Robinhood accused of manipulating customers by Massachusetts regulator

Massachusetts regulators filed a complaint against Robinhood on Wednesday related to the trading app’s use of gamification strategies to attract inexperienced investors and its failure to prevent frequent outages and disruptions on its trading platform.

The 23-page complaint filed by the office of William Galvin, the Secretary of the Commonwealth of Massachusetts, marks the first time the state's fiduciary rule is being used to bring charges against a brokerage firm since the office began enforcing the rule in September.

The complaint alleges Robinhood, which earns revenue on executed trades, gave inexperienced investors the ability to make a potentially unlimited number of trades without properly screening them.

As of this month, Robinhood had nearly half a million Massachusetts customers whose accounts were valued at a total of more than $1.6 billion.

Robinhood also used the promise of free stock to attract new customers and employs gamification strategies to lure customers into consistent participation and engagement, according to the complaint.

“Confetti rains down on the screen of the app after each trade and customers are encouraged to interact with the app repeatedly to move up a waitlist for early access to new products,” the complaint stated.

Since its inception in 2013, Robinhood has exploded in popularity, racking up 13 million users with an average age of 31 years old, according to the regulator. Approximately 68% of Massachusetts customers approved for options trading on Robinhood report having limited or no investment experience.

“We disagree with the allegations in the complaint by the Massachusetts Securities Division and intend to defend the company vigorously,” a Robinhood spokesperson said. “Robinhood is a self-directed broker-dealer and we do not make investment recommendations.”

Robinhood's tactics to attract inexperienced investors had previously garnered attention from regulators after the tragic death of Alex Kearns, a Robinhood Financial Inc. customer who took his life in June after believing he lost some $730,000.

Galvin's office also alleges that Robinhood’s lack of an adequate infrastructure has resulted in approximately 70 outages from the beginning of the year, through the end of November.

“Over the past several months, we’ve worked diligently to ensure our systems scale and are available when people need them,” the spokesperson said. “We’ve also made significant improvements to our options offering, adding safeguards and enhanced educational materials. Millions of people have made their first investments through Robinhood, and we remain continuously focused on serving them.”

Robinhood is already facing scrutiny from federal regulators. The Securities and Exchange Commission and the Financial Industry Regulatory Authority Inc. are investigating the company’s handling of service outages in March when trading volume increased, according to Bloomberg.

The SEC is separately probing whether the discount trading platform properly informed brokerage clients that it sold their stock orders to high-frequency traders, per Bloomberg.

In December 2019, FINRA fined Robinhood $1.25 million for its best execution practices, including its reviews of firms that provided it payment for order flow, a common practice for trading platforms and a major driver of revenue.