Virtually Blind, Benjamin Duranske’s blog focused on law in virtual worlds, has been covering the collapse of a Second Life scam perpetrated by a guy in Sao Paolo named recently that makes for a fun read. It’s best to read the articles in the order he wrote them to follow what went on. I’ll summarize each one briefly as well.

  1. Ginko Financial Suspends then Limits Withdrawals; Head ‘Nicholas Portocarrero’ Calls it a “Bank Run,” Tells Depositors to “Calm Down - This is where it begins. Ginko Financial was a “company” in Second Life that let people “deposit” Linden dollars (which may be legitimately traded for real money and are, thus, real, legal assets) and then withdraw them from virtual ATMs. It pitched itself as a bank, but the difference was that it was claiming it would return outrageous rates on your deposits. They were promising .19% daily return on your money (compounded that’s 100% annually!). How could they achieve such an absurdly high rate of return? Clearly, they could not, and were simply funding the returns on initial deposits with the money people deposited later on. A Ponzi scheme, in other words, as noted by The Journal of the Business Law Society at U of Illinois Law College.

    As Benjamin notes in this article, a few days ago Ginko Financial stopped letting people withdraw money altogether and then began limiting their withdrawls to about $19/day, claiming that they had “invested” most of the deposits and couldn’t provide liquidity for their depositors. The head of Ginko, who is so trustworthy he won’t even reveal his actual, real-life name (Benjamin ferreted it out however. It’s Andre Sanchez), advised depositors to ‘calm down.’ After all, when you’re ripping people off you want to do it in peace and quiet. Who wants to listen to a bunch of your scam victims bitching at you? You’ve got free money to spend!

  2. Commentary: Ginko Financial is Either a Fraud or Negligently Managed - Benjamin runs the numbers showing that Ginko almost certainly outright lied about its total deposits.
  3. Commentary: Ginko Bank Run Update - Day Four - We discover that Andre Sanchez (known as Nicholas Portecarrero in-game) is going to try to do an “IPO” on an in-world “stock market” to cover the deposits. That alone pretty clearly demonstrates that Ginko is/was a Ponzi scheme.
  4. Interview with Ginko’s ‘Nicholas Portercarrero’ - Benjamin interviews Andre/Nicholas, who has serious brass balls. He claims that it was an “objective fact” that he could pay depositors 100% annual returns on their investment. How? Why….he’d just pay them out of his own pocket. Yeah, that’s going to scale well. Andre spends the whole interview avoiding giving any answers about anything substantive.
  5. Ginko Financial Claims to be Acquiring AVIX - We discover that Ginko wants to IPO in order to….buy the “stock market” it is IPOing on. This is while it can’t even cover a fraction of the deposits it claims its customers have made.
  6. Commentary: Ginko Not “Buying” AVIX; IPO Off - It all falls apart. There’s a long chat session transcript with Benjamin, Andre and some other SL people that’s fun to read if only to marvel at the sheer disdain for other people’s money that Andre has. At one point he informs them that even though Ginko wants to “go public” it does not plan on releasing past profit and loss statements.

What baffles me about this is that, say what you will about Second Life, its interface if freaking unfriendly to the average joe and simply figuring out how to use SL and make a deposit with Ginko qualifies you as more tech-savvy, at least, than the average person. I always presumed that the only way the Nigerian scams work (and they apparently do work) is when said Nigerians manage to victimize elderly, half-senile folks. I don’t think that a half-senile person could manage to use Second Life leaving me wondering who the heck had so little common sense as to deposit money into something that was, from the get-go, obviously a scam? There’s something about virtual worlds that seem to make some people check their common sense at the door.

As for Andre, when I worked in the financial industry we had a word for people like him: Criminals. He and his co-conspirators should be prosecuted under applicable banking and securities fraud laws though I don’t expect to see that really happen. There’s still too big of an impenetrable legal cloud around in-world actions for the SEC or whoever the relevant body would be to take action, though I think there’s enough money involved here (several hundred thousand US dollars in claimed “deposits”) that they should. Benjamin is considerably nicer than I am and allows that Andre and his fellow scam artists might just be kids in over their heads but I don’t buy it. They ripped people off, flat-out, in an illegal Ponzi scheme. That’s malicious, not misguided.

(P.S. I’ve got nothing against Brazil. I love your jiu-jitsu!)