Robinhood states that its mission is to "democratize finance" and stand up for the little guy. But Kearns' parents said in the lawsuit that the company targeted young and inexperienced customers, pushing them to engage in risky trading practices.
“This case centers on Robinhood’s aggressive tactics and strategy to lure inexperienced and unsophisticated investors, including Alex, to take big risks with the lure of tantalizing profits,” stated the complaint filed by his parents Dan and Dorothy Kearns, and his sister Sydney Kearns in a California state court in Santa Clara.
Kearns sought to protect family from financial burden
A sophomore at the University of Nebraska-Lincoln, Alex Kearns took his life in June, believing he had a negative cash balance of $730,165 on Robinhood.
The suit alleged that Kearns misunderstood the financial statement from Robinhood and was protecting his family from the financial obligation.
In addition, it also stated that Kearns made three attempts to contact Robinhood customer service regarding his balance. But Kearns' messages were apparently met with automated replies, according to the suit.
In a note to his family obtained by CNBC, Kearns said that Robinhood allowed him to pile on too much risk even though he had "no clue" about what he was doing.
"How was a 20-year-old with no income able to get assigned almost a million dollars worth of leverage?" wrote Kearns. "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."
Kearns also wrote that the puts he bought – options that give the owner the right to sell a security at a specified price – and the shares he sold "should have canceled out."
In response, a spokesman for Robinhood stated: "We were devastated by Alex Kearns’ death. Since June, we’ve made improvements to our options offering."
Robinhood under scrutiny for predatory practices
Robinhood, which has become a popular entry point into the stock market for first-time investors, has come under scrutiny for supposed predatory marketing practices and its "gamification" of investing.
In December of 2020, the Securities and Exchange Commission (SEC) charged the company with misleading customers about how it makes money and failing to deliver the promised best execution of trades.
Securities regulators in the state of Massachusetts filed a complaint against the stock-trading app stating that it aggressively marketed to novice investors while failing to put controls in place to protect them. (Related: Google Play deletes over 150,000 Robinhood app reviews after frustrated users leave one-star ratings.)
"They know that their investors are primarily younger. It's because they think there are more unsophisticated investors among them – we heard from some of them," Massachusetts Secretary of the Commonwealth William Galvin said in an interview with Bloomberg. "They’ve exploited the current situation with the pandemic. They contributed to the frothiness of the market, bringing people in who don’t know much about it. They're not responsible fiduciaries."
The Kearns family's complaint echoes these allegations, saying: "Not only did Robinhood permit Alex to open the account, but when Alex was a freshman in college later that year, it permitted him to trade options."
"Worse, Robinhood provided almost no investment guidance, and its customer ‘service’ was virtually non-existent, consisting of automated e-mail replies devoid of any human contact or interaction," it adds.
But Robinhood has disagreed with the allegations stating that it is a "self-directed broker-dealer" and that it does not "make investment recommendations."
"Over the past several months, we've worked diligently to ensure our systems scale and are available when people need them," the company said in the statement. "We've also made significant improvements to our options offering, adding safeguards and enhanced educational materials."
Follow Risk.news for more on the various lawsuits Robinhood is facing.
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