“How was a 20-year-old with no income able to get assigned almost $1 million worth of leverage?” Alex Kearns said in a note he left his parents before he committed suicide over perceived loses in his trading activity on Robinhood.
He went further saying, “The puts I bought/sold should have cancelled out, too, but I also have no clue what I was doing now in hindsight. There was no intention to be assigned this much and take this much risk, and I only thought that I was risking the money that I actually owned. If you check the app, the margin investing option isn’t even ‘turned on’ for me. A painful lesson. F*** Robinhood.”
On June 12, 2020, Twenty-year-old Alex Kearns took his own life mistakenly believing he’d lost nearly $750,000 in a risky bet on Robinhood, the stock-trading app where he has been trading since his teenage age.
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The app, which allows anyone to buy and trade stocks, says on its website that it is “on a mission to democratise finance” and is currently running an advertising campaign under the slogan of “We are all investors”.
It recently made headlines for limiting sales of some shares to users after US retailer GameStop saw its stock surge.
His parents filed a lawsuit, first obtained by CBS News, on Monday accusing Robinhood of wrongful death, negligent infliction of emotional distress and unfair business practices.
Dan and Dorothy Kearns say their son was unable to get help or support from customer services before he died.
In an interview with “CBS This Morning,” Dan and Dorothy Kearns said they had a full house last year after the pandemic brought their son Alex home early from college.
Dan said, “To be honest, it was really a joyful household.”
Dorothy Kearns said she and Alex would spend evenings in the kitchen. “And one night he says to me, he’s like, ‘Mom, I don’t — I don’t know what I want to do with my life yet. But I do know I want to help people.'”
Alex was interested in investing, and before he graduated from high school, he opened an account with Robinhood. The app lets anybody buy and sell stocks, with no fees and no experience.
Mr and Mrs Kearns say they did not know the app had also approved him to buy and sell options – a risky financial instrument – despite a lack of financial experience.
On 11 June 2020, Alex realized that his account had been restricted by Robinhood amid what appeared to be a negative balance of more than $700,000 on his account.
At 03.26 a.m on 12 June, he received an automated email asking him to take “immediate action” to pay more than $170,000 within days.
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Robinhood had no customer service phone number, but Alex emailed its support address three times late that night and the following morning. He asked for help understanding what had happened, and whether he could still offset the losses with another trade.
Alex wrote, “I was incorrectly assigned more money than I should have, my bought puts should have covered the puts I sold. Could someone please look into this?”
In response, he received an automated message: “Thanks for reaching out to our support team!” The email said, “We wanted to let you know that we’re working to get back to you as soon as possible, but that our response time to you may be delayed.” The company assigned him a case number, 06849753.
“And their response was a canned reply,” Dan Kearns said. “Basically, ‘We’ll get back to you later.'”
Dan said his son just wanted an answer, but no one was there to respond. “It haunts me. It really does,” he said.
Later that day, the sheriff knocked on the Kearns family’s front door to deliver the news: Alex was dead.
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According to the family’s attorneys, Alex may not have lost money at all, because of the way the options bets were structured.
“He thought he blew up his life. He thought he screwed up beyond repair,” Dan Kearns said.
The day after Alex took his own life, Robinhood sent an automated email suggesting the trade had been resolved and he didn’t owe any money.
“Great news!” The email read, “We’re reaching out to confirm that you’ve met your margin call and we’ve lifted your trade restrictions. If you have any questions about your margin call, please feel free to reach out. We’re happy to help!”
Critics of Robinhood say the company has been reckless in its rush to sign up new investors.
William Galvin, Massachusetts Secretary of the Commonwealth and the chief financial regulator in the state of Massachusetts, says online broker-dealers like Robinhood need greater regulation.
“I think it demands some sort of national standard for this behavior,” he said. “There was a very deliberate effort on the part of Robinhood to particularly entice younger, inexperienced investors.”
Galvin points to the company’s marketing. He said it rewards daily usage of the app and encourages frequent trading.
Galvin’s office filed a complaint against Robinhood in December. The complaint described the app’s features — which included a digital confetti effect when users make trades — as “gamification.”
Galvin said, “They’re not treating it as a serious risk of money.”
Galvin said the app doesn’t exemplify its name. Although the fabled Robin Hood stole from the rich and gave to the poor, he said, that’s not happening on the Robinhood app.
“They have not acted in the best interests of their customers. So the idea that they’re caring for the poor,” he said, “is simply not true.”
What happened to Alex Kearns is of particular worry to Galvin and his team. In Massachusetts alone, they said, they found more than 600 examples of Robinhood customers who, by Robinhood’s own standards, shouldn’t have been approved for options trading, but were.
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“Their rush to make money out of this has caused them to add people to their base,” Galvin said, “and to recklessly bring people on board who they probably should have said, ‘No, we won’t qualify you for options right now.”
In a statement to CBS News, a Robinhood spokesperson said, “We disagree with the allegations in the complaint by the Massachusetts Securities Division and intend to defend the company vigorously.”
Since the death of Alex Kearns, Robinhood said it has “revised experience requirements” for customers seeking riskier types of options, but CBS News confirmed last week just how easy it was to get approved for basic options trading on the app. As part of the sign-up questionnaire, the app asks, “How much investing experience do you have?”
Choose “none,” and Robinhood rejects you from trading options. But the app then asks if you want to update your experience level.
If you change the response to, “not much,” the app approves you for options trading. “Welcome to options,” the app says.
Dan Kearns says the safety checks aren’t strong enough. “How are those guardrails? How does that — how does that stop an 18-year-old from making risky trades that they don’t really understand?”
In a statement to the BBC, Robinhood said they have made improvements to their “options offering” since June including how they display buying power and providing more educational materials and revised experience requirements for users.
“We remain committed to making Robinhood a place to learn and invest responsibly,” they added.
Robinhood said they were “devastated” by Alex’s death, and the improvements they are making is in response to that.
To invest is important, as it sets one on a path to financial freedom, but a knowledge and understanding of the assets or businesses we invest in is paramount.
Nnamdi Maduakor is a Writer, Investor and Entrepreneur
