Risk Management

Robinhood Faces Lawsuits Ahead of 2021 IPO

A user's suicide and the app's temporary restrictions on trading GameStop shares have generated numerous lawsuits.
Vincent RyanFebruary 10, 2021

Trading app Robinhood is facing legal hurdles ahead as it prepares for what could be one of the largest IPOs of 2021.

What Happened: This week, the family of Robinhood user Alex Kearns, who committed suicide after racking up large losses on Robinhood, sued the company, stating that its “reckless conduct directly and proximately caused the death of one of its victims.”

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Robinhood is also facing dozens of lawsuits related to its bans and restrictions of GameStop and other popular r/WallStreetBets stocks in recent weeks after the Reddit group drove a pump-and-dump short squeeze that sent share prices skyrocketing.

Robinhood has said that the backlash from the GameStop drama has not deterred its plans for going public. Yet the backlash from the trading restrictions may have damaged Robinhood’s reputation and valuation.

It may also make Robinhood’s stock a target for the same retail traders who feel they were treated unfairly by the company during the height of the short squeeze.

Robinhood has said it restricted trading in certain stocks in an attempt to protect its customers.

One situation Robinhood was likely looking to avoid is another incident like the one that is the subject of the Kearns lawsuit. The 20-year-old student took his own life after making a complex option trade and mistakenly believing he had racked up $730,000 in losses in his Robinhood account.

Kearns reportedly emailed Robinhood’s customer support team to ask for clarification but took his own life after receiving only auto-generated replies.

A Robinhood spokesperson told CNBC this week: “We were devastated by Alex Kearns’ death. Since June, we’ve made improvements to our options offering.”

Benzinga’s Take: As of 2020, Robinhood was valued at about $11 billion, but it’s unclear how much the negative press and user backlash surrounding the GameStop fiasco may have impacted that value.

It’s also unclear how much of a grudge r/WallStreetBets and other traders will hold toward Robinhood’s stock if and when it goes public.

This story originally appeared on Benzinga.

© 2021 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.