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Robinhood was sued on Monday for wrongful death by the family of Alex Kearns, a 20-year-old client who killed himself last summer after believing he had racked up big losses on the stock trading app favored by millennia.
“This case centers on Robinhood’s aggressive tactics and strategy to get inexperienced and unsophisticated investors, including Alex, to take big risks with the allure of tempting profits,” said the complaint filed by his parents Dan and Dorothy Kearns, and her sister Sydney Kearns in a California state court in Santa Clara. The family is based in Naperville, Illinois.
“Robinhood’s reckless conduct directly and immediately caused the death of one of its victims,” the complaint states. The lawsuit also accuses the brokerage of negligently inflicting emotional distress and unfair business practices.
Alex Kearns, then a sophomore at the University of Nebraska at Lincoln, committed suicide in June after thinking he had a negative cash balance of $ 730,165 on Robinhood.
The complaint alleges that Kearns misunderstood Robinhood’s financial state and was protecting his family from financial obligation.
The suit says Kearns made three attempts to contact Robinhood customer service regarding the massive underwater toll.
However, his messages received automated responses, according to the complaint.
In a note to his family that CNBC saw, Kearns accused Robinhood of allowing him to take too many risks. He claimed that the puts he bought and the shares sold “should have canceled,” according to the note.
Puts are options that give the owner the right to sell a security at a specified price.
The trader said he had “no idea” what he was doing, according to the note.
“How could a 20-year-old with no income have been given leverage worth almost $ 1 million?” Read the note Kearns wrote to his family. “There was no intention of being awarded so much and taking so much risk, and I just thought I was risking the money I actually had.”
A Robinhood spokesperson told CNBC: “We have been devastated by the death of Alex Kearns. Since June, we have improved our options offering.”
Robinhood has become a popular entry point into the stock market for new investors. It went from 1 million users in 2016 to more than 13 million last spring. Amid the investor-fueled GameStop drama Reddit, traffic analytics site SimilarWeb estimates that an additional 3 million users downloaded Robinhood in January alone.
Robinhood, which is headed by CEO Vlad Tenev, has come under scrutiny for its “gamification” of investments and alleged predatory business practices.
Robinhood is also facing class action lawsuits from clients after the app’s decision to restrict trading in certain titles during the recent GameStop controversy. The brokerage firm, which plans to go public in 2021, has repeatedly said the majority of its users are long-term investors.
Robinhood, one of the biggest beneficiaries of the retail boom in 2020, has also come under scrutiny for the access it gives to its customers without proper investment training. Last year, Massachusetts regulators filed a lawsuit against Robinhood, accusing the trading app of predatory marketing on inexperienced investors.
The Securities and Exchange Commission accused the brokerage in December of misleading clients about how the stock trading app makes money and fails to deliver the best execution of trades promised.
The Kearns family complaint reads: “Not only did Robinhood allow Alex to open the account, but when Alex was in his freshman year in college later that year, it allowed him to trade options. .
“Worse yet, Robinhood provided virtually no investment guidance, and its customer ‘service’ was virtually non-existent, consisting of automated email responses devoid of any human contact or interaction,” the family said. in pursuit.
Here is Robinhood’s full statement regarding the lawsuit.
“We were devastated by the death of Alex Kearns. Since June, we have made improvements to our options offering. These include adding the ability to exercise contracts in the app, tips to help clients with their early assignment, updates on how we display purchasing power, more educational material on options, and new financial criteria and revised experience requirements for new clients looking to trade Level 3 options. In early December, we also added live voice assistance for clients with a position of ‘open options or a recent expiration, and plan to expand to other use cases. We have also changed our protocol to allow clients to email us for assistance with exercise and advance assignments. We remain committed to making Robinhood a place to learn and invest responsibly. “
– with reporting from CNBC’s Dan Mangan and Kate Rooney.
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