If betting on Nasdaq stocks isn't exciting enough for you,
now a Federal judge has legitimized "fantasy" Internet stock markets
that feature totally fake companies.
The Securities and Exchange Commission last June froze Estonian bank
accounts worth at least $2.7 million. The agency said at the time that a fantasy Internet market called StockGeneration, based on the Caribbean island of Dominica, was defrauding thousands of naive investors.
The company's Web site offered trading in 11 stocks that were purely
imaginary, according to the SEC. One of the stocks, called Golden
Nugget, was guaranteed to gain 10 percent a month. Compounded month by
month, that gain would add up to 215 percent a year.
But U.S. District Court Judge Joseph L. Tauro of Massachusetts last
month threw a wrench into the SEC's injunction. The "virtual stock
exchange" wasn't unlawful, Judge Tauro wrote in his decision, because
people visiting the Web site had been told "that they would be playing a game, not making an investment."
This decision, if it stands, rises to the level of true genius. It opens the floodgates to creative hucksters around the world:
• People dressed like doctors could give sugar pills instead of real medicine to sick children. It would all be OK, because the "doctors" were merely operating a Fantasy Hospital.
• Scholarly types wearing black robes could issue master's degrees and Ph.D.'s at pretentious ceremonies. The degrees might be worthless, but who cares since the "scholars" were merely representing a Fantasy College.
• Executives in business suits could open a banking office, take customers' deposits, and then leave town with the money. No problem! They were merely running a Fantasy Bank.
In the case of StockGeneration, Judge Tauro was persuaded to rule
against the SEC because of a novel legal argument.
In an interview, the fantasy market's attorney, Daniel Small--a partner
in the Boston law firm of Butters, Brazilian & Small--explained
his client's theory: It's all right for an operation to be a pyramid, as long as it isn't a scheme.
The mother of all pyramids?
"Any entertainment is a pyramid," Small said. "It's only a scheme if
somehow that pyramid structure is hidden or denied. If you go to a
casino, you can't win money unless other people are losing money. If you go to a Red Sox game, they can't pay the players unless people are
Small notes that the StockGeneration site openly said, "We depend on
more people coming in."
He says, "Is it a pyramid? Yes, it's a pyramid of sorts. Is it a pyramid scheme? Absolutely not."
This line of thinking was certainly attractive to hordes of people. In a press
release announcing its victorious round in the case,
StockGeneration claims to have enrolled 325,000 players from more than
70 different countries.
It's actually possible that StockGeneration did attract that many
investors, because hope springs eternal.
Testimonials by optimistic investors spread the fantasy like wildfire.
One player posted a Web page this past
January proclaiming that he'd happily invested $3,000. His goal was to
pyramid that into $27,000 so he could afford the fee for cryonic
suspension. (You can't make this stuff up.)
Unfortunately, the player soon posted a very disappointed message in April,
announcing that he'd lost his entire $3,000 as part of "an elaborate
Faced with mounting withdrawals, StockGeneration had just invoked "Rule
13." This permitted its executives--who simply invented the stock
prices every day--to revalue $10,000 worth of shares down to $1. The
resulting outcry from investors led to the SEC's injunction last
Vowing to fight Judge Tauro's new decision, the SEC has appealed. While
the case works its way through the courts, StockGeneration's funds
In the meantime, if you want to lose money, here's a tip: Stick to the
Consumer advocate Brian Livingston appears at CNET News.com every
Friday. Do you know of a problem affecting consumers? Send info to
tips@BrianLivingston.com. He'll send you a book of high-tech secrets
free if you're the first to submit a tip he prints.