The complaint, filed Monday in state court in Santa Clara County, California, seeks unspecified damages on behalf of the parents and sister of Alex Kearns for wrongful death, negligent infliction of emotional distress and unfair business practices.
Kearns, a student at the University of Nebraska-Lincoln, was 20 when he took his life last June after he misunderstood a potential loss from a stock-options trade.
In the lawsuit, Kearns’ parents and sister assert that Robinhood employed “aggressive tactics and strategy to lure inexperienced and unsophisticated investors, including Alex, to take big risks with the lure of tantalizing profits.”
Robinhood also provided little or no investment guidance to its users, and its customer service was limited to automated e-mails, according to the complaint.
Kearns received emails from Robinhood shortly after 11 p.m. on June 11, informing him that his account was restricted and that he was required to buy $700,000 in shares as a result of an options trade, according to the lawsuit. That left Kearns’ account with a negative balance of $730,000 on a trade that he had understood would be limited to a maximum loss of less than $10,000, the lawsuit says.
Kearns, desperate for answers, sent several emails to Robinhood’s customer support, but only received auto-generated replies, according to the lawsuit. Then, after 3:30 a.m., Kearns got an email from Robinhood saying he needed to deposit more than $178,000 within seven days to begin to address the negative balance, according to the lawsuit.
“Tragically, Robinhood’s communications were completely misleading, because, in reality, Alex did not owe any money; he held options in his account that more than covered his obligation, and the massive negative balance would have been erased by the exercise and settlement of the” options Kearns held, according to the lawsuit.
After not being able to speak with anyone from Robinhood, Kearns became more desperate and fearful of the mammoth financial obligation, according to the complaint.
“This resulted in a highly distressed mental condition in Alex, an uncontrollable impulse to commit suicide as the only option he could see,” according to the lawsuit.
Robinhood, which is based in Menlo Park, California, issued a statement in response to the lawsuit Monday saying it was devastated by Kearns’ death and has since made improvements to its options offerings. The measures include adding more educational materials on options trading and new financial criteria and experience requirements for new customers seeking to trade some options.
“In early December, we also added live voice support for customers with an open options position or recent expiration, and plan to expand to other use cases,” the company said.
Robinhood has drawn criticism and regulatory scrutiny in its drive to bring more regular people into investing, not just wealthy investors already well versed in the markets.
In December, regulators in Massachusetts filed an administrative complaint against the company, alleging that Robinhood violated securities laws by aggressively marketing itself to Massachusetts investors without regard for the best interest of its customers. At the time, Robinhood said it disagreed with the complaint and intended to mount a vigorous defense.
Critics say Robinhood makes trading stocks and exchange-traded funds so cheap, easy and maybe even fun, it could be enabling unsophisticated investors to buy and sell too-risky investments too often.
The company tells customers on its website that they can “level up with options trading,” for example. With options, investors buy a contract that gives them the possibility of buying or selling a stock or ETF in the future at a set price. Trading options allows for potentially big profits at a low initial cost, but it can also be riskier than buying a plain vanilla share of stock if the bet goes the wrong way. And if traders borrow money to juice their options trades, it raises the risk even more.
Robinhood nevertheless has forced huge, ground-shaking changes for the brokerage industry. Its decision to charge zero commissions for customers trading stocks and ETFs pushed the industry’s biggest players to eventually follow suit – and to band together. Charles Schwab bought TD Ameritrade and Morgan Stanley acquired E-Trade Financial to try to be more competitive.
Investors on Robinhood and other trading platforms have also influenced prices on Wall Street. Analysts credit these investors with helping drive shares sharply higher last month in GameStop and AMC Entertainment, and in Tesla and other Big Tech companies last summer while the economy struggled.
