I hope the SIPC is looking into this:
Online brokerage site Zecco somehow failed to predict that surprising customers with multi-million dollar trading balances for April Fools would encourage their customers to make actual trades with their newfound riches. When Zecco realized what was happening, they responded by panic-selling the purchased stocks at a loss and charging the balance to customers, along with a $19.99 broker-assisted trading fee. One poor schmo bought $1 million worth of shares that were later sold for less than the purchase price.
Sometimes a bone-headed April Fool transcends mere stupidity to become outright fraud: this is one of those cases. A reputable brokerage doesn’t tell people they have millions of dollars in their account, and then allow them to trade it, and then charge them any losses they make. I’m not sure what sanctions the SIPC has available to it, but I hope they throw the book at Zecco.
(It’s not clear that this was a deliberate April’s Fool; it might have been an online cock-up which coincidentally took place on April 1. Either way, it’s unforgivable. And if this weekend’s Barron’s story has you tempted to use Zecco to trade forex, just don’t do it.)
Update: Zecco has now released a statement:
On April 1, 2009, one of our vendors provided Zecco Trading with an incorrect data feed which caused some customers to see erroneously high buying power. This error was quickly corrected, but about 1% of our customers were impacted. All positions in excess of our customers’ true buying power have since been closed. Except in a very small number of egregious and fraudulent cases, customers will not be responsible for losses (or gains) incurred for trades in excess of their buying power.
Additionally, we want to make it clear that contrary to some reports, this was not in any way intentional and was not an April Fool’s joke. We take the integrity of our customers’ accounts very seriously and we have taken measures to ensure this does not happen again. We sincerely apologize to our customers if this caused any confusion.
I’ve talked to Zecco’s CIO, Michael Raneri, and I do believe that this was a cock-up rather than an April fool or anything deliberate. Essentially the system was erroneously telling people that they had a huge amount of “buying power” — which is Zecco’s term for margin — and because Zecco’s customers have three days to meet margin calls, their orders were allowed to go through. It’s not the kind of thing you ever want to see at an online brokerage, but it’s not malign, just a nasty mistake which was magnified by the fact that it took place on April 1.