(CBS/CNN) -- Free stock-trading app Robinhood has agreed to pay a $65 million fine to the Securities and Exchange Commission to settle charges that it engaged in deceptive practices that hurt its clients. This comes one day after Massachusetts charged the company with targeting inexperienced investors and failing to prevent outages on its platform.
Specifically, the SEC said Robinhood did not disclose "the firm's receipt of payments from trading firms for routing customer orders to them, and with failing to satisfy its duty to seek the best reasonably available terms to execute customer orders."
The SEC said that Robinhood benefited from completing trades at prices that were less than optimal for its clients. In aggregate, those fees deprived customers of $34.1 million, even after taking into account the savings from the commission-free trades.
The regulators said the deception took place at a time when Robinhood's trading app was growing rapidly in popularity. The firm added 3 million funded accounts between January and April alone, a 30% growth spurt, according to an earlier statement from the company. About half of those new users were first-time investors.
"Robinhood provided misleading information to customers about the true costs of choosing to trade with the firm," said Stephanie Avakian, director of the SEC's enforcement division. "Brokerage firms cannot mislead customers about order execution quality."
Robinhood settled the case without an admission of guilt and said it has changed the practices cited in the complaint. The company claims to have significantly improved its practices and said it has established relationships with additional market makers to ensure the best trades possible for its customers.
"The settlement relates to historical practices that do not reflect Robinhood today. We recognize the responsibility that comes with having helped millions of investors make their first investments, and we're committed to continuing to evolve Robinhood as we grow to meet our customers' needs." said Dan Gallagher, Robinhood's chief legal officer.
In the Massachusetts case, Secretary of the Commonwealth Bill Galvin said the app treated the stock market "like a game."
"As a broker-dealer, Robinhood has a duty to protect its customers and their money," Galvin said in a statement. "Treating this like a game and luring young and inexperienced customers to make more and more trades is not only unethical, but also falls far short of the standards we require in Massachusetts."
The app has nearly half a million customers in Massachusetts with accounts totaling over $1.6 billion, Galvin said.
Robinhood replied to Galvin's accusations in a statement, saying it "is a self-directed broker-dealer and we do not make investment recommendations."
(© Copyright 2020 CBS Broadcasting Inc. All Rights Reserved. CNN's Chris Isidore contributed to this report.)
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