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March 5, 2021

William Galvin is as old school as they come, even for a state securities regulator. Galvin, 70, drives an Impala, uses a flip phone, and leaves the emailing and tweeting to his staff. But he may turn out to be the worst nightmare of Robinhood Markets, the company whose zero-commission brokerage app captivates millennial and Gen Z investors.

Galvin is the secretary of the commonwealth of Massachusetts, a position he’s held since 1995, when the founders of Robinhood were still in grade school. In that time, Galvin turned the office that oversees elections, historic preservation, and record-keeping into a financial regulator that’s sometimes ahead of its national counterparts. He’s won penalties from such Wall Street giants as Morgan Stanley and Goldman Sachs, as well as local icons like the mutual fund manager Putnam Investments.

In December his office sued Robinhood, alleging that the trading platform violated state law by emphasizing the addictive thrills of trading over helping novice investors learn how to make sound investment decisions. He says the company’s brightly designed smartphone app is promoting the “gamification” of investing with features such as animated confetti when users make their first transaction and promotions giving away free stock for signing up or referring friends.

Although the company doesn’t charge commissions, it makes money from trading activity because outside firms such as Citadel Securities pay to be able to fill Robinhood customers’ orders. (Those firms can earn profits on tiny differences in market prices.) Robinhood co-founders Vlad Tenev and Baiju Bhatt could become billionaires after an initial public offering, which could take place within weeks, Bloomberg has reported.

The founders named the company after the medieval outlaw who stole from the rich to give to the poor, modernizing the myth with the tagline that they’re “democratizing finance.” It’s a slogan that doesn’t impress Galvin. “It’s not quite fair to democracy,” he says in an interview, sitting among birth and death records at the Massachusetts Archives building. “It’s propaganda.”

While Galvin has a long history of being a regulatory activist, his questioning of Robinhood isn’t just headline chasing, says John Coffee, a Columbia law professor. The Financial Industry Regulatory Authority, the Wall Street-backed regulator that oversees brokerage firms, “should have been doing this for some time,” he says.

The U.S. Securities and Exchange Commission and Finra have uncovered some lapses: In 2019, Finra fined Robinhood almost $1.3 million over how it routed customer orders. In December the SEC penalized the company $65 million for failing to properly inform clients that it sold their stock orders to high-frequency traders and other firms. Robinhood said then that its settlement with the SEC related to past practices and that it’s transparent about how it makes money.

Galvin says he can act more quickly than other regulators. The SEC, he says, has a more deliberative process, whereas his team of about 30 enforcement staff often hear directly from aggrieved investors. Galvin also has a tool the SEC doesn’t: His complaint alleges that Robinhood violated a new state rule that holds brokers like Robinhood to a fiduciary standard of care, which means putting customers’ interests above their own.

A Robinhood spokesperson says that because the app makes no recommendations, the company doesn’t have to meet a fiduciary standard. By eliminating commissions, the company estimates it’s saved Massachusetts customers about $180 million to $360 million in trading costs since December 2017. It’s denied gamifying its app in a way that encourages frequent trading and has said customers tend to trade less the longer they stay on the platform.

“He’s unafraid to stand up on his own, alone, and say this is the right thing”

Galvin won’t necessarily have an easy road, says Abu Jalal, a finance professor at Suffolk University in Boston. He must prove that Robinhood’s features are materially different than those offered by other trading platforms. “There’s still a bell ringing or a text sent when your order has been filled,” Jalal says of other brokers’ apps. “And you can still go in and see if you managed to make some money.”

The difference, Galvin says, is that Robinhood’s design encourages customers with no experience to make trades, including bets using margin, that could quickly ruin them. “I don’t have a problem with risk,” he says. “I do have a problem when investors are naively told they can do this. They deliberately target young people.”

Another challenge for Galvin: While he thinks retail investors need to be protected from their worst instincts, the new crop of online traders may not appreciate such paternalism. The Robinhood app helped enable much of the recent frenzied trading in GameStop Corp., which Galvin also decries. Shares of the video game seller experienced wild price swings after it became a favorite on Reddit discussion boards. In late January, when Robinhood was forced to temporarily prevent clients from buying some stocks including GameStop, the outcry from customers was loud. Dave Portnoy, a day trader and founder of Barstool Sports Inc., asked Tenev in an interview following the outage: “You know everyone watching this hates your guts, right?” Tenev responded “That’s what I hear.”

Galvin won’t be dissuaded. He notes in the complaint that one customer with no investment experience made more than 12,700 trades in just over six months. Robinhood has said it can’t know if this is true, because Galvin hasn’t named the customer. Massachusetts residents have more than 486,000 Robinhood customer accounts with a total value of more than $1.6 billion.

Galvin, for whom smiles don’t come easy, isn’t a typical back-slapping politician. He won a seat in the Massachusetts House of Representatives in 1975, the year he graduated from Suffolk Law School, and has served longer than any other current statewide elected official in the Bay State. “He’s unafraid to stand up on his own, alone, and say this is the right thing,” says Michael Goldman, a veteran Democratic political consultant. “If you’re his worst enemy and he thinks you’re right, he’ll stand with you.”

Galvin extracted huge penalties from mutual fund companies in the early 2000s after a market-timing scandal—investment managers had allowed some traders to move in and out of funds to profit from short-term pricing discrepancies. After the subprime crisis, he went after banks for selling shoddy mortgage-backed securities. Nothing about Robinhood seems new to Galvin, who’s been filing day-trading-related cases for decades. It’s just that the internet’s reach makes the problems bigger, he says. Galvin looks down at his Motorola flip phone, which has chirped to life. He says it’s time to go.