The family of 20-year-old college student who died after he mistakenly believed he had racked up stock market trading debts in the neighborhood of $730,000 sued Robinhood Monday.
(CN) — The parents of a 20-year-old man who died by suicide sued the financial services company Robinhood in federal court Monday, saying the company aggressively lures young inexperienced people and introduces them into the world of stock trading without proper vetting.
Dan, Dorothy and Sydney Kearns — father, mother and sister to Alex Kearns — said the stock brokerage firm lured their son and brother into the world of high finance and allowed him to rack up a $730,000 negative account balance by using sophisticated trading options that are meant for more seasoned veterans of the stock market.
“Though Alex was merely a senior in high school when he opened an account with Robinhood and had little or no income, Robinhood determined he was qualified enough to enter into the world of trading sophisticated financial options,” the Kearns family said in the complaint. “Not only did Robinhood permit Alex to open the account, but when Alex was a freshman in college later that year, it permitted him to trade options.”
Options allow traders to bet whether a given stock will go up or down, coming in two forms, calls or puts. Sophisticated traders can use the maneuver to increase their profits well above levels obtained by investing in individual stocks and waiting for gains. But their downside is significant, as some critics argue trading options is just another form of casino gambling.
Some traders hedge their bets by selling their options before they expire, something Alex Kearns did on a large bet he had placed his freshmen year of college, in June 2020. But Kearns did not understand the sale of the options required him to buy the stock at the listed price, called the strike price, the complaint says.
“Alex did not learn this until later, when his account reflected a negative cash balance in his account of $730,000 which was more than $700,000 greater than the amount of cash he had in the world,” the Kearns family said in the complaint. “At that point, Alex was extremely concerned and upset.”
Due to the complex nature of options, Alex Kearns abruptly came to believe he was in arrears to the tune of nearly three-quarters of a million dollars on a trade that he believed had a maximum of a $10,000 downside.
He reached out to Robinhood customer services to gain clarity on how this could have happened but instead received a demand that he deposit about $178,000 by the end of June, according to the complaint.
“Robinhood provided almost no investment guidance, and its customer ‘service’ was virtually non-existent, consisting of automated e-mail replies devoid of any human contact or interaction,” the complaint states.
Alex Kearns began to panic, fearful his family would have to cover his obligation. He did not realize he had the ability to sell his various options and settle his various bets to be able to cover costs.
His frequent overtures to Robinhood for clarifiction were met with either silence or bad advice, the complaint states.
Distressed by the appalling level of debt he believed he had incurred on himself and his family, Alex Kearns rode his bicycle to the railroad tracks on a June night and jumped in front of an oncoming train, killing himself instantly.
Robinhood released a statement Monday, saying the company was “devastated by Alex Kearns’ death” and that it had taken steps to improve its educational materials and make sure live customer service representatives are more available.
The Kearns family believes he was lured into trading stocks in such a manner by Robinhood’s advertising and its attempts to make trading in the stock market seem as innocuous as a video game.
“Robinhood’s website entices young, inexperienced users with the slogan: ‘Our goal is to make investing in financial markets more affordable, more intuitive, and more fun, no matter how much experience you have (or don’t have),’” the complaint says.
The plaintiffs further said that Robinhood sought explicitly to market itself to young and inexperienced traders.
“By marketing its online trading platform like a video game, it implied that trading stock and options was a fun way to make money, perhaps even to get rich, without significant risk,” the complaint states.
The family brought claims of wrongful death, unfair business practices and negligent infliction of emotional distress against the company, and they are are seeking economic restitution of Alex Kearns debts as well as injunctive relief.
Robinhood has captured headlines since it first launched, becoming famous for allowing traders to buy and sell stocks without a commission fee. The company is credited with dramatically overhauling how retail investors interact with the stock market.
But the company has also been dogged by controversy.
Recently, a group of Reddit users used Robinhood to purchase GameStop Corp. and other stocks that had short interest from large Wall Street hedge funds.
The buying frenzy set off what some deem as a retail investor revolution, where retail investors have found ways to collaborate to injure large investment firms who have bet large dollar amounts that certain companies’ stocks are going to go down and even fail.
In the midst of the frenzy that roiled markets and sent all major indices into the red, Robinhood restricted access to certain stocks, angering retail investors who agitated for a truly free market. Robinhood said at the time it had to restrict trades in order to stay solvent.