The Enforcement Section of the Massachusetts Securities Division of the Office of the Secretary of the Commonwealth on Wednesday, December 16, 2020, filed an administrative complaint to commence proceedings against Robinhood Financial LLC. The company allegedly violated the Massachusetts Uniform Securities Act and Regulations.

In particular, Robinhood allegedly aggressively marketed itself to Massachusetts investors without regard for the best interest of its customers and failed to maintain the necessary infrastructure to meet the needs of its growing customer base.

Although successful in growing its customer base, Robinhood failed to take adequate steps to set up internal controls to protect its customers and its platform. For instance, the company failed to implement policies and procedures reasonably designed to prevent and respond to outages and disruptions on its trading platform.

The authorities estimate that, from January 1, 2020, through November 30, 2020, Robinhood experienced as many as 70 outages or disruptions on its platform. There was at least one big outage in March, followed by six in April, fifteen in June, and seven in August 2020.

The complaint notes that in the face of Robinhood’s inability to provide adequate infrastructure, the company continues to invite more customers to open accounts. Once these accounts are open, the company encourages traders to use the platform constantly. Customers are constantly bombarded with strategies designed to encourage them to engage with the platform. The use of these strategies is often referred to as “gamification”.

Furthermore, Robinhood gave hundreds of customers with limited or no investment experience the ability to make thousands of trades in a matter of months. As one example, Robinhood allowed a customer with no investment experience to make more than 12,700 trades in just over six months.

The company allowed thousands of inexperienced investors to engage in risky options trading activities, thereby breaching its own policies for screening customers’ profiles.

The complaint explains that, as a broker-dealer registered in Massachusetts, Robinhood has an obligation to protect its customers and their assets. However, its business model has put customers and their assets at risk. The company allegedly exposes investors to harm.

The authorities seek an order that, inter alia, requires Robinhood to provide restitution to compensate investors for losses attributable to the alleged wrongdoing and that requires Robinhood to disgorge all profits received from the alleged wrongdoing.