Robinhood agrees to $7.5M penalty to settle ‘gamification’ charges

Robinhood will pay $7.5 million to settle enforcement actions brought by Massachusetts regulators.

By John Hilton

Online brokerage Robinhood will pay a $7.5 million fine in a settlement with Massachusetts' securities regulators, who say that it encouraged inexperienced investors to place risky trades.

Robinhood also agreed to overhaul its practices in a deal announced Thursday.

The agreement settles an enforcement action brought in 2020 by Massachusetts Secretary of State Bill Galvin alleging that Robinhood's app-based service used strategies that treated trading like a game to lure young, inexperienced customers into placing risky trades.

In addition, the fine settles a 2021 investigation by Galvin's office into a Robinhood data security breach and allegations the company failed to maintain reasonable cybersecurity policies.

The Robinhood action was the the first by Galvin's office under Massachusetts' fiduciary duty rule requiring brokers to put their clients ahead of their own interests. Robinhood, which neither admitted or denied the allegations with the settlement, challenged the fiduciary rule legality in court.

The Massachusetts Supreme Judiciary Court upheld the regulation in an August ruling. Robinhood faced a Monday deadline to appeal that decision to the U.S. Supreme Court, but opted to settle the case instead.

"This settlement resolves historical matters dating back to 2021 that do not reflect Robinhood today," said Lucas Moskowitz, deputy general counsel and head of government affairs at Robinhood Markets. "We’ve invested heavily in strengthening how we supervise our technology and system controls, ensuring platform stability, and enhancing cybersecurity policies and practices. We are pleased to put this matter behind us and move forward steadfast in our commitment to providing access to the markets for our Massachusetts customers.”

Fast growth at Robinhood

According to court documents, Robinhood, which formed in 2013, experienced skyrocketing growth after its mobile app was introduced in 2015. Membership grew more than 500% from 2016 to October 2018, court documents say. The growth was experienced by many online trading platforms as mainstream online trading grew popular during the COVID-19 pandemic.

As of Galvin's 2020 action, the company served nearly 500,000 Massachusetts' residents with total account values of $1.7 billion.

The Robinhood app used emojis and a generally light tone to encourage participation, Galvin's complaint said, including a flexing bicep emoji and digital confetti that rained down upon making an initial trade. Those practices ceased in 2021.

"We reject the premise that any part of our app, past or present, is 'gamified,'" a company spokesman said. "The settlement concerns historical practices related to supervisory controls and procedures, and the order does not find that digital engagement practices in the app themselves violated the regulations or the state’s fiduciary rule, or that they negatively influenced customer behavior."

Galvin's complaint details the inexperience of Robinhood users. More than 200 Robinhood customers with no self-reported investment experience averaged at least five trades per day on the platform. In particular, 25 customers with no experience combined to make 125,790 trades.

Data breach

On Nov. 3, 2021, Robinhood suffered a data breach that resulted in various information about seven million customers being exposed. For five million of them, email address were accessed, and another two million had their full names revealed.

The data breach impacted more than 117,000 users in Massachusetts, Galvin's office said in court documents. The cyberattack happened because Robinhood used under-trained and inadequate personnel and lacked sufficient support resources, Galvin said in court documents.

"Since 2021, we have taken numerous steps to safeguard our systems including enhancing our internal security controls and training, as well as building upon our threat detection, threat intelligence, and incident management programs," a Robinhood spokesman said.

InsuranceNewsNet Senior Editor John Hilton covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.