The protection that the financial regulators have factored into the market trading regulations as a protection with regard novice investors is there for a very good reason, one that has been starkly demonstrated by the tragic suicide of a 20-year old young man in California who started trading in the markets with no experience or proper understanding of the markets. His lack of knowledge led him to misinterpret an automated notification where he believed he had incurred enormous losses which neither he nor his family could pay.
Demetri Benzaintes, a junior associate in the financial and banking litigation team, commented "the stock markets and their countless ways of trading takes years of experience to fully understand, therefore investment brokers prevented from encouraging inexperienced investors to trade in the more risky aspects of market trading and are obliged to take steps to ascertain whether an investor is a novice or an experienced trader with comprehensive knowledge of the markets" Demetri further pointed out "the rules are frequently flouted by rogue investment brokers to scam inexperienced individuals who have little or no knowledge of trading in the markets. They depend on their inexperience and failure to recognise the impossibility of the proposed returns on investment."
According to a wrongful death lawsuit filed in the California state court (Santa Clara County) on Monday 8 February 2020, the family of a novice stock trader are seeking damages against Robinhood, an automated investment platform. The claimants, Mr and Mrs Kearns, say that their son Alex took his own life last June after misunderstanding a potential loss from a stock options trade and mistakenly believing that he owed $730,000.
The 20-year-old trader received an automated notification from Robinhood regarding a potential loss of $730,000 from one of the trades he had placed through the broker's app. Due to his lack of experience in trading in complex financial instruments, he understood that his family would have to pay the losses. Although he emailed the broker's customer service several times to ask for support and help to understand the figures on his account, he only received automated responses that the broker's representatives would get back to him. Panicked by what he thought was an unrepairable mistake, he took his own life later that day.
Tragically, his parents discovered that Robinhood clarified the issue in an email sent the day after Alex's death, where they informed him that the trading restrictions had been lifted and the trade had been resolved as the loss was covered by other options in his account.
Mr and Mrs Kearns allege the broker failed to perform the necessary suitability and appropriateness tests and its customer service was limited to automated emails. Robinhood, whose trading strategies have recently come under scrutiny in relation to the GameStop share price, has issued a statement where they say they are devasted by Alex's death and that they are working towards improving the educational materials and adding more live support staff.
The lawsuit is alleging wrongful death, negligent infliction of emotional distress and unfair business practices as well as the accusation of using "aggressive tactics and strategy to lure inexperienced and unsophisticated investors to take big risks with the lure of tantalising profits". It should be noted that Robinhood's slogan for its current advertising campaign is "We are all investors".
Financial Conduct Authority (FCA), that regulates the UK financial industry, has adopted in COBS 2.1 a principle known as "the client's best interest rule" which requires for firms to act honestly, fairly and professionally in accordance with the best interests of its client. Moreover, under COBS 4.2, the firms must ensure that a communication or a financial promotion is fair, clear and not misleading.
FCA imposes a further obligation for firms to only recommend investment services and financial instruments which are suitable for the client in particular, in accordance with the client's risk tolerance and ability to bear losses. In order to comply with this obligation, the firms must perform a suitability assessment, which consists of obtaining the necessary information regarding the client's: (a) knowledge and experience in the investment field relevant to the specific type of the financial instrument; (b) financial situation including the client's ability to bear losses; and (c) investment objectives including the client's risk tolerance.
Investment firms must also perform an appropriateness assessment on whether the service or product envisaged is appropriate for the specific client to comply with COBS 10.2. To fulfil this obligation, firms should ask their clients to provide information regarding their knowledge and experience in the investment field relevant to the specific type of product or service offered. Finally, the firm must warn the client accordingly, if, based on the information received to enable it to assess appropriateness, it considers that the product or service is not appropriate to the client.
Demetri points out "If you have recently started to trade in the markets through an investment broker and you have not been asked about your knowledge and experience with regard to investing, this should be of concern as the firm you are working with has failed to comply with the FCA rules and you should terminate your activities with the firm as soon as possible."
The markets are volatile and challenging for the most seasoned traders. The lawyers in Giambrone's financial and banking litigation team see countless examples of scams driven by deceit. It remains to be seen whether this tragic case will be a wake-up call to aggressive trading platforms cause them to draw back from their aggressive behaviours.
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