednesday accused the popular online brokerage Robinhood of engaging in aggressive tactics to attract inexperienced investors and failing to prevent outages on its trading platform.

Massachusetts Secretary of the Commonwealth William Galvin, the state's top securities regulator, in an administrative complaint alleged that Robinhood marketed itself to investors without regard for the best interest of its customers.

Galvin said Robinhood has a duty to protect its customers and their money. Yet, the complaint said, Robinhood gave its inexperienced customers the ability to make an unlimited number of trades without first screening them.

The complaint alleged that Robinhood used the promise of free stock trades to attract new users and strategies such as "gamification" to encourage and entice repeated use of its trading application.

"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," Galvin said in a statement.

The regulator is seeking an administrative fine and an order requiring Robinhood to engage an independent compliance consultant to review its platform and policies.

Robinhood in a statement said it will continue to work closely and cooperatively with all regulators.

"Robinhood has opened up financial markets for a new generation of people who were previously excluded," it said. "We are committed to operating with integrity, transparency, and in compliance with all applicable laws and regulations."

The Menlo Park, California-based company has amassed 13 million user accounts since its founding in 2013, with its commission-free trading model gaining popularity among retail traders during the COVID-19 pandemic.

Its valuation has surged to $11.2 billion. But the company has suffered several outages, and critics have argued its growth has been supported by drawing young, inexperienced traders to risky trading.

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