Massachusetts securities regulators filed a complaint Wednesday against the wildly popular trading platform operated by Robinhood Financial LLC, alleging the company aggressively marketed to inexperienced investors and failed to implement controls to protect them.

In a 24-page complaint, the enforcement arm of the Massachusetts Securities Division said Robinhood failed to protect its customers and their assets, violating state laws and regulations. Robinhood exposed Massachusetts investors to “unnecessary trading risks” by “falling far short of the fiduciary standard” adopted this year that requires broker-dealers to act in their clients’ best interest, the state said.

The Wall Street Journal first reported early Wednesday the state’s intention to file the complaint.

A Robinhood spokeswoman said before the complaint was filed that the company has and will continue to work closely with all regulators.

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



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The complaint from the office of William Galvin, the Secretary of the Commonwealth of Massachusetts, marks the latest round of scrutiny that the popular brokerage has faced in its short history. Since it was founded less than a decade ago, Robinhood has exploded in popularity, amassing more than 13 million customer accounts. Traders tend to be drawn to the user-friendly platform that allows customers to trade securities like stocks for free.

But its explosive growth in recent years has also made it the target of probes from regulators. Last year, Robinhood agreed to pay $1.25 million to settle claims from the Financial Industry Regulatory Authority, which alleged the company didn’t take steps to ensure it was getting the best prices for customer orders. The company agreed to settle without admitting or denying fault.

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The accusations from Massachusetts center on the tactics that the company uses to keep customers engaged, claiming that it “encourages customers to use the platform constantly” through what it calls “gamification.” The complaint alleges that, through the promise of free stocks, push notifications and its signature digital confetti, Robinhood encourages “continuous and repeated engagement with its application.” State regulators allege Robinhood allowed one customer with no investment experience to make more than 12,700 trades in just over six months.

In another example, the regulators point to Robinhood’s rollout of a new cash-management feature, accompanied by a wait list for customers to sign up for early access. Customers were given the ability to improve their position on the wait list by “tapping” a fake credit card in the app up to 1,000 times a day, the complaint says.

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It also alleges Robinhood violated its own rules regarding options trading by approving customers to engage in the practice without having the necessary qualifications. Options allow traders to pay a relatively small sum for a big return if their wagers prove correct. In turn, however, losses can add up if traders’ bets are wrong.

Like many brokerages, Robinhood makes money by a practice called payment for order flow, sending customer orders to trading firms in return for cash payments. By encouraging inexperienced investors to continuously execute trades, “Robinhood prioritized its revenue over the best interest of its customers,” the complaint says.

It also addresses the recent outages Robinhood experienced that sidelined traders from accessing their accounts at different points this year. “Robinhood failed to adequately protect its customers and their assets” by “failing to implement policies and procedures reasonably designed to prevent and respond to outages,” the state said.

A Robinhood spokesman has said previously the platform has worked “diligently to harden our infrastructure, improve reliability, and increase capacity” and is continuing to invest to make sure its systems support customers on busy trading days. The company has also previously said it is continuing to increase educational tools for customers.

In an interview, Mr. Galvin said his office filed the complaint to protect young Massachusetts investors. The platform, he said, “is not presented as serious investing with substantial risk.”

“It’s presented as some sort of game that you might be able to win,” he added. The complaint estimates that as of early December, Robinhood has nearly 500,000 customers in Massachusetts with accounts totaling over $1.6 billion.



Massachusetts regulators, under Mr. Galvin, are known for taking a hard line against financial companies, previously bringing probes against Charles Schwab Corp. and Fidelity Investments, among others.

But the complaint against Robinhood focuses, in part, on what the regulator says is the company’s violation of the state’s new fiduciary rule, which it began enforcing in September. The complaint marks Mr. Galvin’s first enforcement action of the rule.

The regulation stipulates that a broker-dealer has a duty of loyalty to its customers, in part by making recommendations that give priority to the customers’ interests without regard to the interests of any other party. Regulators say the lists of popular trades to which users have access have the potential to influence the securities that traders buy, without the company conducting “a suitability analysis” of those investments.

“This is no different from a broker-dealer agent handing a list of securities to a customer, pretending to be surprised when the customer purchases securities from that list, and then proclaiming that he made no recommendations to the customer,” the complaint says.

Among other requested relief, Massachusetts regulators seek to require Robinhood to engage consultants to review its infrastructure in response to the platform outages and to enhance its policies for approving users for options trading. The complaint also suggests an administrative fine be placed on Robinhood.

Write to Caitlin McCabe at caitlin.mccabe@wsj.com

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