Second Life, not so much a fraud as a dismal failure

In Second Life, the game where those with more marketing qualifications than sense excel the virtues of Web 2.0 and promise that very soon, we will never put our anoraks on and go outside ever again, the final whimper of a somewhat controversial exercise in trust is finally being played out.

First, this came across my RSS reader from the “World Stock Exchange” – which has nothing to do with the World, Stocks, nor it seems, them being Exchanged (for anything other than other junk).

The WSE has halted trading in Ginko Perpetual Bonds (GPB) pending an important company announcement.

My interest piqued, I scrolled a little further down to see what was about to be unleashed. Would the so-far anonymous Second Life player reveal his identity? Would be announce his buyback plan to pay back the millions of dollars of monopoly play money he’d taken? Would it be a note from his Dad saying that he was a Very Naughty Boy.

But no. It was the following:

Hello,
A couple years ago, I had this idea to create a bank. I wanted to leverage myself by investing other people’s money, something I thoughtI could do well. This was more an exercise in entrepreneurship than itwas a million dollar idea. I didn’t plan to make a living out of it,just play with the concept and see how it went. I didn’t have this idea in Second Life and I almost created it outside this world. I just bumped back in here and thought, hum, maybe this is a good platform. I had been away ever since I had given up the idea of being a virtualstore owner.I of course had hope but I did not expect it to grow to such a size sofast and I was caught by surprise with it’s success, perhaps just as much as I was later caught by surprise by it’s failure. Say what you will, but Ginko Financial changed Second Life for the better.As you very well know, there were problems. Ginko Financial was hit from too many different sides and it fell. Perhaps if I had been more competent in building Ginko Financial, I could have made it strong enough to stand through this, but, that was not the case. The creation of the bonds was meant as a truce, a way to help me catch my breathback. I knew that in six, nine months tops I could settle the matter of the success or failure of our investments and that we had the meansto make interest payments for the first quarter or two even withoutthe success of our offworld venture.I also thought I could do partial liquidations and use the money to lower our debt proportionally. However, first with the ban on buyingbonds for less than the face value and later with the gradual erosionof our investments, both of these things ceased to be possible and my position became even weaker than it was when I created the bonds. The fact is, there is no way for me to meet this quarter’s interest payment. Neither of our main in-world investments got off the ground(BNT and HCL), though they may still do so sometime in the future. The stocks are too weak to be sold to help meet this quarter’s interestpayment. The L$2,400,000 we have inside Allenvest, despite Allen’s lie about me having withdrawn everything, are locked and probably lostforever.The situation is such that I am left with no choice here. The bonds needto be converted to a fund, which will hold these assets. Namely, theWSE Traders Fund (WTF) already listed on the WSE. Interest payments are no longer part ofthe equation and as I am transferring the assets to Luke, I will nolonger be involved with anything regarding Ginko Financial as it willno longer exist. Assets previously held by Ginko Financial are beingtransferred to the WTF.I am sorry that things did not work out.

Best Regards,
Nicholas Portocarrero

My summary for those of you who didn’t want to wade through all that turgid whiny garbage:

  • I’m an fool who made empty promises to fools who followed me (Thank you Obi-Wan)
  • Lots of fools followed me, and I rode the gravy train, laughing my sides off with my friends.
  • Ummm, Ooops. People actually want their money back! Damn. Never mind, have some junk bonds instead. They’re great, I promise.
  • Ooops again. You know that promise I made a couple of months back? You guys believed me again! Hahaha. But if you argue with me, you’re a liar! Dammit.
  • I’m walking away from it all. Its someone else’s problem now, I need to finish my homework. But I tell ya, this will look great on my resume! Dammit again.
  • I promise, I won’t ever do THAT again. Hey, you lost money? Sucks to be you then.

Now just in case you didn’t quite get the irony, the next piece in my RSS feed was this from the World Stock Exchange:

CHAIRMAN’S LETTER—————————

My fellow Shareholders and WSE Traders,I joined Second Life in December 2006 and within the first week I was convinced that virtual worlds with endless possibilities such as Second Life will provide an extended platform to the existing website and over time would provide Internet users with a complete Broadband Entertainment experience that included live and On-Demand Audio and Video services along with the huge potential for e-Commerce.At the heart of most economies is a Stock Exchange and therefore I felt it was the right time to establish a stock market for the Second Life economy.

On the 22 December 2007 Hope Capital Ltd a Second Life based company was nothing more than a vision in a pdf file. Today it operates the first and leading fully operational virtual securities exchange in the world. The World Stock Exchange has experienced exceptional growth over the past 8 months and this growth is expected to continue. The World Stock Exchange is History in the making and has exceeded our expectations.The WSE has faced will continue to face challenges such as market volatility, high levels of day trading, smear campaigns against Second Life, the WSE, Hope Capital and its management along with false or misleading conduct by a small percentage of companies on the WSE.The WSE has overcome a number of recent direct challenges that resulted in significant losses. These include development bugs, the loss of approximately L$3m due to theft from a former employee and his accomplices who successfully hacked the system using insider system knowledge just prior to the WSE Security system upgrade that now prevents such actions from occurring, recent policy changes by Linden Lab regarding gambling in Second Life and negative market sentiment regarding virtual banks which combined to create panic and concern which resulted in a significant increase in user withdrawals and the implementation of Risk API, an imposed security feature which at the time resulted in a large number of users being unable to make deposits.Although the WSE has overcome the above financial challenges well it would not be appropriate or advisable for Hope Capital Ltd to pay a dividend for the quarters ending 6 August 2007 and 6 November 2007 and the bond interest payment for period ending 2nd November 2007. All profits currently being generated by Hope Capital Ltd are being held to offset previous unexpected losses. We expect to be in a position to meet all dividend and bond interest payments in the future as we will see a significant increase in trading volume and profit resulting from the anticipated high growth of WSE entering Mid November 2007 to February 2008.We have also seen a wave of stock exchange and bank start-ups trying to gain a share of the lucrative market through lots of empty promises that try to create the impression of a safer and more regulated trading environment along with offering unrealistic interest rates or by using questionable tactics to acquire customers.We express caution to all users before considering to use a start-up exchange or banking service. Such operations are small, extremely risky due to a lack of credibility, brand awareness and experience. We have seen more than enough examples of banks with high interest rates and start up exchanges closing down and suffering extreme losses for customers or going completely bankrupt due to fraud or empty promises.Although it is good to have competition in all markets especially those that have matured it is important to remember that in a small emerging economy such as Second Life there is limited liquidity and available capital in the market and as a result it is imperative that we have a large strong solid Stock Exchange and Bank backed by real life people who can pool all its vast resources into continued Research & Development, Growth and Marketing rather than many small operations that are likely fraudulent or scams and simply dilute the precious market that remains.These challenges are expected in a new emerging market and economy that is in many cases emotionally driven, ambitious and apprehensive.The WSE has constantly made every effort where possible to improve and develop our services while providing information to allow all stakeholders an opportunity to share in the future growth and prosperity of the World Stock Exchange and virtual world economies such as Second Life.I’m pleased to announce that since March 7th 2007 the World Stock Exchange has achieved over 25,000 user accounts, raised virtual businesses over L$145 million Linden Dollars and total Exchange Turnover has exceeded L$462 million.The WSE is well established in the virtual world of Second Life and is now poised to reach new heights thanks to the hard work of our development team and the integration of a new fictional currency called the World Internet Currency (WIC) which will provide all Internet users with the opportunity to learn and participate in the new world of virtual securities trading.WSE 4.0 AND BEYONDWe have almost completed the release of WSE 4.0 which includes:- Full shareholder voting on company resolutions- Financial reporting system on monthly or quarterly earnings.- Automatically generated company data such as Price to Earnings Ratio, Net Tangible Asset and Earnings Per Share with more to come in the future.- Market Analyst reporting system allowing approved WSE analysts to provide reports on the operational and financial performance of listed companies along with buy and sell recommendations that includes the target price.- Market Rating system allowing all WSE traders to apply a 1 – 5 star rating on all companies based on their experiences as a shareholder or on their opinions of the companies operational and financial performance.- IPO Applications List allowing all WSE Traders and Analysts to review and apply a marketing rating to all IPO Applications thereby allowing the WSE to view the markets preferred choices prior to making any approvals.- Portfolio News section allowing WSE traders to stay informed on any events, outstanding resolutions or news from companies listed in their Watchlist and Portfolio.- THE KILLER APP OF VIRTUAL FINANCE NOT YET REVEALED BUT COMING SOON….THE SECRET IS REVEALED!Yes its true, it has always been part of the WSE’s agenda to ensure that all WSE Traders whom we class as stakeholders would be indirectly protected as much as possible from the potential ethics based fraud and misconduct that would come from businesses listing on the WSE during the start-up and development phase which has been almost entirely unregulated environment in order to cultivate and encourage growth.The Secret is out and the time has now come as we feel there is an improved regulatory environment and sufficient information available to WSE traders in order to help them make informed decisions when trading on the WSE.World Stock Exchange Traders Fund (WTF) is a specially designed fund that holds shares in Hope Capital Ltd on behalf of all WSE account holders who have lost their virtual shares or bonds in delisted companies up to the 19th October 2007. All WSE account holders are stakeholders in the business.Management alone did not make the WSE what it is today and it is through the participation of our customers that the WSE has become what it is today and what it will become in the future.WSE account holders will have all their shares in any company that was delisted due to fraud or bankruptcy converted into shares in the World Stock Exchange Traders Fund (WTF).The WSE Traders Fund will be allocated shares in Hope Capital Ltd on 23rd October 2007 and will begin actively trading on the WSE on the 24th October 2007.CURRENT CONVERSIONS INCLUDE:APT 1 – 3PNK 1 – 1IBM 1 – 1MPR 1 – 1PCL 1 – 1PPC 1 – 1RIN 1 – 1SEX 1 – 1TSF 1 – 10WED 1 – 1TLS 1 – 1XAN 1 – 1XDT 1 – 1SBJ 1 – 1TGC 1 – 1PGI 1 – 3AMD 1 – 0.5CIG 1 – 1

We will announce any new conversions to the WTF on the 19th October 2007.’

2004 – ’06 were the years of Google, YouTube & MySpace’

2007 – ’09 will be the years of IPTV, Wikipedia, FaceBook, Second Life and the World Stock Exchange!

Kind Regards,

LukeConnell Vandeverre,Chairman & CEO

Summary again:

  • Hey, are you guys still here? Oh my. Look! They’re still here!
  • Ok, we got caught with our pants down, hands in the cookie jar. But we promise we’ll never do THAT again. C’mon, you can trust us.
  • Real banks coming into SL. Dammit!
  • We’ve got a brilliant secret sauce. Please enjoy the dogfood that we smother it with.
  • We call our trade fund WTF, and our capital fund “Hope Capital”. Don’t think about the injokes.
  • Real names? But why? Dammit!

Please Dear Lord, remind people that giving your money to cartoon characters that can be erased, rubbed out, and transmogrified by their owners is a bit like trusting the Leprachauns to provide you with a retirement pension.

Second Life, same old con

Ponzi schemes are not new, they’ve been around since the 1920’s. And one would think, with the FSA, SOX, the SEC, offices of fair trading, and ultimately the courts, that adequate protection exists for the consumer today. Right?

Wrong.

Enter Second Life, and more specifically, Ginko Financial, a “virtual company” offering high-interest bearing savings accounts. It used to call itself a bank, until … oh wait, you read their website already right? Terribly sad, holding onto their assets to avoid devaluing the market, any customer funds have been converted into “Ginko Perpetual Bonds”, paying a rate of interest two orders of magnitude lower than that originally offered by Ginko.

Ginko appears to be wholly owned by a nom de joue called Nicholas Portocarrero, although recent research has revealed a possible name behind this pseudonym, one Andre Sanchez.

A major landowner/landlord in Second Life, Anse Chung, has declared that Ginko is “most likely a Ponzi scheme” – this was before the recent collapse. The chances of it being a Ponzi fraud scheme, it has to be said, appear better than average right now. Of course, looking back on it, if there was a legal way to pay 60% on investments, then surely banks both virtual and real would be doing it?

While I had a small amount of virtual cash in Ginko, I know many other people who have lost big – concerns over leaving money in virtual pockets, ready to be picked by a malicious object, have led people to entrust their funds, some would say, less than wisely.

So the question turns back to: Who is responsible? Is this fraud? If so, who is the perpetrator? Are Linden labs, the owners and operators of the Second Life infrastructure, simply the duped instruments of a con man, or do they share a responsibility and financial liability for failing to safeguard information and assets entrusted to them.

Watch this space.