Robinhood Markets has been hit with a wrongful death suit by the parents of a 20-year-old client.
Alex Kearns died last year after he believed he had lost $730,000 (£532,290, €602,000) on an options trade, reports newswire Bloomberg.
Kearns’ parents claim that the no-fee brokerage service preys on unsophisticated investors, like their son.
They are seeking unspecified damages.
“Robinhood’s aggressive ploys to attract young customers, combined with its flagrant disregard for its duty of care to its customers, creates a time bomb that was destined to lead to the type of tragedy that happened to Alex,” the complaint said.
Lack of support
Kearns had placed an option spread trade where he could acquire and sell put options in the same security the same time, according to the lawsuit.
But he didn’t understand that the options he sold could have been assigned before expiration.
In June 2020, Kearns received an email from Robinhood saying that he needed to deposit around $178,000 to pay for a negative balance, which the firm’s app showed to be around $730,000, the complaint said.
What Robinhood didn’t tell the 20-year-old, however, was that he held options in his account that could have been more than enough to cover the sum owed, which would have then been erased by the exercise and settlement of the puts he had.
The lawsuit added that the young trader could not get in touch with anyone at Robinhood to find out what was happening.
He died later that night.
International Adviser was not able to contact Robinhood, but the firm released a statement to several media outlets in the US.
“We were devastated by Alex Kearns’ death,” the DIY trading platform said. “Since June, we’ve made improvements to our options offering.
“These include adding the ability to exercise contracts in the app, guidance to help customers through early assignment, updates to how we display buying power, more educational materials on options, and new financial criteria and revised experience requirements for new customers seeking to trade Level 3 options.”
‘Unintended consequences’
Vijay Raghavan, senior analyst at Forrester, said that Robinhood’s model is dangerous for inexperienced clients.
“No commissions will lead to losses for some novice investors. The appeal of learning to trade stocks without the worry of commissions eating into returns may encourage active trading and unintended consequences for some investors.
“Robinhood does not offer an IRA account, so retirement planning and investing for the long term are not emphasised to customers.
“Robinhood doesn’t offer bonds or mutual funds, so its customers will inadvertently create a portfolio concentrated in one asset class, creating risk.
“In a volatile market, or a stock market crash, a lack of diversification will lead to greater losses — making young investors less likely to invest through the next economic cycle,” he added.
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