Massachusetts State Securities Regulators File Complaint Against Robinhood Financial

Posted on December 16th, 2020 at 4:41 PM

From the Desk of Jim Eccleston at Eccleston Law LLC:

Massachusetts state securities regulators filed an administrative complaint against Robinhood Financial, LLC (“Robinhood”). The 24-page complaint included allegations that Robinhood used aggressive tactics to attract new and inexperienced investors, that Robinhood used “gamification” to encourage repetitive use of its trading app, that Robinhood breached its fiduciary conduct standard and that the firm failed to follow written supervisory procedures regarding options trading. Additionally, the Massachusetts state regulators alleged that Robinhood failed to implement policies and procedures to prevent and respond to the well-documented outages experienced by the firm’s trading platform. This is the first complaint against a firm brought under Massachusetts’s recently-enacted fiduciary rule.

According to the complaint, the “gamification” strategies used by Robinhood included confetti raining down on the screen of the app when a customer made a transaction, as well as a system that allowed used to improve their position on a waiting list through frequent use of the trading app.  The state regulators alleged that Robinhood successfully used the “gamification” strategies to encourage inexperienced investors to make frequent trades.

Additionally, the Massachusetts state regulators alleged that Robinhood experienced as many as seventy outages or disruptions in 2020. According to the complaint, in addition to a failure by Robinhood to reasonably prevent and respond to these outages, Robinhood also breached its fiduciary duty as a result of these outages. 

The complaint noted the rapid growth Robinhood has experienced. According to the complaint, the number of Robinhood customer accounts increased from 1 million to 5 million between 2016 and October 2018. According to the complaint, the number of Robinhood customer accounts increased by an additional 3 million in the first five months of 2020. Currently, Robinhood has more than 486,000 customers in Massachusetts with a total account value of more than $1.6 billion, according to the complaint.

Massachusetts state regulators are seeking a number of sanctions, including restitution to investors, fines, and requirements that Robinhood engage an independent compliance consultant to review various aspects of the firm.

Tags: eccleston, eccleston law, state securities regulators, robinhood, complaint

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