Robinhood was sued Monday for wrongful death by the family of Alex Kearns, a 20-year-old client who took his own life last summer because he believed he had made huge losses on the millennial favorite stock trading app.
“This case is about Robinhood’s aggressive tactics and strategy of getting inexperienced and undemanding investors, including Alex, to take huge risks in order to make tempting profits,” said his parents’ complaint, Dan and Dorothy Kearns and his sister Sydney Kearns a California state court in Santa Clara. The family lives in Naperville, Illinois.
Robinhood’s “reckless behavior directly and immediately caused the death of one of its victims,” the complaint read. The lawsuit also accuses of mediating negligent infliction of emotional stress and unfair business practices.
Alex Kearns, a sophomore at the University of Nebraska at Lincoln, committed suicide in June after believing he had a negative cash balance of $ 730,165 with Robinhood.
The complaint alleges that Kearns misunderstood the Robinhood financial statements and protected his family from the financial obligation.
The suit states that Kearns made three attempts to contact Robinhood customer service regarding the massive underwater household.
However, according to the complaint, his messages were replied to with automated replies.
In a note to his family watched by CNBC, Kearns accused Robinhood of allowing him to take too much risk. He claimed the puts he bought and the stocks he sold should have “canceled,” the note reads.
Puts are options that give the owner the right to sell a security at a certain price.
The dealer said he “had no idea” what he was doing, according to the note.
“How could a 20-year-old with no income get nearly a million dollars worth of leverage?” Read the note Kearns wrote to his family. “There was no intention of being assigned so much and taking so much risk and I just thought I was risking the money I actually own.”
A Robinhood spokesman told CNBC: “We were devastated by the death of Alex Kearns. Since June we have improved our options.”
Robinhood has become a popular entry point into the stock market for first time investors. It has grown from 1 million users in 2016 to more than 13 million last spring. Amid the GameStop drama run by Reddit investors, traffic analysis site SimilarWeb estimates 3 million more users downloaded Robinhood in January alone.
Robinhood, led by CEO Vlad Tenev, has been investigated for its “gamification” of investments and alleged predatory marketing practices.
Robinhood is also facing class action lawsuits from customers after the app decided to restrict trading in certain securities during the recent GameStop controversy. The brokerage firm, which plans to go public in 2021, has repeatedly stated that the majority of its users are long-term investors.
Robinhood, one of the biggest beneficiaries of the 2020 retail boom, has also been screened for the access it grants its customers without proper investment education. Last year, Massachusetts regulators filed a complaint against Robinhood, accusing the trading app of predatory marketing for inexperienced investors.
The Securities and Exchange Commission accused the broker in December of misleading clients about how the stock trading app makes money and failing to deliver the promised best execution of trades.
The Kearns family complaint reads: “Robinhood not only allowed Alex to open the account, but when Alex was a freshman later that year allowed him to trade options.”
“Worse, Robinhood provided almost no investment advice and its customer service was virtually non-existent. It consisted of automated email responses with no human contact or interaction,” the family alleged in the lawsuit.
Here is Robinhood’s full statement on the lawsuit.
“The death of Alex Kearns devastated us. Since June we have improved our options offering. These include the ability to exercise contracts in the app, guides to help customers with early allocation, and updates on purchasing power and other training materials on options as well as new financial criteria and revised experience requirements for new customers looking to trade Level 3 options. In early December, we also added live voice support for customers with an open option position or a recently expired expiry, and are planning an expansion.We also changed our protocol to Escalating clients who email us for help with exercise and early referral. We continue to strive to make Robinhood a place to learn and invest responsibly. “
– with reports from CNBC’s Dan Mangan and Kate Rooney.
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