A 20-year-old customer of zero-commission brokerage Robinhood took his own life after seeing his account show a negative $730,000 cash balance that may have been merely a temporary balance, according to news reports.
Alexander Kearns, a resident of Naperville, Ill., was pronounced deceased at a railroad crossing in Naperville by the Will County Coroner’s office on June 12, after he was struck by a train, according to WJOL.com.
Kearns, a University of Nebraska student who was home from college and living with his parents in Naperville, allegedly took his own life, according to Forbes.
While all the factors contributing to suicide are impossible to determine, Kearns’ parents found a note on June 12 showing the young man’s despair about the negative Robinhood balance, according to the publication:
Kearns also wrote in the note that he didn't authorize margin trading on the account, according to Forbes.
Kearns’ account appeared to have $16,000, but it also showed a negative cash balance of $730,165, the publication writes.
However, that “may not have represented uncollateralized indebtedness at all, but rather his temporary balance until the stocks underlying his assigned options actually settled into his account,” according to Forbes.
Robinhood has not released details on Kearns’ account, citing privacy concerns, the publication writes.
One possible explanation, however, is that Kearns had been trading a strategy known as a “bull put spread,” which involves selling put options at a higher strike price while at the same time buying puts, with the same expiration date, at a lower strike price, according to Forbes.
As long as the price of the underlying stock is above the higher strike price, the strategy generates a profit, while the maximum risk is limited to the difference between the strike prices, minus the amount earned from the original sale of the puts, the publication writes.
In his note, Kearns wrote that the puts he bought and sold should have canceled out, according to Forbes.
“Tragically, I don’t even think he made that big of a mistake. This is an interface issue, they have slick interfaces. Confetti popping everywhere,” says Bill Brewster, Kearns’ cousin-in-law and a research analyst at Chicago-based Sullimar Capital Group, referring to the colorful confetti Robinhood displays after customers make trades, according to Forbes. “They try to gamify trading and couch it as investment.”
“All of us at Robinhood are deeply saddened to hear this terrible news and we reached out to share our condolences with the family over the weekend,” the company says in a statement cited by the publication.
Kearns started investing during the pandemic, signing up with Robinhood, Forbes writes. The company opened a record 3 million new accounts in the first quarter of 2020, according to the publication.
But Robinhood also suffered several outages on its platform in March, with customers unable to execute trades. The company offered to reimburse some of the customers affected by the outages, but it’s also facing at least three lawsuits over the glitches.
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Jun. 18, 2020 at 09:52 AM EDT
Sad state of legalized gambling. I'd like to blame Robinhood but Jay Powell and his clown posse are really where the "buck stops" (or gets electronically printed into infinity). This speculative type of behavior is sanctioned by a Fed gone rogue. If his parents are willing to pick up the gauntlet and pursue a suit I would sue the Fed and Jay Powell personally. As the "Federal Reserve" is not a federal agency, Jay Powell cannot be covered by qualified or sovereign immunity. Maybe then, they would get justice for their lost son and we would get some financial accountability.
Jun. 19, 2020 at 11:06 AM EDT
I believe you mean the SEC.