Robinhood was sued on Monday for wrongful death by the family of Alex Kearns, a 20-year-old client who committed suicide last summer after believing he had accumulated huge losses in the stock trading app favored by the millennial generation.
“This case focuses on Robinhood’s aggressive tactics and strategy to attract inexperienced and unsophisticated investors, including Alex, to take big risks by attracting tempting profits,” said the complaint filed by his parents Dan and Dorothy Kearns, and their sister Sydney Kearns in a California state court in Santa Clara. The family is based in Naperville, Illinois.
Robinhood’s “reckless conduct directly and approximately caused the death of one of his victims,” the complaint said. The lawsuit also accuses the broker of negligent infliction of emotional suffering and unfair trading practices.
Alex Kearns, then a sophomore at the University of Nebraska in Lincoln, committed suicide in June after thinking he had a negative balance of $ 730,165 in cash at Robinhood.
The complaint alleges that Kearns misinterpreted Robinhood’s financial statement and was protecting his family from financial obligation.
The suit says that Kearns made three attempts to contact Robinhood’s customer service regarding the enormous underwater balance.
However, his messages were received with automated responses, according to the complaint.
In a note to his family that CNBC saw, Kearns accused Robinhood of allowing him to take too much risk. He said the put options he bought and the shares sold “should have been canceled,” according to the note.
Puts are options that give the owner the right to sell a security at a specified price.
The merchant said he “had no idea” what he was doing, according to the note.
“How did a 20-year-old with no income manage to get almost a million dollars in leverage?” read the note Kearns wrote to his family. “There was no intention of receiving so much and taking so much risk, and I just thought I was risking the money I really had.”
A spokesman for Robinhood told CNBC: “We were devastated by the death of Alex Kearns. Since June, we have made improvements to our options offering.”
Robinhood has become a popular entry point into the stock market for first-time investors. It grew from 1 million users in 2016 to more than 13 million last spring. Amid the GameStop drama driven by Reddit investors, SimilarWeb’s traffic analytics website estimates that an additional 3 million users downloaded Robinhood in January alone.
Robinhood, who is headed by CEO Vlad Tenev, is under scrutiny for his “gamification” of investments and alleged predatory marketing practices.
Robinhood is also facing collective lawsuits from clients following the app’s decision to restrict trading in certain securities during the recent GameStop controversy. The broker, which plans to go public in 2021, has repeatedly said that most of its users are long-term investors.
Robinhood, one of the biggest beneficiaries of the retail trade boom in 2020, is also under scrutiny for the access he gives his clients without the proper investment education. Last year, Massachusetts regulators filed a complaint against Robinhood, accusing the predatory marketing trading app for inexperienced investors.
The Securities and Exchange Commission accused the broker in December of misleading customers about how the stock trading app makes money and does not deliver the best promised trading execution.
The Kearns family complaint says, “Not only did Robinhood allow Alex to open an account, but when Alex was a freshman in college later that year, it allowed him to trade options.”
“Worse, Robinhood barely provided investment guidance and his ‘customer service’ was virtually nonexistent, consisting of automated email responses without any human contact or interaction,” claimed the family in the process.
Here is Robinhood’s full statement on the process.
“We were devastated by the death of Alex Kearns. Since June, we’ve made improvements to our options offering. This includes adding the ability to exercise in-app contracts, guidance to assist customers with early assignment, updates on how we display purchasing power , more educational materials on options and new financial criteria and revised experience requirements for new customers looking to trade Tier 3 options. In early December, we also added live voice support for customers with an open options position or recent expiration, and we plan to expand to other use cases. We’ve also changed our protocol to escalate customers who email us for help with exercises and initial assignments. We remain committed to making Robinhood a place to learn and invest responsibly. “
– with reports by CNBC’s Dan Mangan and Kate Rooney.
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