Massachusetts Suing Robinhood, Alleging Failure To Protect Investors

Robinhood has come under the watchful eye of regulators — this time in Massachusetts. State regulators are set to file a complaint on Wednesday (Dec. 16) saying that the stock-trading platform failed to protect its customers and their assets, violating state laws and regulations.

Robinhood offers a brokerage app that is often favored by inexperienced investors.

The complaint argues that the company aggressively marketed its business to newbie investors and exposed them to “unnecessary risks,” reported The Wall Street Journal, which reviewed an administrative complaint drawn up by the Massachusetts Securities Division. The complaint alleges that Robinhood fell “far short of the fiduciary standard” adopted this year that requires broker-dealers to act in their clients’ best interests.

A Robinhood spokeswoman told the Journal that the company hadn’t seen the complaint, but would continue to work closely with any regulators. The complaint is from the office of William Galvin, Massachusetts secretary of state.

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

The company is also being investigated by the U.S. Securities and Exchange Commission over its alleged failure to disclose practices in which it would sell clients’ orders to high-speed trading firms.

Robinhood allegedly sent customers’ orders to buy or sell stock options to high-speed trading firms and accepted payments from those firms. The practice, called “payment for order flow,” is controversial; critics say it creates a conflict of interest for the broker selling the orders. If the company chooses to settle the investigation, it could face a fine of over $10 million, according to the Journal.

The stock trading platform has seen explosive growth right through the pandemic. Robinhood signed a record three million new users in the first four months of 2020, and is finding its younger client base to be savvy and risk-averse, said Vlad Tenev, co-founder and co-CEO.