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#227 - 10/27/07 11:56 AM
This Is How VAS Started
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Michael45
Admin
old hand
Registered: 10/12/07
Posts: 802
Loc: San Antonio, TX
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BusinessWeek
FEBRUARY 26, 2001
PERSPECTIVE
By Geoffrey Smith
An Open Door for Online Crooks?
If a judge's flawed decision is left standing, the SEC could be stymied in cases where it believes cyber fraud is masquerading as entertainment
The law is usually able to distinguish clearly between legal investments and those that constitute fraud. But the Internet is blurring lines most of us assume are easily drawn when federal prosecutors try to protect us from crooks. And that's making it increasingly difficult for authorities to keep up with a new generation of cyber thieves.
This quandary was driven home by a recent court decision from a federal judge in Boston who decided a Web site that promised sky-high returns on investments wasn't actually ripping people off -- it was merely entertaining the public. The Jan. 25 decision is disturbing because it has already triggered a tidal wave of online theft masking itself as entertainment, and it could significantly hinder the ability of a key regulatory authority to protect investors against online fraud.
"PRIVILEGED COMPANY." The case involves http://www.stockgeneration.com, a Web site based on the island of Dominica in the Caribbean. Before it was shut down by federal authorities last summer, the site marketed itself as a "virtual stock exchange" where investors could put money in fictitious companies, including one "privileged company" guaranteed to go up at least 10% a month, or 215% annually.
"Would you like to double your money each month? Then Welcome to the Virtual Stock Exchange SG," the Web site teased its unwitting victims. The site called itself a "game" but also repeatedly reassured participants that its privileged company would "only rise," according to court filings.
Last June, the Securities & Exchange Commission took the company that owned Stockgeneration.com to court, arguing it was "nothing more than a classic pyramid scheme with high-tech trappings." The SEC claimed the site amounted to securities fraud because the money needed to pay off existing investors was derived solely from investments by new or existing investors. By the time the suit was filed, thousands of investors were out a total of $5.5 million. Stockgeneration says it had 325,000 players last spring. The court ordered the money frozen in banks in the U.S., Estonia, and Cypress.
CALLING IT A GAME. But in a decision that could reverberate for years to come, Judge Joseph L. Tauro ruled that Stockgeneration.com is legal. The reason: It's merely a game that more closely resembles gambling than investing. Judge Tauro concluded that Stockgeneration.com had "forcefully" disclosed that it's entertainment. "While it's true that participants in the 'virtual exchange' parted with their money in the hope of doubling it through SG's promotion of the Web site and payments by other participants, all transactions were in the form of a game...and no investment vehicle was involved," Tauro wrote.
Stockgeneration's attorney, Daniel I. Small of Butters, Brazilian & Small in Boston, says the decision simply reflects a new reality of cyberspace: "That the SEC would put the full force of its resources behind this indicates a total lack of understanding of the Internet as a source of entertainment for millions of people all over the world." Others don't see it that way. "The judge seems to be saying that as long as you call something a game, then you're home free," says a federal prosecutor close to the case.
The decision has outraged Internet-fraud watchdogs, who say it has led to a flood of online scams that are now labeled games. Rana Adamchick, a Florida computer-repair technician who claims she lost $150 to Stockgeneration.com, says: "Sites now boldly proclaim they are games, whereas they were claiming for a while they were risky ventures, or investments, or even out and out Ponzis."
DUBIOUS SITES. Adamchick should know. After her Stockgeneration misadventure, she launched a Web site called http://www.victimsagainstscams.com, which attempts to expose Internet fraud. The site invites Netizens to post information on online scams and lists hundreds of suspect games and dubious sites on the Net. Adamchick claims some 20 new candidates for fraud appear each day on leading portals such as Delphi and Yahoo!, and that hundreds are operating at any one time. Many open and close within days or even hours, she says.
One example is the 711GAME, which recently appeared on Delphi and quickly disappeared. The game described itself as paying out money to participants strictly on a first-spent, first-paid basis. "For every two people spending [$7], one gets paid [$11]...the faster the spends the faster the payouts, so promote the h--- out of it. The game stalls when the spends stop coming in," the site said.
There's little doubt that online scams are a major public menace. The last time federal regulators conducted a sweep aimed at closing down Internet pyramid schemes -- in December, 1999 -- they sent warnings to some 600 sites in a single day. The SEC has appealed Judge Tauro's decision, and an appellate judge granted a restraining order that keeps Stockgeneration.com closed pending a decision in the case. Still, the case is all the more remarkable because of who may be the mastermind behind the scheme.
RUSSIAN FUGITIVE. Stockgeneration.com is owned by Oksana Pavluchenko, a 23-year-old Russian, the SEC says. According to a September Wired article, she's the sister-in-law of Sergei Mavrodi, a notorious Russian who ran a widely publicized, $1 billion pyramid scheme in Russia in 1994 called MMM. Afterward Mavrodi ran for national public office, saying he'd return the money if elected. He won but eventually became an international fugitive sought by Russian authorities.
Mavrodi's role in Stockgeneration.com, if any, is unclear. Small, Stockgeneration's attorney, says he isn't authorized to discuss ownership or interests in the company. He refuses to make the company's owner available for comment. No one testified for the company in pretrial discovery.
Several securities lawyers predict Judge Tauro's decision will be overturned. "Other courts considering this issue are likely to find that similar products are in fact false securities," says Mark W. Pearlstein, a securities lawyer with McDermott, Will & Emery in Boston. One critical issue in the case is Judge Tauro's finding that the Web site is only a game even though it clearly guarantees a return on the privileged stock. Such guarantees have been considered investment contracts in prior cases, securities lawyers say.
UPDATE NEEDED. More fodder for the appeals court is Tauro's view that Stockgeneration is like gambling and doesn't take place in "our commercial world" as defined by prior court rulings in securities-fraud cases. That precedent clearly needs updating in light of the enormous role the Internet now plays in both commerce and entertainment, and its ability to create and vaporize value out of thin air. It should be irrelevant that real estate or sales brochures didn't change hands, as in prior cases cited by the judge as examples of commercial activity involving securities fraud. The people who participated in Stockgeneration.com thought they were creating real accounts that contained real shares in fictitious companies. Many watched the value of those accounts fluctuate on a daily basis, and Stockgeneration made large payouts to some players and promoted that fact to other players to keep them hopeful they would make big money as well. On Apr. 6, 2000, Stockgeneration reduced every player's account value by amounts ranging from 90% to 99.9%, citing player panic after word spread that a bank in Estonia had frozen the company account.
Though the payouts and account values were basically determined arbitrarily by Stockgeneration.com, Judge Tauro considers that just part of the fun. He ruled that the "economic reality" is that Stockgeneration is just a game, so the site's marketing hype about a virtual stock market and investments "without any risk" is essentially irrelevant.
PROMISE OF HIGH RETURNS. The economic reality of Stockgeneration.com is precisely the reverse. People were fleeced under the guise of a game. Let's hope it doesn't become legal precedent for cyber crooks to call their thievery entertainment when their hook is to create fictitious investments and bait people with the promise of risk-free, impossibly high returns.
If the SEC doesn't win this case, the door will be open wide for online crooks to copy the Stockgeneration model. In addition, the SEC would lose enormous clout as a force against Internet fraud. The bulk of the heavy lifting would be shoved on to other authorities, including the Federal Trade Commission and the Justice Dept.
Numerous angry victims of Stockgeneration.com have already contacted me by e-mail. I want to hear from the other side. If you operate an online "game" or know how these programs work, let me know, using the e-mail address below, why you do what you do and what you think of Judge Tauro's ruling.
Smith covers a wide variety of topics, including personal finance issues, from BusinessWeek's Boston bureau. You can e-mail him at geoff_smith@businessweek.com
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#228 - 10/27/07 12:03 PM
Re: This Is How VAS Started
[Re: Michael45]
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Michael45
Admin
old hand
Registered: 10/12/07
Posts: 802
Loc: San Antonio, TX
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Stock Generation was a website that ran from 1998 to early 2000 and is now part of Internet lore as the longest-running, most infamous Ponzi scheme in the history of the Internet. Stock Generation allowed people to trade "virtual companies" using real money and promised enormous returns on investment.
History
The website was run from an off-shore island, Dominica, in the Caribbean, and the U.S. Securities and Exchange Commission was unable to cite Stock Generation's founders and owners (members of the Russian conglomerate MMM) for securities violations. In late 1999, participants began to experience difficulties in redeeming their virtual shares. Finally, in 2000, the market "crashed", which caused losses of at least $5.5 million to hundreds of participants. On March 20, 2000, SG unilaterally suspended all pending requests to withdraw funds and sharply reduced participants' account balances in all companies except the privileged company. Two weeks later, SG peremptorily announced a reverse stock split, which caused the share prices of all companies listed on the virtual stock exchange, including the privileged company, to plummet to 1/10,000 of their previous values. At about the same time, SG stopped responding to participant requests for the return of funds, yet continued to solicit new participants through its website. [1]
The SEC then sued in the U.S. District Court for the District of Massachusetts, alleging that the "virtual stock exchange" was in effect a Ponzi scheme [2]. The court ruled in favor of Stock Generation, stating that the site adequately described the market as "a game" not an investment vehicle. The United States Court of Appeals for the First Circuit later reversed the District Court, stating that "the opportunity to invest in the shares of the privileged company, described on SG's website, constituted an invitation to enter into an investment contract within the jurisdictional reach of the federal securities laws." The game was promptly shut down.
Operation
The descripion below a quotation of the public information from the United States Court of Appeals[3]
"StockGeneration" website offering on-line denizens an opportunity to purchase shares in eleven different "virtual companies" listed on the website's "virtual stock exchange." SG arbitrarily set the purchase and sale prices of each of these imaginary companies in biweekly "rounds," and guaranteed that investors could buy or sell any quantity of shares at posted prices. SG placed no upper limit on the amount of funds that an investor could squirrel away in its virtual offerings.
The SEC's complaint focused on shares in a particular virtual enterprise referred to by SG as the "privileged company," and so do we. SG advised potential purchasers to pay "particular attention" to shares in the privileged company and boasted that investing in those shares was a "game without any risk." To this end, its website announced that the privileged company's shares would unfailingly appreciate, boldly proclaiming that "[t]he share price of [the privileged company] is supported by the owners of SG, this is why its value constantly rises; on average at a rate of 10% monthly (this is approximately 215% annually)." To add plausibility to this representation and to allay anxiety about future pricing, SG published prices of the privileged company's shares one month in advance.
While SG conceded that a decline in the share price was theoretically possible, it assured prospective participants that "under the rules governing the fall in prices, [the share price for the privileged company] cannot fall by more than 5% in a round." To bolster this claim, it vouchsafed that shares in the privileged company were supported by several distinct revenue streams. According to SG's representations, capital inflow from new participants provided liquidity for existing participants who might choose to sell their virtual shareholdings. As a backstop, SG pledged to allocate an indeterminate portion of the profits derived from its website operations to a special reserve fund designed to maintain the price of the privileged company's shares. SG asserted that these profits emanated from four sources: (1) the collection of a 1.5% commission on each transaction conducted on its virtual stock exchange; (2) the bid-ask spread on the virtual shares; (3) the "skillful manipulation" of the share prices of eight particular imaginary companies, not including the privileged company, listed on the virtual stock exchange; and (4) SG's right to sell shares of three other virtual companies (including the privileged company). As a further hedge against adversity, SG alluded to the availability of auxiliary stabilization funds which could be tapped to ensure the continued operation of its virtual stock exchange.
SG's website contained lists of purported "big winners," an Internet bulletin board featuring testimonials from supposedly satisfied participants, and descriptions of incentive programs that held out the prospect of rewards for such activities as the referral of new participants (e.g., SG's representation that it would pay "20, 25 or 30% of the referred player's highest of the first three payments") and the establishment of affiliate websites.
At least 800 United States domiciliaries, paying real cash, purchased virtual shares in the virtual companies listed on the defendants' virtual stock exchange. In the fall of 1999, over $4,700,000 in participants' funds was deposited into a Latvian bank account in the name of SG Trading Ltd. The following spring, more than $2,700,000 was deposited in Estonian bank accounts standing in the names of SG Ltd. and SG Perfect Ltd., respectively.
In late 1999, participants began to experience difficulties in redeeming their virtual shares. On March 20, 2000, these difficulties crested; SG unilaterally suspended all pending requests to withdraw funds and sharply reduced participants' account balances in all companies except the privileged company. Two weeks later, SG peremptorily announced a reverse stock split, which caused the share prices of all companies listed on the virtual stock exchange, including the privileged company, to plummet to 1/10,000 of their previous values. At about the same time, SG stopped responding to participant requests for the return of funds, yet continued to solicit new participants through its website.
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#2040 - 01/23/08 06:36 PM
Re: This Is How VAS Started
[Re: Michael45]
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Angel98
Admin
stranger
Registered: 01/23/08
Posts: 1
Loc: Florida
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Hello everyone. I'm the one that had this situation occur in the beginning. Yes, I'm a real person! I'm sure some of you have heard of me already via Michael. Anyway, I just wanted to say hi and welcome to the NEW Victims Against Scams! I won't be staying around, as my life has become somewhat busy with other important things (my children, teaching, my art, writing my books and moving), but I did want to say hello to everyone and introduce myself since the VAS site was recreated in my honor.
I would highly suggest that you listen to Michael, as he has been trained not only by me, but by various authorities, re what to look for, how to report it properly, how to gather the victims, and how to deal with the perpetrators of the scams.
Of course, I realize that Mike can sometimes get a little colorful, however, he does know his stuff...so, try to ignore the vibrant colors, hehe. 
Have a great time and do make sure that you report the scams you find on the internet. Those that do report them can help thousands of people. There was a time that we were assisting many, many people to get some of their money refunded and many illegal programs were shut down.
You too, can help, simply by sticking together and reporting them. When you do, you can beat them at their own game. Just don't let them get you down. Keep a strong support system, because these companies are trained to 'hush' the crowds. They run in teams in forums and other public places. We call that, 'touting'. So, always try, when communicating to others to stick together, Where there are numbers, there is strength.
Understand that these things take time too. It can feel like the authorities aren't doing anything about them. They are, you just can't see the 'behind the scenes' actions as they're occurring. That's due to the court systems, not to mention other factors such as, gathering enough evidence to close it down permanently. It doesn't mean they aren't working on them, though, they are! Just be patient!
Most of all, watch out for each other. Some of these folks don't like going to jail, and they will do what they have to, in order to avoid it. Don't take any chances, if there is any sense of 'real' danger. Many will threaten, but most are just idle threats.
Ok, I'm out of here, have fun and don't let them ever pull one over you, because once they do, you are on their 'permanent hit list', so to speak. Enjoy!
Edited by Angel98 (01/23/08 06:39 PM)
_________________________
It's great to be alive.
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