StockGeneration

» see stockgeneration.com as it lived, on the wayback machine

~ the obituary ~

turkey already had its pyramid scheme by then and it did not need a browser. titan was set up in izmir in 1997 and took twenty-four hundred german marks a head, in cash, from a person standing in front of you. thirty thousand people were in it within a year and the state shut it down in 1998. i read about it in the newspaper like everybody else did. the online version of the same idea opened in january of that year, in english, out of a caribbean registration, and it was somebody else's problem entirely.

stockgeneration called itself a virtual stock exchange. you bought shares in eleven listed companies, none of which existed in any form, and sg ltd set both the buying and the selling price itself in rounds that closed every two weeks. that alone should end the story. the reason it did not is that the operators had thought carefully about which lie to tell.

the site was registered in dominica and held a gambling license, which was the legal position it fell back on later: this is a game, nobody thinks these are real companies, you cannot defraud someone in a game. money came in by wire and left, when it left, from accounts in latvia and then estonia. at least eight hundred people in the united states put real dollars into it, and they were a small fraction of the total.

~ the case file ~

~ where it came from ~

the people behind sg ltd came out of mmm, which is not a small detail. sergei mavrodi set mmm up in 1989 with his brother vyacheslav and a partner, olga melnikova, as a computer importing business. it turned into a share scheme in february 1994 and advertised annual returns of up to three thousand percent on russian television, using a fictional everyman character that most of the country could recite.

the russian ministry of finance declared mmm's securities illegal on 22 july 1994 and the company was finished the following day. somewhere between five and ten million people lost their savings in it. mavrodi was arrested that august and spent a stretch shielded by parliamentary immunity before it was taken off him. he was convicted of fraud in april 2007, and stockgeneration is recorded among the schemes that came in between.

so 1998 was a port, not an invention. the pitch did not change and neither did the arithmetic. the advertising moved from russian television to a web page in english, and the jurisdiction moved to an island where the whole thing could be described as a game.

~ the privileged company ~

ten of the eleven imaginary companies moved around like anything else. the eleventh was the product. sg called it the privileged company and published a guarantee in writing: the share price would rise at ten percent a month, roughly two hundred and fifteen percent a year, and it was described on the site as a game without any risk because the price was supported by the owners of sg.

two details made it convincing to people who should have known better. sg published the privileged company's prices a month in advance, so you could check that last month's promise had been kept before putting money in this month. and it capped the downside by rule, stating that no round could take more than five percent off. a number that only goes up, published ahead of time so that anybody could check it later. the checking was real enough. everything it checked was manufactured.

~ the twentieth of march ~

the withdrawal problems started in late 1999, which is the normal first symptom. people who asked for their money got slow answers, then no answers. the wayback machine has www.stockgeneration.com serving a full five-kilobyte page on 1 march 2000 and a six-hundred-byte stub by 8 april, and it never recovers.

the collapse itself has a date. on 20 march 2000 sg took the site down for server maintenance and applied a clause it called rule 13 to every account, suspending all pending withdrawals. account balances were cut at the same time. two weeks after that came the announcement of a reverse split that dropped share prices to one ten-thousandth of their previous value, which meant the privileged company, the one that could never fall more than five percent, fell by 99.99 percent in a single move. the site was halted altogether on 1 june. new participants were still being solicited in the gap.

~ what the court decided ~

the sec sued in the district of massachusetts on 9 june 2000. it lost the first round, because the district court accepted the argument that this was a game rather than an investment, which would have put it outside the securities laws entirely.

the first circuit reversed on 13 september 2001, holding that the privileged company met the howey test for an investment contract no matter what the operators had called it. the reasoning is the useful part of this grave: what a thing is labeled on its own website does not decide what it is. by then the money had been gone for eighteen months. final judgment came on 29 may 2003, with $850,558 in disgorgement plus interest and a $471,544 penalty, which was the measured dollar loss of everybody who had bought the company that only went up.

@}-->--

              )
             (_)
            .-'-.
            |   |
            |   |
            |   |
            |   |
          __|   |__   .-.
       .-'  |   |  `-:   :
      :     `---'     :-'
       `-._       _.-'
           '""""""

« previous  ·  random  ·  next »