Robinhood sued by family of 20-year old trader who committed suicide
cnbc.com
cnbc.com
You have to go out of your way to trade options (they're disabled by default), and the only way you can get options enabled in Robinhood as a college freshman is to straight up lie on the application.
> “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,” the family alleged in the suit.
How many brokers provide investment guidance? How many do it without additional fees?
I've only reached out to Robinhood two or three times but a person has responded to the initial inquiry in all but one instance (where an automated email just said it would be a while, and a person followed up about a week later to actually address the issue).
Robinhood is a shit company and I look forward to incoming class action lawsuit but this is a grieving family lashing out and should be dismissed. If anything comes of this the only thing that's going to happen is there are going to be more roadblocks for retail investors to invest.
Most other brokers WILL NOT allow this. When I applied for options Schwab had a broker call me and make sure I knew about all the risks involved for the level I applied for.
RH was also down a couple times in March, which lost me a good amount of money. A week is a VERY long time if you're playing short-term options. There's also other issues where they were holding customer shares in margin when they had cash to cover, and when they've allowed customers to leverage 5k -> 1M of positions (a huge nono).
The conclusion here is that RH is a toy broker following the mantra of move fast and breaks things. Good if you're casually investing, but for options and serious investing with real amounts of cash it's worth getting a broker that is serious at providing reliable service.
I personally see them at the Juul of the finance world. They're intentionally targeting young inexperienced people and telling them "just download this app and you'll be rich! all your friends are doing it, don't miss out!"
TDA, Fidelity, Webull, Interactive Brokers, Tasty works, ETrade, and more all make options just as accessible as RH.
I opened both Fidelity and E*Trade brokerage accounts in the last 3 weeks and it took minutes to submit options applications for both, at max levels. ET was approved instantly and Fidelity the next day. Not a single piece of paper from either one.
I remember reading when the original story broke that the negative balance / suicide happened over a weekend.
And about the the negative balance, I've had a similar story (with much less). The problem is that once a long-short vertical option expires worthless, Robinhood showed a negative balance for the full amount of the short position, even if you had a long position covering most of it. Because they don't update the available balance/money you made from the long side until it clears (which can take a few days).
I believe it was extremely bad UX on Robinhood's part, even my heart skipped a beat when I saw the negative bal, and that was for only 5k.
If all it took was a lie on an application for Robinhood to grant someone the ability to use extremely risky trading strategies, that's still Robinhood's fault. Robinhood isn't absolved of responsibility just because the student did something dishonest.
Given the fact he was 20 years old, his options application should have automatically been under a heightened degree of scrutiny, if not immediately rejected. That it wasn't indicates Robinhood is not responsibly implementing KYC controls, which is a huge deal.
In your world, do we blame casinos when someone goes in and gambles away their money? My naive perspective sees no difference. The concept of an individual being responsible for their own terrible choices really seems to have changed unbelievably in the last 20 years.
If Robinhood wants to carry same responsibility as casinos, they should call themselves a casino.
Then they will loose certain privileges like in UK it's illegal for casinos to provide leverage or 'gambling debt', they will be subject to payout percentage regulation, etc. https://www.casino.co.uk/guides/payout-percentages-rtp/
Try CTRL+F "suitability" for a five-second read of why the casino comparison doesn't apply here.
For the perspective that Robinhood owns his risk somehow, from not following their suitability guidelines, I'm not familiar with any of this so can't speak about it. Naively reading this, it appears to be extremely open ended, requiring a consistent internal process for approval, along with a warning, rather than anything specific.
The burden's on the firm to demonstrate why it believed the customer was qualified to trade the product, and to demonstrate that it made an effort to evaluate the customer's goals, finances, and needs.
> ... shall recommend to any customer any transaction ...
> ... that the recommended transaction is not suitable
Was Robinhood recommending transactions, or just enabling transactions? Even if not, this seems very open ended with no specifics, since “reasonable” is up for interpretation. I suppose we’ll see, probably sooner rather than later. I assume some actual specifics will result from all of this though.
I'm not excusing it. I'm just making an observation.
And I'm not blaming parents for that. The world has changed and it's harder than it used to be to simultaneously protect kids and give them room to grow.
By your logic, you might as sue all auto manufacturers for not installing BAC interlocks on the vehicles they sell, or all tobacco companies just because the users are too stupid to read the giant warning labels. That's not the society I want to live in.
Like this? https://www.cnbc.com/2020/12/16/robinhood-reportedly-facing-...
>all tobacco companies just because the users are too stupid to read the giant warning labels
Like this? https://www.publichealthlawcenter.org/topics/commercial-toba...
In our society, we hold companies responsible for being poor citizens. And "our users are stupid" is not a valid justification for being a poor citizen, whether you like that or not.
They have an investigation, but we'll see what it turns up. Remember, we work on an innocent until proven guilty basis.
If you're saying that companies need to be good citizens or we shut them down, then you should close almost all businesses. You don't think the other brokers take the same steps that RH does? I can tell you from the inside that they do.
When COVID/2008 hits the fan, its the young people on zero hour contract that loose their income first, landlords might loose some, and banks loose least.
If anything our system is setup so that the higher you are, the less consequences you face. I believe this is the new phenomenon and its not helped by 'kids these days, back in my day...'.
It is usually quite explicit that they are not providing investment advice with the online ones.
It is the company's job to make sure the screening process is not too permissive.
Do they have no process to talk to a customer who has lost a lot of money? This is not a rare freak event, it's key part of the business they are in. You'd think about this within the first 10 minutes of even entertaining the idea of starting a trading firm. Even the WSB reddit had a link to a suicide prevention hotline, how is RH more irresponsible than a random web forum.
We as a society don't need to bend over backwards to accomodate these zero-support business models - and especially not as the bedrock of our economy.
Lastly, I want to share a court case from Russia: for a few years it was common for banks to mass send out loan contracts in the post to random Tom, Dick and Harry. It would just appear in your postbox randomly, and if you countersign it you would get the money. One bloke scanned the document and amended it, he really went to town: increased the borrowing limit, put in a negative interest rate, etc. The bank signed it without realising. Obviously the bank sued, argued that their business model made it impossible to read every contract and the that the guy knew that.
The judge held up the contract, saying it wasn't the customers problem their business model involves spamming people and signing things without reading.
Isn't this a problem with most brokers? They all seem to require that you claim experience trading an asset class before they let you trade that asset class.
Many brokers seem to have gotten very lax about this in recent years, and even Schwab/Ameritrade allowed me to trade options without verifying anything. My guess is that the recent Robinhhood/GME fiasco is going to see FINRA cracking down hard and reinstating some strict verification procedures.
(I was still in college and did not know what I was doing, but fortunately only ended up losing a few hundred bucks.)
This isn't new - it's how it's worked for a good long while.
With older brokerage firms, they use to call you up after you signed up. You would have to chat with them on the phone before they unlocked your account.
It would be trivially simple to empty out your entire account by buying foolishly deep out-of-the-money options. (E.g. betting that GameStop shares will be worth $800 by the end of the week).
but the catch is that he didn't lose the money really ... it was a UX glitch that made him suicide
Could you please clarify, what does the application ask that he would have had to lie about?
I've been declined for top options levels before because my total net worth was too low even with years of actual options trading experience (including complicated multi-leg strategies).
There is a reasonable argument to be made that whatever minute price slippage customers might experience(which I believe isn't even supposed to be legal due to NBBO and Reg NMS? not an expert) due to payment for order flow is much less than the $10 commissions at deep discount retail brokerages and certainly than the $50 trades in the old days of calling up your friendly local rent seeking broker -- for typical robinhood sized equity transactions.
Robinhood has plenty of problems but they directly caused investors to be able to trade for free @ fidelity, vanguard, schwab, etc which is obviously a boon to consumers.
Also imo at least robinhood is somewhat up front about like 'the market is a zany gambling game' with their UX. Contrast with IBKR and TOS who heavily market their stuff to Serious Portfolio Dads With 4 Monitors and then ALSO do sheisty manipulation appearing stuff to "protect their clients from volatility." RH targeting a smaller computer and being colorful doesn't make it any worse than other discount retail brokerages shoving derivative trading platforms at unsophisticated retail.
I really do believe Robinhood is a net positive in the world because it has provided the lower classes the ability to more easily buy a small sliver of the means of production.
Most people lose money when they first start trading and investing. A lot of people are going through that the first time right now, but losing money in the market is the first step to making money in the market, and eventually I think this commission-free environment (paired with approachable apps) will build a great deal of financial competence among the general population.
Short put vertical: Underlying is at 392, sell 200 390P, buy 20 389P. Underlying moves to 387, counterparty exercises 20 ITM puts, now you’re long 2,000 shares at 390, you exercise your ITM 389P and sell 2,000 shares at 389 for a net $2,000 loss.
Long put vertical: Underlying at 392, buy 20 390P, sell 20 389P. Underlying moves to 387, counterparty exercises 20 ITM puts, now you’re long 2,000 shares at 389, you exercise your ITM 390P and sell 2,000 shares at 390 for a $2,000 net gain.
Either one of these would’ve shown a negative $780,000 balance when the early exercise happened, poor kid didn’t know it was recoverable.
https://i.imgur.com/a2JmlyQ.jpg
Of course, I have a fairly advanced understanding of options and knew it was mathematically impossible to have lost that amount, so to me it was just a humorous and quirky bug in some startup software.
What I think needs to be noted is that the only way this young man would have gotten access to the level of options required to place a trade like that was to deliberately lie on his account application. Someone who was qualified to have the level of trading access he had would have immediately known he wasnt $780k in the hole. So while Robinhood wrote some bad code, there is some personal responsibility that should be assigned here. Such a sad situation.
But Robinhood obviously makes no attempt to verify the answers. If two kids, one riding on the other’s shoulders inside of a trench coat walked into a bank and claimed to be an adult, you’d put at least some blame on the bank if those kids walked out with a loan.
A kid lying to an adult is different from an adult lying to an adult.
I recently applied for (and was granted) the ability to trade options.
For the question "How long have you been trading options?" I wrote "never - because I can't yet".
My application was approved.
If each party only makes the one trade and has no other securities in his portfolio, maybe. That's almost never the case.
For example, if you're a market maker at Goldman Sachs and you sell 10k calls to a hedge fund, you want the stock to go up monotonically and gradually so that the customer profits on direction, you profit on volatility, and you can make money on the unwind trade as well. Win-win.
I was sued for $55MM this year after my (now former) business partner lost $5MM to Vietnamese mafia which triggered a loss for a customer.
Was crazy, but I took a deep breath and realized worse case was personal bankruptcy if they pierced the LLC.
The worse case scenario for this kid would have been 7 years of bad credit (had he lost $750k).
There were some deeper things going on in his life and family system that no one is talking about.
Oh, I ended up selling my position to my partner, getting indemnified and walking away with a few hundred grand (some still be to paid). It was super stressful, and I’m really grateful I’ve learned how to process painful experiences (I work as a mindset coach to billionaire tech founders).
I'm not a fan of the argument "they shouldn't have let him make decisions he didn't understand" because I believe the onus is on us to know what we are doing before we do it, and arguments like these are what led us to our current regulatory framework disallowing investors into markets unless they meet capital requirements, essentially pricing everyone but rich people out of markets.
PSA: Please use a real brokerage when participating in capital markets. Fidelity is my recommendation, but others are at parity if not close. No one should be using Robinhood.
Do it on a desktop, and know what you're doing.
> The suit says that Kearns made three attempts to contact Robinhood customer service regarding the massive underwater balance. However, his messages were met with automated replies, according to the complaint.
I wonder how the people who set up a brokrage dealing with people's hard earned money in such a way you couldn't get in contact with a human easily must feel after hearing this?
I get calls from Morgan Stanley just because a of a form error while initiating a transfer asking if I'd like them to do it for me, and RH is over here (wrongfully) telling people they're down almost a million dollars and then sending them to voicemail.
Even though it was a bug, you'd think there'd be some provision for this, like if an account suddenly went that far in the negative they'd freeze the account and contact you immediately (and yes, people will point out that means they can't sell if it bounces back, but if you actually owe RH 750k I'm pretty sure all your positions will be liquidated before you can cough...)
Perhaps they're hoping to be the Google of the finance industry /s
I love Google, use it all the time.
It's easy to complain, lots of companies tried and failed to comlete with it.
I have received almost immediate support from a real human every single time I've contacted Google (dozens of times). This includes chat, email, and even phone support initiated by them... and I live in the a "third world" country in the middle of the Pacific Ocean, and earn them no more than two figures a month.
In my experience, Google provides stellar support.
This is anecdotal. Here is a high-profile counter-experience to yours:
https://news.ycombinator.com/item?id=26061935
When dealing with large companies we must consider trends, not individual points. This same line of thinking is what causes climate-change-deniers to point at snow on the ground and say its all a hoax.
In fact wasn't the Terraria developer who randomly got banned by Google just on the front page yesterday?
Seriously, people have done that - and Robinhood is too incompetent to follow up or take legal action.
This is a very known thing with spread positions, can be verified by just googling for a few minutes. And while his death is a tragedy that was easily avoidable, I don't think that it is fair to blame RH for this man's failure to do less than a few minutes of googling.
Important to note, this isn't unique to RH, this is pretty much how every broker displays that specific kind of a trade in their UI. And it isn't because they are all bad at UI, but because it is indeed an accurate representation of the state of the account at that moment. You just gotta make sure you actually understand the information you are looking at. And if you are doing option spreads with even the most basic knowledge of those, you should already be able to easily understand what those charts are actually displaying.
Not even mentioning that the parents claim he opened a trading account and started trading options as a college freshman, which is kind of impossible to get an approval for from RH (or any other broker) unless you make a lot of money already or lie on the application. And we know he didn't make a lot of money, because some of the headlines on the matter have mentioned "RH trader with no income manages to open a $750k position". So he indeed went around the rules (and the law) by lying to get a permission from the broker to trade options. Not trying to blame him for what happened, the situation is just unfortunate all around. I am simply struggling to think of anyone who could be honestly and justly blamed for this situation, aside from, maybe, his parents. But even that is a stretch.
"this man's failure to do less than a few minutes of googling" is true if you know what to google, but not if you are clueless.
Setting up OAuth is a few minutes of googling to me, but not to the boss of my boss.
I agree with you overall, but I don't think I am being unfair to the kid. That's the entire reason why I am extremely hesitant to say that it was all his own fault. I don't think it was purely his fault. And there is a reason safeguards for trading options exist, but he was smart enough to google what specifically he should lie about on that application to get the permission for trading options from his broker.
>"this man's failure to do less than a few minutes of googling" is true if you know what to google, but not if you are clueless.
>Setting up OAuth is a few minutes of googling to me, but not to the boss of my boss.
Makes perfect sense. But if the boss of your boss goes around the company rules, gets access to modifying live prod (by lying to whoever is in charge of granting permissions), and then makes some clueless changes to OAuth in prod that end up bringing down the entire auth infrastructure, I don't think it would be fair to blame OAuth for this. Not a perfect analogy, given that the kid didn't actually blow his account, he just couldn't read the charts for the type of options he was trading. But the main point of what i am trying to illustrate with that analogy still holds.
That's a tough one, but I presume he did try to google things before offing himself? Or do you think he just panicked?
We've had issues with people lying on online prescription forms in the UK and getting opioids and other controlled substances. Once one person has got them, the 'right answers' spread online and tons of less-informed folks get in. I don't think you can rely on any online form without checking documents.
Total guess and speculation, but I think it is the latter. Because, at the time when this happened, I knew way less about option spreads than he did (I only knew that it involved two option legs), so I decided to search online to find out whether what he saw on the chart was normal or not.
Took me barely a few mins until I found a bunch of posts with people asking a similar question at many random points in time, with answers confirming that it was totally normal. And that was with my almost-non-existent level of knowledge about option spreads.
>We've had issues with people lying on online prescription forms in the UK and getting opioids and other controlled substances. Once one person has got them, the 'right answers' spread online and tons of less-informed folks get in. I don't think you can rely on any online form without checking documents.
Solid point, but most people can easily guess "correct" answers for brokerages specifically. It is just about earnings, and your experience with options. Maybe a few other basic questions of a similar type, like your employment situation or your personal risk assessment of your profile (been a while for me, so I forgot the details). Since it is a multiple-choice dropdown, you can just pick a really high earnings number and then for the other question pick "multiple years of experience trading options" (or something like that). While with your opioid example, i can totally imagine what kind of an advice people online would give, since the situation with that is a bit less trivial.
To be honest, however, I assumed they were checking this info on some level before granting a permission to trade options. But I am not gonna comment on that, as I have zero knowledge of how they process those permission checks. My permission for options was granted naturally through trading for a couple of years and slowly getting more accustomed to the whole process, so I didn't give much thought to that process.
However, it's impossible to see every risk that comes the way of your loved ones.
I've always done my trading through Schwab, and my experience has been worlds different from what I read in the news about Robinhood. Schwab hasn't restricted the trading of any stocks or options, and they make professional support as available as air. Whether it's technical issues or basic investment advice, I can easily get in touch with them by phone or email.
Then later after his death, he received another email from Robinhood:
"Great news! We're reaching out to confirm that you've met your margin call and we've lifted your trade restrictions."
Did Robinhood's margin call system make a mistake?
The messaging around this is terrifying because it is all boilerplate risk management stuff -- nothing you'd expect if you were naively engaged in a controlled risk spread.
The thing to keep in mind is that RH won't let you engage in infinite risk positions. So, if this happens, take a deep breath and maybe re-read a few sections on Investopedia.
Some initial thoughts that may be wildly off the mark:
1. Is it pertinent that he was a college student in a world where student loans are eating the futures of students while not giving them the good careers they thought it guaranteed?
2. Is it pertinent that the rich have gotten richer and the poor have gotten poorer during the pandemic? It's kind of a winner-take-all economy and we just crap all over everyone else and then blame them as lazy whiners who need to try harder and basically tell them "shut up!" if they try to point out "I'm doing all I can and it's never enough because the system is broken."
3. If you aren't one of the "winners" you get kind of this dystopian reality where you can't get health coverage, you can't get housing, once you are homeless no one wants to hire you so escaping seems nigh impossible, etc.
4. We have raised the ceiling on our economy and put in no floor. Then we wonder when folks slip through the cracks.
5. If you have overwhelming real world problems such that it makes you think suicide is your only option and you try to talk to someone, you will most likely be dismissed as "mentally ill" for being suicidal.
This is tragic and I assume Robinhood does need to handle things differently, but I can't help but wonder what this says about or how this relates to other societal issues in the US today.
This is not to lessen the tragedy of this situation in any way. Acknowledging a tragedy doesn't have to involve trying to find a sue-able party to blame it on.
Note that I'm not excusing the current financial system that has basically become legalized gambling more or less (like options and shorting).
I am not a RH user but I expect that to get started you have to transfer in money. To do anything with leverage (options, etc.) you certainly have to opt-in to additional agreements including indicating that you understand the risks, etc. Ultimately the steps of "wiring money in" or accepting "I understand I can lose more than I invested" should trigger something in your brain. And if it doesn't unfortunately you have to pay the price rather than somehow making the whole activity illegal.
Obviously this is a terrible situation for the family, but it's also a reminder that parents need to teach their kids common sense. For example: there's no free lunch. If your kid at 20 has the brain that says "oh duh there's free money here" you kinda messed up.
It will be settled out of court.
Kharma is a bitch, and when you build a business based on virtue signaling and lies you had better expect for it to come back and bite you.