Local News Matters weekly newsletter

Start your week with a little inspiration. Sign up for our informative, community-based newsletter, delivered on Mondays with news about the Bay Area.

The family of a Nebraska college student who died by suicide as a result of his allegedly mistaken belief that he had incurred a massive financial loss trading in stock options has brought a lawsuit in Santa Clara County Superior Court against the securities trading platform Robinhood.

The suit claims that Robinhood Markets Inc. and its affiliates are responsible for the 20-year old’s death because, among other things, they targeted young investors and allowed them to trade in financial products without ensuring that they understood the risks.

In an unusually dramatic complaint filed Monday, the plaintiffs recounted the life story of Alex Kearns, who “was shy as a little boy but outgoing and active in high school.”

Alex Kearns, 20, committed suicide in June after mistakenly believing he owed $178,000 in losses on his option trade. (Photo via Twitter)

Replete with anecdotes that paint Kearns as a fun-loving but earnest boy growing up in Napierville, Illinois, the complaint describes him as a “true goofball with a terrific sense of humor” who was loved by his classmates and community.

In one anecdote, the complaint describes Kearns attending an awards ceremony as a high school senior. He did not win an award, but because “Alex was too deserving to go home without one, Alex’s fellow students and teachers surprised him by calling him to stage, while everyone in the room gave a standing ovation. Cheering and shouting filled the bleachers and room by all, showing their love for Alex.”

Kearns won a scholarship to University of Nebraska-Lincoln where he enrolled in the R.O.T.C. program.

According to the complaint, Kearns opened a Robinhood stock trading account while still a high school student. “Within only a few months, despite being only eighteen years old and having little or no income, Robinhood approved Alex for trading in options.”

Many of the complaint’s allegations about Kearns’ option trading are stated to be on “information and belief.” Information and belief is the legal phrase used in a complaint to indicate that while the plaintiff does not have first-hand knowledge, he or she believes the allegation to be true.

Options trade gone bad

According to those allegations, Kearns initiated a “spread trade” in which he simultaneously sold and purchased options for the same stock at different prices. According to the complaint, Kearns believed that by doing a spread trade, his maximum loss in the worst case would be less than $10,000. While that would be a lot for him — the total “cash he had in the world” was $30,000, according to the complaint — nevertheless he would have been able to absorb it.

On June 11, 2020, the complaint alleges, the holder of the options that Kearns had sold exercised the options, “thus obligating Alex to purchase the underlying [stock.]”

Just before midnight on that date, Kearns received an email from Robinhood that showed his cash account to have a negative balance of $730,000.

Four hours later — at 3:26AM — Robinhood sent notice that Kearns had to deposit $178,000 to his account.

“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 puts he held.”

Court document

Kearns tried to contact Robinhood several times that night and again in the morning of June 12, but allegedly he could not reach a live person and only received auto-generated replies.

The complaint alleges that Kearns, swept up in desperation and panic, rode his bike to a railroad crossing “and ran in front of an oncoming train, killing himself.”

He left a note that stated “If you’re reading this, I am dead. How was a 20 year old with no income able to get assigned almost a million dollars’ worth of leverage? … You could fill an ocean with the amount of tears I’ve shed typing this. Please, please take care of yourselves. The amount of my guilt I feel as I commit to this is unbearable — I did not want to die.”

In tragic irony, according to the complaint, it turns out that Kearns killed himself over a misunderstanding.

The communications from Robinhood only covered one part of the spread trade.

“In reality,” the complaint states, “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 puts he held.”

In the national spotlight

In recent weeks, Robinhood has attracted a tsunami of attention after a large group of retail traders — self-organized on Reddit and trading on the Robinhood platform — began to bid up the price of retail video game seller GameStop that had been heavily shorted by hedge funds betting the company’s share price would fall.

Stories of day traders making millions on popular stocks like GameStop have captured the imagination of young investors and driven them to commission-free trading platforms such as Robinhood. (Photo by Clay Banks/Unsplash)

The situation turned into one of the big stories of the new year as an army of small buyers drove GameStop’s price to record highs, in the process squeezing the hedge fund traders and forcing them to cover billions of dollars of short positions, generating massive trading losses.

The complaint argues that Robinhood is responsible for Kearns’ death by allowing him to trade in financial products that he was too young and unsophisticated to understand. According to the complaint, Robinhood targets young investors and does not rigorously evaluate whether the investments they are approved to make are appropriate for them.

One section of the complaint goes through medical literature to argue that young adults — those in the 18- to 25-year-old cohort — do not have a fully developed “pre-frontal cortex” and as a result their decision-making is highly influenced by emotion as opposed to reason.

While the company’s website offers a “commitment” to help and support investors (“Our dedicated team of customer support professionals are available to answer your questions,” it states), the complaint focuses on Kearns’ inability to get help in the hours between the time he learned of the negative cash balance and the time he killed himself.

Tenev and Bhatt issued a “Founder Letter” after Kearns’ death, committing the company to improvements in education and user interface, and stating they were “personally devastated by this tragedy.”