20-Year-Old Robinhood Customer Dies By Suicide After Seeing A $730,000 Negative Balance

Jun 17, 2020

The note found on his computer by his parents on June 12, 2020, asked a simple question. “How was a 20 year old with no income able to get assigned almost a million dollars worth of leverage?” The tragic message was written by Alexander E. Kearns, a 20-year-old student at the University of Nebraska, home from college and living with his parents in Naperville, Illinois. Earlier that day, Kearns took his own life.

Like so many others, Kearns took up stock investing during the pandemic, signing up with Millennial-focused brokerage firm Robinhood, which offers commission-free trading, a fun and easy-to-use mobile app and even awards new customers free shares of stock. During the first quarter of 2020, Robinhood added a record 3 million new accounts to its platform. As the Covid-19 stock market swung wildly, Kearns had begun experimenting, trading options. His final note, filled with anger toward Robinhood, says that he had “no clue” what he was doing.

In fact, a screenshot from Kearns’ mobile phone reveals that while his account had a negative $730,165 cash balance displayed in red, it 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.





Silicon Valley-based Robinhood is not sharing details of Kearns’ account, citing privacy concerns: “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.”

It’s impossible to know all of the factors contributing to suicide, especially in young people. Still, the tragic demise of Alexander Kearns is a cautionary tale of the serious risks associated with the race to the bottom in the brokerage business. Robinhood, E-Trade, TD Ameritrade, Charles Schwab, Interactive Brokers, Fidelity and even Merrill Lynch have all embraced commission-free trading and zero-minimum balances in an effort to attract younger customers, many of whom have little understanding of the securities and markets they are dabbling in.

“I thought everything was going fine,” says Bill Brewster, Kearns’ cousin-in-law and a research analyst at Chicago-based Sullimar Capital Group. His father said he was loving the markets and really enjoying investing, Brewster told Forbes, “and then on Friday night, we got this call from his mom, and he had died.”

Kearns apparently fell into despair late Thursday night after looking at his Robinhood account, which appeared to have $16,000 in it but also showed a cash balance of negative $730,165. In his final note, seen by Forbes, Kearns insisted that he never authorized margin trading and was shocked to find his small account could rack up such an apparent loss.

“When he saw that $730,000 number as a negative, he thought that he had blown up his entire future,” says Brewster. “I mean this is a kid that when he was younger was so conscious about savings.”

Although Robinhood won’t release the details of his account, it‘s possible that Kearns was trading what’s known as a “bull put spread.” Put options give buyers the right to sell the stock at the strike price anytime until expiration, while put-sellers are on the hook to buy the underlying stock at the strike price, if assigned. This happens automatically at expiration if the price of the underlying stock closes that day at a price one penny or more below the strike price.

In Kearns’ note, he says that the puts he bought and sold “should have cancelled out,” because normally a bull put spread involves selling put options at a higher strike price, and buying puts at a lower strike price, both with the same expiration. The trade generates a net credit, which the options trader keeps if the stock price stays above the higher strike price through expiration. It’s generally considered a limited risk strategy because the simultaneous purchase and sale of put options means the maximum loss on a per-share basis is the difference between the strike prices, less the amount earned when the puts are sold initiating the trade.

There can be wrinkles, however, when the price of the underlying stock at expiration is between the two strike prices, or in the case of early assignment, which may have occurred in Kearns’ account.

Here’s an example of how a bull put spread could produce an unexpectedly large stock position in your portfolio. On June 16, Amazon (AMZN) trades at $2,615 per share. If you’re neutral to bullish on Amazon, you could sell put options that expire on July 17 with a $2,615 strike price for $28 per option. To limit your risk, the other leg of the trade is to purchase puts at a lower strike price, $2,610, for a cost of $26. That two-dollar differential (multiplied by 100) generates $200 for every contract you sell. Do three contracts and you generate $600. If Amazon closes on July 17 above $2,615, you’re in the clear and keep all of the proceeds, as both puts expire worthless. If the stock closes below $2610, you will encounter your maximum loss of $900: $5.00 (difference between strike prices) minus $2.00 (proceeds earned up front) times three contracts.

When the stock closes between the two strike prices, the put you bought at the lower strike price expires worthless, but the one you sold is in the money and legally binds you to buy the stock at the strike price. In the case of three contracts of $2,615 Amazon puts, that would be $784,500 to purchase 300 shares. Over a weekend, say, you may see a –$784,500 debit to buy the stock, but you would not see the stock among your holdings until Monday.

Kearns may not have realized that his negative cash balance displaying on his Robinhood home screen was only temporary and would be corrected once the underlying stock was credited to his account. Indeed it’s not uncommon for cash and buying power to display negative after the first half of options are processed but before the second options are exercised -- even if the portfolio remains positive.

“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 Brewster referring to the shower of colorful confetti Robinhood routinely deploys after customers make trades. “They try to gamify trading and couch it as investment.”

Says Robinhood: “We are committed to continuously improving our platform and are reviewing our options offering to determine if any changes may be appropriate.”

Robinhood Has Lured Young Traders, Sometimes With Devastating Results

July 8, 2020

Richard Dobatse, a Navy medic in San Diego, dabbled infrequently in stock trading. But his behavior changed in 2017 when he signed up for Robinhood, a trading app that made buying and selling stocks simple and seemingly free.

Mr. Dobatse, now 32, said he had been charmed by Robinhood’s one-click trading, easy access to complex investment products, and features like falling confetti and emoji-filled phone notifications that made it feel like a game. After funding his account with $15,000 in credit card advances, he began spending more time on the app.

As he repeatedly lost money, Mr. Dobatse took out two $30,000 home equity loans so he could buy and sell more speculative stocks and options, hoping to pay off his debts. His account value shot above $1 million this year — but almost all of that recently disappeared. This week, his balance was $6,956.

“When he is doing his trading, he won’t want to eat,” said his wife, Tashika Dobatse, with whom he has three children. “He would have nightmares.”

Millions of young Americans have begun investing in recent years through Robinhood, which was founded in 2013 with a sales pitch of no trading fees or account minimums. The ease of trading has turned it into a cultural phenomenon and a Silicon Valley darling, with the start-up climbing to an $8.3 billion valuation. It has been one of the tech industry’s biggest growth stories in the recent market turmoil.

But at least part of Robinhood’s success appears to have been built on a Silicon Valley playbook of behavioral nudges and push notifications, which has drawn inexperienced investors into the riskiest trading, according to an analysis of industry data and legal filings, as well as interviews with nine current and former Robinhood employees and more than a dozen customers. And the more that customers engaged in such behavior, the better it was for the company, the data shows.

More than at any other retail brokerage firm, Robinhood’s users trade the riskiest products and at the fastest pace, according to an analysis of new filings from nine brokerage firms by the research firm Alphacution for The New York Times.

In the first three months of 2020, Robinhood users traded nine times as many shares as E-Trade customers, and 40 times as many shares as Charles Schwab customers, per dollar in the average customer account in the most recent quarter. They also bought and sold 88 times as many risky options contracts as Schwab customers, relative to the average account size, according to the analysis.

The more often small investors trade stocks, the worse their returns are likely to be, studies have shown. The returns are even worse when they get involved with options, research has found.

This kind of trading, where a few minutes can mean the difference between winning and losing, was particularly hazardous on Robinhood because the firm has experienced an unusual number of technology issues, public records show. Some Robinhood employees, who declined to be identified for fear of retaliation, said the company failed to provide adequate guardrails and technology to support its customers.

Those dangers came into focus last month when Alex Kearns, 20, a college student in Nebraska, killed himself after he logged into the app and saw that his balance had dropped to negative $730,000. The figure was high partly because of some incomplete trades.

“There was no intention to be assigned this much and take this much risk,” Mr. Kearns wrote in his suicide note, which a family member posted on Twitter.
Like Mr. Kearns, Robinhood’s average customer is young and lacks investing know-how. The average age is 31, the company said, and half of its customers had never invested before.

Some have visited Robinhood’s headquarters in Menlo Park, Calif., in recent years to confront the staff about their losses, said four employees who witnessed the incidents. This year, they said, the start-up installed bulletproof glass at the front entrance.

“They encourage people to go from training wheels to driving motorcycles,” Scott Smith, who tracks brokerage firms at the financial consulting firm Cerulli, said of Robinhood. “Over the long term, it’s like trying to beat the casino.”

At the core of Robinhood’s business is an incentive to encourage more trading. It does not charge fees for trading, but it is still paid more if its customers trade more.

That’s because it makes money through a complex practice known as “payment for order flow.” Each time a Robinhood customer trades, Wall Street firms actually buy or sell the shares and determine what price the customer gets. These firms pay Robinhood for the right to do this, because they then engage in a form of arbitrage by trying to buy or sell the stock for a profit over what they give the Robinhood customer.

This practice is not new, and retail brokers such as E-Trade and Schwab also do it. But Robinhood makes significantly more than they do for each stock share and options contract sent to the professional trading firms, the filings show.

For each share of stock traded, Robinhood made four to 15 times more than Schwab in the most recent quarter, according to the filings. In total, Robinhood got $18,955 from the trading firms for every dollar in the average customer account, while Schwab made $195, the Alphacution analysis shows. Industry experts said this was most likely because the trading firms believed they could score the easiest profits from Robinhood customers.
Vlad Tenev, a founder and co-chief executive of Robinhood, said in an interview that even with some of its customers losing money, young Americans risked greater losses by not investing in stocks at all. Not participating in the markets “ultimately contributed to the sort of the massive inequalities that we’re seeing in society,” he said.

Mr. Tenev said only 12 percent of the traders active on Robinhood each month used options, which allow people to bet on where the price of a specific stock will be on a specific day and multiply that by 100. He said the company had added educational content on how to invest safely.

He declined to comment on why Robinhood makes more than its competitors from the Wall Street firms. The company also declined to provide data on its customers’ performance.

Robinhood does not force people to trade, of course. But its success at getting them do so has been highlighted internally. In June, the actor Ashton Kutcher, who has invested in Robinhood, attended one of the company’s weekly staff meetings on Zoom and celebrated its success by comparing it to gambling websites, said three people who were on the call.

Mr. Kutcher said in a statement that his comment “was not intended to be a comparison of business models nor the experience Robinhood provides its customers” and that it referred “to the current growth metrics.” He added that he was “absolutely not insinuating that Robinhood was a gambling platform.”

Robinhood was founded by Mr. Tenev and Baiju Bhatt, two children of immigrants who met at Stanford University in 2005. After teaming up on several ventures, including a high-speed trading firm, they were inspired by the Occupy Wall Street movement to create a company that would make finance more accessible, they said. They named the start-up Robinhood after the English outlaw who stole from the rich and gave to the poor.

Robinhood eliminated trading fees while most brokerage firms charged $10 or more for a trade. It also added features to make investing more like a game. New members were given a free share of stock, but only after they scratched off images that looked like a lottery ticket.

The app is simple to use. The home screen has a list of trendy stocks. If a customer touches one of them, a green button pops up with the word “trade,” skipping many of the steps that other firms require.

Robinhood initially offered only stock trading. Over time, it added options trading and margin loans, which make it possible to turbocharge investment gains — and to supersize losses.

The app advertises options with the tagline “quick, straightforward & free.” Customers who want to trade options answer just a few multiple-choice questions. Beginners are legally barred from trading options, but those who click that they have no investing experience are coached by the app on how to change the answer to “not much” experience. Then people can immediately begin trading.

Before Robinhood added options trading in 2017, Mr. Bhatt scoffed at the idea that the company was letting investors take uninformed risks.

“The best thing we can say to those people is ‘Just do it,’” he told Business Insider at the time.

In May, Robinhood said it had 13 million accounts, up from 10 million at the end of 2019. Schwab said it had 12.7 million brokerage accounts in its latest filings; E-Trade reported 5.5 million.

That growth has kept the money flowing in from venture capitalists. Sequoia Capital and New Enterprise Associates are among those that have poured $1.3 billion into Robinhood. In May, the company received a fresh $280 million.

“Robinhood has made the financial markets accessible to the masses and, in turn, revolutionized the decades-old brokerage industry,” Andrew Reed, a partner at Sequoia, said after last month’s fund-raising.

Mr. Tenev has said Robinhood has invested in the best technology in the industry. But the risks of trading through the app have been compounded by its tech glitches.

In 2018, Robinhood released software that accidentally reversed the direction of options trades, giving customers the opposite outcome from what they expected. Last year, it mistakenly allowed people to borrow infinite money to multiply their bets, leading to some enormous gains and losses.

Robinhood’s website has also gone down more often than those of its rivals — 47 times since March for Robinhood and 10 times for Schwab — according to a Times analysis of data from Downdetector.com, which tracks website reliability. In March, the site was down for almost two days, just as stock prices were gyrating because of the coronavirus pandemic. Robinhood’s customers were unable to make trades to blunt the damage to their accounts.

Four Robinhood employees, who declined to be identified, said the outage was rooted in issues with the company’s phone app and servers. They said the start-up had underinvested in technology and moved too quickly rather than carefully.

Mr. Tenev said he could not talk about the outage beyond a company blog post that said it was “not acceptable.” Robinhood had recently made new technology investments, he said.

Plaintiffs who have sued over the outage said Robinhood had done little to respond to their losses. Unlike other brokers, the company has no phone number for customers to call.

Mr. Dobatse suffered his biggest losses in the March outage — $860,000, his records show. Robinhood did not respond to his emails, he said. A Robinhood spokesman said the company did respond.

Mr. Dobatse said he planned to take his case to financial regulators for arbitration.

“They make it so easy for people that don’t know anything about stocks,” he said. “Then you go there and you start to lose money.”

Mr. Dobatse took out two $30,000 home equity loans so he could buy and sell more speculative stocks and options, hoping to pay off his debts. His account value shot above $1 million this year — but almost all of that recently disappeared. This week, his balance was $6,956.

This start-up promised higher interest rates on savings. Now some customers are struggling to get their money back

Wed, Oct 28 2020

The ads popped up on social media. Earn as much as 7% interest on your savings by opening an account with a new start-up.

In this historically low interest rate environment — when the average savings account pays just 0.09% annual percentage yield — the offer might have sounded too good to be true.

Many of the company’s customers are now wondering if indeed it was.

A joint investigation by CNBC TV and CNBC.com has found that Beam Financial is having trouble processing customer withdrawals. Some users CNBC spoke with say their withdrawal transactions have been pending for months and that repeated attempts to get answers and updates from Beam have either gone unanswered or were not useful. Many of these email and text updates from Beam put the blame on the company’s bank partners or vendors.

San Francisco-based Beam launched in September 2019 and promoted itself as the “first mobile high-interest bank account designed for the 99%.”

Brandon Earl, 36, of Meridian, Idaho, opened an account with Beam depositing the maximum the company would let him put in, $15,000, earlier this year.

He heard about Beam through a friend, and also saw ads on Facebook and Instagram.

“I started off with a little bit, to make sure it was all legit, and did my own research to make sure it was good, and felt like it was,” Earl said.

His goal was to grow the money, particularly to eventually help pay for his children’s college educations. He has a 5-year-old and 2-year-old, and a baby on the way.

He decided in August to withdraw his money and invest it elsewhere. That’s when his problems began.

At first, he got no response from the company. Then, he received a message explaining there were delays due to Covid-19.

From there, it got worse, Earl said. Beam’s app temporarily went down in September.

Then, Earl started reading online reviews and saw other Beam customers who were experiencing the same difficulty withdrawing their funds.

“It’s now been over two months and I still haven’t seen my money,” Earl said.

“It’s been stressful, trying to think of what’s going to happen to my money and if I just got scammed,” he said.

Now, multiple Beam customers who spoke with CNBC said they are also facing long delays after trying to get their money out. It is unknown how many customers are affected or how much total money is at stake.


[ . . . ]

Feds Seized Robinhood CEO's Phone in GameStop Trading Halt Investigation

Robinhood says it is being widely investigated over its role in January's GameStop bonanza; is subject to at least 49 class action lawsuits.
....

• Robinhood's opening price was $38 per share, valuing the stock trading app at roughly $32 billion.

Robinhood Announces Data Security Incident

November 8, 2021

Late in the evening of November 3, we experienced a data security incident. An unauthorized third party obtained access to a limited amount of personal information for a portion of our customers. Based on our investigation, the attack has been contained and we believe that no Social Security numbers, bank account numbers, or debit card numbers were exposed and that there has been no financial loss to any customers as a result of the incident.

The unauthorized party socially engineered a customer support employee by phone and obtained access to certain customer support systems. At this time, we understand that the unauthorized party obtained a list of email addresses for approximately five million people, and full names for a different group of approximately two million people. We also believe that for a more limited number of people -- approximately 310 in total -- additional personal information, including name, date of birth, and zip code, was exposed, with a subset of approximately 10 customers having more extensive account details revealed. We are in the process of making appropriate disclosures to affected people.

After we contained the intrusion, the unauthorized party demanded an extortion payment. We promptly informed law enforcement and are continuing to investigate the incident with the help of Mandiant, a leading outside security firm.

“As a Safety First company, we owe it to our customers to be transparent and act with integrity,” said Robinhood Chief Security Officer Caleb Sima. “Following a diligent review, putting the entire Robinhood community on notice of this incident now is the right thing to do.”

If you are a customer looking for information on how to keep your account secure, please visit Help Center > My Account & Login > Account Security. When in doubt, log in to view messages from Robinhood—we’ll never include a link to access your account in a security alert.

Robinhood shares tank after it loses users, forecasts weak revenue

Thu, Jan 27 2022

Stock-trading app Robinhood gave a bleak revenue forecast for the first quarter of 2022 on Thursday as its latest earnings report showed a decline in users.

The newly public brokerage anticipates first-quarter revenue of less than $340 million, down 35% compared with 2021.Wall Street’s consensus estimate was for $448.2 million in revenue for Q1, according to FactSet.

Monthly active users fell to 17.3 million last quarter from 18.9 million in the third quarter. This number was also below estimates of 19.8 million, according to FactSet.

Meanwhile, net cumulative funded accounts totaled 22.7 million at the end of the fourth-quarter, about in-line with estimates. This is up from 22.4 million accounts in the third-quarter. To be sure, Robinhood added 10 million accounts alone in 2021.

For the fourth quarter, Robinhood reported a net loss of $423 million, or a 49 cent loss per diluted share, wider than the 45 cent loss estimate collected by Refinitiv. However, Robinhood posted $363 million in revenue in the final three months of 2021, slightly above analysts expectations of $362.1 million.

Robinhood is about to face its toughest comps in the first and second quarters of 2022 following its record year in 2021 from events like the GameStop short squeeze.

Robinhood’s stock is more than 86% off its most recent high since the trading app’s July 2021 public debut. Shares are down more than 34% in January, bringing its market capitalization to less than $10 billion.

Fourth-quarter transaction-based revenue was $264 million. Options trading made up $163 million, cryptocurrency trading added $48 million and equities contributed $52 million to transaction based revenue in Q4.

Revenue from crypto has been declining since the second quarter of 2021. After a banner $233 million in the second quarter of 2021, crypto-based revenue was only $51 million in the third quarter. And Thursday’s report shows its continuing to decline.

Robinhood’s assets under custody rose to $98 billion on an annualized basis. Average revenue per user decreased by 39% to $64 year over year from $106.

Robinhood stock falls more than 11% after quarterly miss, fewer users

April 28, 2022

Robinhood Markets Inc. shares fell more than 11% late Thursday after company missed Wall Street expectations for its first quarter and said it saw fewer people trading equities, crypto and options on its online platform, blaming the missteps on the “macroeconomic environment.”

Robinhood said it lost $392 million, or 45 cents a share, in the quarter, compared with a net loss of $1.4 billion, or $6.26 a share, in the year-ago period.

Revenues fell 43% to $299 million, compared with $522 million in the first quarter of 2021.

FactSet consensus called for a loss of 38 cents a share on sales of $355 million.

Transaction-based revenue fell 48% to $218 million, including a 39% drop for cryptocurrency revenues and a 73% decline for equities revenue, the company said.

Monthly active users fell by 10% to 15.9 million in March 2022, compared with 17.7 million for March 2021, Robinhood said. The number of active users fell 8% as compared with December 2021, mostly thanks to users with lower balances engaging “less in the current market environment,” the company said

Robinhood soars 22% following report that Sam Bankman-Fried's FTX could acquire the brokerage firm

June 27, 2022

Robinhood stock popped as much as 22% on Thursday following a Bloomberg report that Sam Bankman-Fried's FTX was exploring a buyout of the brokerage firm.

The merger would be of little surprise given that Bankman-Fried personally disclosed a 7.6% stake in Robinhood last month, calling its current valuation "cheap."

A potential merger between the two would bolster FTX's stock trading aspirations and give the company more scale, as Robinhood has nearly 23 million accounts. A merger would also be a shot in the arm for Robinhood's crypto trading operations, which recently launched a long-awaited wallet feature.

Citing people with knowledge of the matter, Bloomberg reported that FTX is deliberating internally on how to buy Robinhood. No formal offer has been made, and there are no official talks currently underway between Robinhood and FTX.

"We are excited about Robinhood's business prospects and potential ways we could partner with them. That being said, there are no active M&A conversations with Robinhood," Bankman-Fried told Bloomberg. A spokesman for Robinhood declined to comment on the report.

A deal between FTX and Robinhood would require approval from Robinhood co-founders Vlad Tenev and Baiju Bhatt, who control more than 50% of the company's voting power, according to filings made with the SEC.

Depending on the price, a deal could be a quick exit for Tenev and Bhatt, who have experienced a bumpy ride as a public company. After going public in July, Robinhood stock briefly soared 156% before losing more than 90% in value. The stock is down 76% from its IPO price of $38 per share.

Robinhood's valuation of $32 billion at its IPO now stands at a paltry $7 billion thanks to an ongoing decline in the stock market, cryptocurrencies, and waning retail trading activity.