Robinhood accused of downplaying the risks of trading

FILE - Massachusetts Secretary of the Commonwealth Bill Galvin testifies on Capitol Hill in Washington, Wednesday, May 22, 2019. Regulators in Massachusetts claim Robinhood Financial targets and manipulates inexperienced investors and has failed to prevent costly outages on its popular stock trading platform. In an administrative complaint filed Wednesday, Dec. 16, 2020 by Galvin, the state alleges that Robinhood violated securities laws by aggressively marketing itself to Massachusetts investors without regard for the best interest of its customers," while also failing to maintain a properly working platform as its number of users exploded.  (AP Photo/Carolyn Kaster, file)
FILE - Massachusetts Secretary of the Commonwealth Bill Galvin testifies on Capitol Hill in Washington, Wednesday, May 22, 2019. Regulators in Massachusetts claim Robinhood Financial targets and manipulates inexperienced investors and has failed to prevent costly outages on its popular stock trading platform. In an administrative complaint filed Wednesday, Dec. 16, 2020 by Galvin, the state alleges that Robinhood violated securities laws by aggressively marketing itself to Massachusetts investors without regard for the best interest of its customers," while also failing to maintain a properly working platform as its number of users exploded. (AP Photo/Carolyn Kaster, file) (Copyright 2018 The Associated Press. All rights reserved)

Regulators in Massachusetts claim Robinhood Financial targets and manipulates inexperienced investors and has failed to prevent costly outages on its popular stock trading platform.

In an administrative complaint filed Wednesday by Secretary of the Commonwealth William Galvin, the state alleges that Robinhood violated securities laws by aggressively marketing itself to Massachusetts investors “without regard for the best interest of its customers," while also failing to maintain a properly working platform as its number of users exploded.

The complaint seeks an unspecified fine against Robinhood and an order requiring the company to hire an outside consultant to review its platform, infrastructure, and policies and procedures, among other penalties. Robinhood has nearly half a million customers in Massachusetts with accounts valued at more than $1.6 billion, according to the complaint.

In a statement, the Menlo Park, California-based company said it disagrees with the complaint and intends to mount a vigorous defense.

Galvin takes aim at how Robinhood does business, claiming the company uses "gamification strategies," such as showering a user's screen with virtual confetti every time they make a trade, to lure young people with little or no investment experience to trade stocks. The median age of a Robinhood customer is 31 and roughly 68% of the company’s customers in Massachusetts report having little or no trading experience, the state said.

Galvin also asserts that the company, which earns revenue for trades executed by its customers, allows users to make a potentially unlimited number of trades without properly screening them to be approved for making certain types of riskier trades.

“As a broker-dealer, Robinhood has a duty to protect its customers and their money,” Galvin said in a statement. “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.”

In its statement, Robinhood said it is “a self-directed broker-dealer and we do not make investment recommendations.”