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LOS ANGELES (AP) – The family of a novice stock trader who killed himself after mistakenly believing he had lost more than $ 700,000 is suing Robinhood Financial, claiming that the popular stock trading platform’s business practice ‘directly’ led to the death of their son.
The lawsuit, filed Monday in Santa Clara County, California State Court, claims unspecified damages on behalf of Alex Kearns’ parents and sister for wrongful death, negligent infliction of emotional distress and unfair business practices.
Kearns, a student at the University of Nebraska-Lincoln, was twenty when he took his life in June last year after misunderstanding a potential loss due to a stock trade.
In the case, Kearns’ parents and sister claim that Robinhood “used aggressive tactics and strategies to lure inexperienced and unscrupulous investors, including Alex, to take big risks in attracting lucrative profits.”
Robinhood also provided little or no investment guidelines to its users, and its customer service was reportedly limited to automated emails.
Kearns received an email from Robinhood shortly after 11pm on June 11 informing him that his account was restricted and that he had to buy $ 700,000 shares as a result of an option trade. That left Kearns’ account with a negative balance of $ 730,000 on a deal that he said would be limited to a maximum loss of less than $ 10,000, the lawsuit reads.
Kearns, who is desperate for answers, sent several emails to Robinhood’s customer support, but according to the lawsuit, he only received answers that were generated automatically. Then, after 3:30 a.m., Kearns received an email from Robinhood asking him to deposit more than $ 178,000 within seven days to address the negative balance, according to the lawsuit.
“Tragically, Robinhood’s communication was completely misleading, because Alex did not really owe any money; he held options in his account that covered more than his obligation, and the massive negative balance would have been wiped out by the exercise and settlement of the options that Kearns had under the lawsuit.
After Kearns could not speak to anyone from Robinhood, he reportedly became desperate and afraid of the huge financial obligation.
“This led to a very distressed state of mind in Alex, an uncontrollable impulse to commit suicide as the only option he could see,” according to the lawsuit.
Robinhood, based in Menlo Park, California, issued a statement Monday in response to the lawsuit, saying it was devastated by Kearns’ death and has since offered improvements to its offering. The measures include the addition of more educational material on options trading and new financial criteria and experience requirements for new clients wishing to trade options.
“In early December, we also added live voice support for customers with an open option position or recent expiration, and plan to expand to other use cases,” the company said.
Robinhood has attracted criticism and regulatory scrutiny in its quest to invest in more ordinary people, not just wealthy investors who are already well acquainted with the markets.
In December, regulators in Massachusetts filed an administrative complaint against the company, alleging that Robinhood violated security laws by aggressively marketing itself to Massachusetts investors without holding the best interests of its customers. At the time, Robinhood said he did not agree with the charge and intended to tackle a powerful defense.
Critics say Robinhood makes trading stocks and exchange traded funds so cheap, easy and maybe even fun, that it enables unsophisticated investors to buy and sell investments too often.
The company says on its website for customers that they can, for example, “pick up with options trading”. With options, investors buy a contract that gives them the ability to buy or sell a stock or ETF at a set price in the future. Trading options offers potentially huge profits at a low initial cost, but it can also be riskier than buying a regular vanilla stock if the bet goes wrong. And if traders borrow money to trade their options, it increases the risk even more.
Robinhood has nonetheless enforced major, groundbreaking changes for the brokerage industry. The decision to charge commissions for clients trading stocks and ETFs has prompted the biggest players in the industry to eventually follow the same example – and work together. Charles Schwab bought TD Ameritrade and Morgan Stanley acquired E-Trade Financial to be more competitive.
Investors on Robinhood and other trading platforms also influenced prices on Wall Street. Analysts give credit to these investors for raising their shares in GameStop and AMC Entertainment, and in Tesla and other Big Tech companies, significantly higher last month, while the economy struggled.