Robinhood sued by family of 20 year old suicide victim who thought he owed the company $730k

[Carolina Red]

Well, this is an interesting story...

https://www.cnn.com/2021/02/09/investing/robinhood-lawsuit-suicide/index.html

New York (CNN Business)Robinhood is being sued for the wrongful death of a 20-year-old college student who died by suicide last summer after he saw a negative balance of $730,000 in his trading account and mistakenly believed that was the sum of money he owed.

The parents and sister of Alexander Kearns accused Robinhood of luring inexperienced investors like their son to take big risks in sophisticated financial instruments such as the options trading he engaged in -- without providing the necessary customer support and investment guidance.

"Robinhood built out its trading platform to look much like a videogame to attract young users and minimize the appearance of real-world risk," reads the lawsuit filed Monday in California by Kearns' parents Dan and Dorothy and sister Sydney.

In addition to wrongful death, the complaint filed by the Illinois family accuses Robinhood of negligent infliction of emotional stress and unfair business practices. The damages they are seeking will be determined at a later date.

 

[Solius]

Did the kid have learning difficulties? Shitty by the company but seems an incredibly drastic thing to do before hearing back from them.

 

[Green_Red]

Why did his account say -$730K?

 

[VorZakone]

Why did his account say -$730K?

If I remember correctly he wasn't really -730k but the numbers weren't updated yet. Which made him think he was really that much into debt.

 

[Green_Red]

If I remember correctly he wasn't really -730k but the numbers weren't updated yet. Which made him think he was really that much into debt.

Wow, that's a bit of a big feck up. Wonder if they emailed explaining the situation.

 

[shamans]

I think robinhood and recent trading commercialization in nature is very predatory but where do you draw the line ?

There could be a foundations 101 stock trading license you have to acquire before trading stocks

There needs to be another course for options trading which is basically gambling.

 

[Carolina Red]

There needs to be another course for options trading which is basically gambling.

I've honestly always thought of the entire stock market system as fancied up gambling.

 

[tinfish]

I think robinhood and recent trading commercialization in nature is very predatory but where do you draw the line ?

There could be a foundations 101 stock trading license you have to acquire before trading stocks

There needs to be another course for options trading which is basically gambling.

Anything related to the stock market is basically gambling.

Regardless I completely agree with you. I'm a full time options trader and without the proper tuition and know how you can easily blow up your account. I still think it's safer than leveraged CFD's though.

 

[Zarlak]

I've honestly always thought of the entire stock market system as fancied up gambling.

While this is true to an extent at least with buying stocks you can only go to 0. When trading options there is no limit to the hypothetical losses you can make.

 

[Bojan11]

How has someone who is 20 even if it's a mistake got to -£730,000?

 

[calodo2003]

Just don’t see this lawsuit making it too far.

 

[Sky1981]

While this is true to an extent at least with buying stocks you can only go to 0. When trading options there is no limit to the hypothetical losses you can make.

Not really. There's margin involved normally. Average joe can't trade beyond their means. Worst case scenario the brokers would auto cut his position when his margin is up.

You still can lose a lot mind you, but nothing over 0 assuming you dont pull loan shark loans

 

[Tarrou]

possible they'll settle

its a slam dunk win in court as they'll be covered in T&Cs, but terrible PR for them

what an awful thing to happen though, I don't think as a parent I'd ever recover from that

 

[SalfordRed18]

Did the kid have learning difficulties? Shitty by the company but seems an incredibly drastic thing to do before hearing back from them.

Tbh, that's an amount that can set you over the edge. Don't think you need learning difficulties to panic and one thing lead to another.

 

[iKnowNothing]

Just don’t see this lawsuit making it too far.

As sad a loss it is for the family, I think it’s a slightly opportunistic lawsuit given the timing. They probably feel RH will settle to avoid bad press.

 

[calodo2003]

As sad a loss it is for the family, I think it’s a slightly opportunistic lawsuit given the timing. They probably feel RH will settle to avoid bad press.

This could be exactly that. The loss is certainly disappointing, but just don’t see it gaining any traction. Smacks a bit of a predatory law firm / lawyer being opportunistic.

 

[Zarlak]

Not really. There's margin involved normally. Average joe can't trade beyond their means. Worst case scenario the brokers would auto cut his position when his margin is up.

You still can lose a lot mind you, but nothing over 0 assuming you dont pull loan shark loans

You can absolutely lose beyond 0 if you trade in options. Your margin allows you to borrow more than you hold and if it gets called you can be forced to sell other holdings to cover it, or have legal action taken against you.

 

[Sky1981]

You can absolutely lose beyond 0 if you trade in options. Your margin allows you to borrow more than you hold and if it gets called you can be forced to sell other holdings to cover it, or have legal action taken against you.

You can't.

If you put 100 dollars of margin deposit, you can only sustain 99.99 dollars of losses and you'll be cut on the 100. Happens to everyone of us, big Firms have some leeway and allowance due to their reputation but nobody would want to take a big risk. Even big firms have margin calls on a bigger level.

Technically you can't lose beyond negative, the only way you lose beyond negative is if your investment is borrowed or leveraged.

If I borrow 1000 from my aunt to play stocks and lose, my net worth is -1000 true, but the stock market didn't owe my auntie, they're paid in full. I'm the one bearing the loses.

It's just technicalities. I can lose everything playing in a casino, but the casino would not lose something they can't collect, it's paid in full.

I think ti's also illegal to trade without sufficient capital. Some firm are just taking that risk for convenience sake (say if my customer is away and unreachable, the company decided to not cut and maintain his position. It simply means my company is taking the risk incase of a loss beyond the available margin). Someone somehow is providing the margin, the SEC aren't going to let anyone hold a position based on empty collateral.

 

[Suedesi]

Why did his account say -$730K?

Without seeing his trade history it's hard to say.

My guess would be that he was writing options.

 

[Suedesi]

You can absolutely lose beyond 0 if you trade in options. Your margin allows you to borrow more than you hold and if it gets called you can be forced to sell other holdings to cover it, or have legal action taken against you.

Case in point...


Guess which brokerage?

 

[Suedesi]

How has someone who is 20 even if it's a mistake got to -£730,000?

Say he was trading SPY put spreads, which is a relatively safe spread. Let's say we open a Feb 12, 2020 spread - buy puts with a strike of 394 and sell puts with a strike of 393 - both are in the money.

These are real numbers from today:

Trades to open position	No.	Price	Total
buy 12th Feb $394.00 Put​	20x100​	$4.05​	$-8100.00​
sell 12th Feb $393.00 Put​	20x100​	$3.35​	$6700.00​
Total​	​		$-1400.00​

It costs 70 cents per contract ($4.05 - 3.35) and since each option represents 100 shares, each option costs 70 bucks. We bought 20 options, total cost $1400. That's it, that the max loss if the trade goes sideways. In a credit spread the max you could lose is the premium paid.

Now let's ff to Friday, and say SPY ends at 390. Both legs expire in the money.

You have sold someone the right to sell SPY at 393, and they exercise. This creates a $786,000 debit in your account.

Short Leg: -393 strike x 100 shares x 20 contracts -> $786,000

So this guy probably saw this massive negative number on his account which made him panic - because his max loss is $1400 and now sees this big scary red number -$786,000!

But the long leg which is there to hedge against this risk had not been exercised yet. When you're assigned after expiration, the long options are going to exercise automatically. Somehow, RH did not show the other leg

+ 394 strike x 100 shares x 20 contracts -> $788, 000. In this example $788-$786 = $2k less $1,400 paid in premiums = $600 profit.

He killed himself which is sad, but the irony is he probably made money on the trade.

 

[Zarlak]

You can't.

If you put 100 dollars of margin deposit, you can only sustain 99.99 dollars of losses and you'll be cut on the 100. Happens to everyone of us, big Firms have some leeway and allowance due to their reputation but nobody would want to take a big risk. Even big firms have margin calls on a bigger level.

Technically you can't lose beyond negative, the only way you lose beyond negative is if your investment is borrowed or leveraged.

If I borrow 1000 from my aunt to play stocks and lose, my net worth is -1000 true, but the stock market didn't owe my auntie, they're paid in full. I'm the one bearing the loses.

It's just technicalities. I can lose everything playing in a casino, but the casino would not lose something they can't collect, it's paid in full.

I think ti's also illegal to trade without sufficient capital. Some firm are just taking that risk for convenience sake (say if my customer is away and unreachable, the company decided to not cut and maintain his position. It simply means my company is taking the risk incase of a loss beyond the available margin). Someone somehow is providing the margin, the SEC aren't going to let anyone hold a position based on empty collateral.

This just isn't true. You can go negative on naked calls/puts as opposed to covered calls. Also, if you get margin called and can't put up the capital and they close out your position, if your shares don't cover the call then you are negative and owe them the rest plus interest on top. This is exactly the reason why rookie investors are told to stay away from options and to deal solely in stocks. If it wasn't possible to go past 0 then everyone would be encouraged to deal in options.

 

[Solius]

Tbh, that's an amount that can set you over the edge. Don't think you need learning difficulties to panic and one thing lead to another.

Yeah but it seems like he just immediately went straight to suicide before getting any clarification on why the amount was so big. They got back to him in two days.

 

[stevoc]

Yeah but it seems like he just immediately went straight to suicide before getting any clarification on why the amount was so big. They got back to him in two days.

Two days is a long time for a 20 year old kid to stress himself out about being almost 1 million dollars in debt though.

And who knows what other mental health issues he may have had or any other health/financial/personal troubles he was dealing with.

 

[Solius]

Two days is a long time for a 20 year old kid to stress himself out about being almost 1 million dollars in debt though.

And who knows what other mental health issues he may have had or any other health/financial/personal troubles he was dealing with.

I know. I just think he must've had mental health issues or learning difficulties because there are so many other seemingly logical steps before suicide.

 

[SalfordRed18]

I know. I just think he must've had mental health issues or learning difficulties because there are so many other seemingly logical steps before suicide.

Mental health issues sure.

But I really don't see where learning difficulties come into things.

 

[MrMarcello]

Tbh, that's an amount that can set you over the edge. Don't think you need learning difficulties to panic and one thing lead to another.

Brings to question the person's mental state. I figure discovery would permit the subpoena of all medical records. Does make me wonder if this person has had prior mental health issues to take such a drastic measure so quickly without inquiry, and how would such discovery affect a lawsuit, i.e. this person has had prior acts, bouts of anger, etc. Could also just be an immature, irrational college kid not fully thinking.

 

[Smores]

They have a duty of care to vulnerable investors and that doesn't mean small print T&Cs. Honestly all these new retail platforms emerging (and i include crypto) need some serious regulation enforced and quickly.

Bring them upto speed with established industries so that all investors have to read and agree key information before they trade. Valuations should have extensive supplementary information.

I can see them facing a significant payout for material distress and rightly so.

 

[Pogue Mahone]

Say he was trading SPY put spreads, which is a relatively safe spread. Let's say we open a Feb 12, 2020 spread - buy puts with a strike of 394 and sell puts with a strike of 393 - both are in the money.

These are real numbers from today:

Trades to open position	No.	Price	Total
buy 12th Feb $394.00 Put​	20x100​	$4.05​	$-8100.00​
sell 12th Feb $393.00 Put​	20x100​	$3.35​	$6700.00​
Total​	​		$-1400.00​

It costs 70 cents per contract ($4.05 - 3.35) and since each option represents 100 shares, each option costs 70 bucks. We bought 20 options, total cost $1400. That's it, that the max loss if the trade goes sideways. In a credit spread the max you could lose is the premium paid.

Now let's ff to Friday, and say SPY ends at 390. Both legs expire in the money.

You have sold someone the right to sell SPY at 393, and they exercise. This creates a $786,000 debit in your account.

Short Leg: -393 strike x 100 shares x 20 contracts -> $786,000

So this guy probably saw this massive negative number on his account which made him panic - because his max loss is $1400 and now sees this big scary red number -$786,000!

But the long leg which is there to hedge against this risk had not been exercised yet. When you're assigned after expiration, the long options are going to exercise automatically. Somehow, RH did not show the other leg

+ 394 strike x 100 shares x 20 contracts -> $788, 000. In this example $788-$786 = $2k less $1,400 paid in premiums = $600 profit.

He killed himself which is sad, but the irony is he probably made money on the trade.

I’d like to think that when I post technical stuff in the covid thread it seems as smart/confusing to people who haven’t studied science as this post does to me.

I’d like to think that but I reckon the truth is I’m just unbelievably thick when it comes to all things financial. No matter how many times someone explains shorting to me it blows my tiny mind every time I next encounter it. It’s basically voodoo and that’s that.

 

[Solius]

Mental health issues sure.

But I really don't see where learning difficulties come into things.

I just thought maybe that might contribute to his overreaction. I feel like most people would realise/assume it wouldn't be possible to be that far into debt and it was just an error and that suicide would not be the first course of action they would take. Perhaps that he couldn't quite comprehend the situation properly.

 

[11101]

Say he was trading SPY put spreads, which is a relatively safe spread. Let's say we open a Feb 12, 2020 spread - buy puts with a strike of 394 and sell puts with a strike of 393 - both are in the money.

These are real numbers from today:

Trades to open position	No.	Price	Total
buy 12th Feb $394.00 Put​	20x100​	$4.05​	$-8100.00​
sell 12th Feb $393.00 Put​	20x100​	$3.35​	$6700.00​
Total​	​		$-1400.00​

It costs 70 cents per contract ($4.05 - 3.35) and since each option represents 100 shares, each option costs 70 bucks. We bought 20 options, total cost $1400. That's it, that the max loss if the trade goes sideways. In a credit spread the max you could lose is the premium paid.

Now let's ff to Friday, and say SPY ends at 390. Both legs expire in the money.

You have sold someone the right to sell SPY at 393, and they exercise. This creates a $786,000 debit in your account.

Short Leg: -393 strike x 100 shares x 20 contracts -> $786,000

So this guy probably saw this massive negative number on his account which made him panic - because his max loss is $1400 and now sees this big scary red number -$786,000!

But the long leg which is there to hedge against this risk had not been exercised yet. When you're assigned after expiration, the long options are going to exercise automatically. Somehow, RH did not show the other leg

+ 394 strike x 100 shares x 20 contracts -> $788, 000. In this example $788-$786 = $2k less $1,400 paid in premiums = $600 profit.

He killed himself which is sad, but the irony is he probably made money on the trade.

Almost certainly this, the article even said he ended up in the money. I don't know if the both legs had the same expiry but even if they did there is always a lag on execution with these retail brokers. It can take hours for them to get round to processing trades and updating their systems, and there is no urgency with options due to the settlement time.

What I think is odd is how he managed to place a seemingly successful spread trade but didn't understand the mechanics of it. Another WSB regular?

I’d like to think that when I post technical stuff in the covid thread it seems as smart/confusing to people who haven’t studied science as this post does to me.

A bit simpler - you commit to buying 2,000 shares at $393. Separately, you commit to selling 2,000 shares at $394. You make $1 per share, so $2,000, and those commitments cost you $1400. Profit = $600.

That said, I still don't understand options well enough to want to play around with them.

 

[Redlyn]

What did RH do wrong here? They are not babysitters.

 

[Carolina Red]

What did RH do wrong here? They are not babysitters.

Apparently the last thing the guy wrote before killing himself was... "How was a 20 year old with no income able to get assigned $1 million worth of leverage?"

Which, honestly, is a question I'd like answered as well. But I do agree with you that I find it very hard to see how RH is liable for a wrongful death as the lawsuit is claiming.

 

[shamans]

I've honestly always thought of the entire stock market system as fancied up gambling.

The past few years have been extremely weird and I wouldn't blame anyone who thinks it is gambling. Fundamentals almost have no meaning at all. Stocks are going up and down purely due to speculation.

 

[shamans]

Anything related to the stock market is basically gambling.

Regardless I completely agree with you. I'm a full time options trader and without the proper tuition and know how you can easily blow up your account. I still think it's safer than leveraged CFD's though.

I think I spot the source of your opinion.

Value based trading is far, far from gambling. Like I said in the other post the market is weird nowadays but if you only ever invest in companies that actually have money, assets and make a profit (and are generally safe) 8/10 times you will make money. Sure you may not make an insane amount of money, but you'll make money. Heck, if you dollar cost average the S&P500 you will make money over 5-10 years even during the worst period after the great depression.

If you invest in a stock that is priced at 300 and loses money, then yes you're gambling (looking at you GME). You can gamble in the stock market but it doesn't have to be. For instance, a rich dude can just buy apartments in random cities hoping one is a jackpot or they can buy an apartment in a hot area of London or NYC and put it up for rent. You get my drift.

Options trading (in my eyes) is pure gambling.

 

[VorZakone]

I think I spot the source of your opinion.

Value based trading is far, far from gambling. Like I said in the other post the market is weird nowadays but if you only ever invest in companies that actually have money, assets and make a profit (and are generally safe) 8/10 times you will make money. Sure you may not make an insane amount of money, but you'll make money. Heck, if you dollar cost average the S&P500 you will make money over 5-10 years even during the worst period after the great depression.

If you invest in a stock that is priced at 300 and loses money, then yes you're gambling (looking at you GME). You can gamble in the stock market but it doesn't have to be. For instance, a rich dude can just buy apartments in random cities hoping one is a jackpot or they can buy an apartment in a hot area of London or NYC and put it up for rent. You get my drift.

Options trading (in my eyes) is pure gambling.

Full time trader too. Not just a trader. Gave me a good laugh.

 

[Wibble]

I’d like to think that when I post technical stuff in the covid thread it seems as smart/confusing to people who haven’t studied science as this post does to me.

I’d like to think that but I reckon the truth is I’m just unbelievably thick when it comes to all things financial. No matter how many times someone explains shorting to me it blows my tiny mind every time I next encounter it. It’s basically voodoo and that’s that.

I wonder why it isn't illegal.

But I agree with you about the voodoo bit. Selling something you don't own is totally counter-intuitive to me. Probably because I can't see that it has any function so my brain doesn't engage.

 

[MrMarcello]

So, as a novice, if I wanted to spend 10K on stocks, should I buy through an online site like sharebuilder.com (have some Oracle stock in there from 2002 purchase) or another reputable source?

 

[NotThatSoph]

I think I spot the source of your opinion.

Value based trading is far, far from gambling. Like I said in the other post the market is weird nowadays but if you only ever invest in companies that actually have money, assets and make a profit (and are generally safe) 8/10 times you will make money. Sure you may not make an insane amount of money, but you'll make money. Heck, if you dollar cost average the S&P500 you will make money over 5-10 years even during the worst period after the great depression.

If you invest in a stock that is priced at 300 and loses money, then yes you're gambling (looking at you GME). You can gamble in the stock market but it doesn't have to be. For instance, a rich dude can just buy apartments in random cities hoping one is a jackpot or they can buy an apartment in a hot area of London or NYC and put it up for rent. You get my drift.

Options trading (in my eyes) is pure gambling.

It depends on how you define gambling. Betting on individual stocks is like roulette but with a positive expected value and huge variance. Even buying a big company like Apple is gambling in the sense that you're hoping to beat the index without much reason behind it. Insider trading, arbitrage and luck more or less exhaust all ways to profit above market.

So, as a novice, if I wanted to spend 10K on stocks, should I buy through an online site like sharebuilder.com (have some Oracle stock in there from 2002 purchase) or another reputable source?

If you're doing it to invest then buy a cheap index fund or three. If 10k is play money for you then I'm sure there are a lot of options.

 

[Suedesi]

I’d like to think that when I post technical stuff in the covid thread it seems as smart/confusing to people who haven’t studied science as this post does to me.

I’d like to think that but I reckon the truth is I’m just unbelievably thick when it comes to all things financial. No matter how many times someone explains shorting to me it blows my tiny mind every time I next encounter it. It’s basically voodoo and that’s that.

Sorry my explanation may not be the most eloquent one, but I think the logic checks out. I have heard people offer some bizarre explanations that make absolutely no sense.

Just have a look here - http://opcalc.com/oog - maybe this will make more intuitive sense.