 | This article needs additional citations for verification .(April 2021) |
Stock Generation (SG) was a Ponzi scheme operated by SG Ltd. that operated on the Internet from 1998 to early 2000. Stock Generation allowed people to trade "virtual companies" using real money and promised unsustainably high returns on investment.
The website was established in January 1998 and was run from Dominica using a gambling license issued by the Caribbean country, [1] and the U.S. Securities and Exchange Commission was initially unable to cite Stock Generation's founders and owners (members of the Russian conglomerate MMM) [2] for securities violations. In late 1999, participants began to experience difficulties in redeeming their virtual shares. Finally, in 2000, the market "crashed". On March 20, 2000, SG took down the website on pretext of a server maintenance while unilaterally suspending all pending requests to withdraw funds and sharply reducing participants' account balances in all companies except the privileged company by invoking the game's Rule 13. [lower-alpha 1] [1] Two weeks later, SG peremptorily announced a reverse stock split for its highest-yield company, applying a caveat in the definition for companies 10 and 11 (as defined in Rule 26.6) [lower-alpha 2] which caused the share prices to plummet to less than 1/10,000 of their previous values, while other shares (including those that were "guaranteed" not to decrease in value) were devalued by 50% to 95%. 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. [4] By May, Stock Generation began banning players who started to question its legitimacy on other forums. [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. [5] The court initially ruled in favor of Stock Generation, stating that the site adequately described the market as "a game", not an investment vehicle. [6] 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." [7] The game was shut down around June 1, 2000, but the home page continued running until autumn of that year, although none of the links worked by that time; it briefly reopened in early 2001 following the Massachusetts court ruling, announcing that the game would return at one point (were it not for the First Circuit decision). [8]
Stock Generation's website traded shares of 11 "virtual" companies. Each of those companies had its name and logo, but they were most often referred to by the number under which they were listed.
Companies 1 to 8 were traded for purely "gambling" purposes, as their shares could go up and down randomly. Having those 8 companies "trading" on their website allowed Stock Generation to claim its enterprise as online gambling venture, rather than an actual stock market or any other investment-related business, to which SEC rules would apply.
Company 9, named Golden Nuggets, was the "privileged" company, with its shares "guaranteed" never to decrease in value. Promised return was originally 10% a month (215% annually), but was later reduced to 7% a month (125% annually). In early April 2000, Stock Generation, despite all previous guarantees, devalued its privileged company shares to 5% of their previous value.
Companies 10 and 11, named MegaByte and The Fountain of Youth respectively, promised monthly returns of 50% and 100% (later 40% and 70%) respectively. At the same time, share prices could plummet 50% for company 10 and 100% (e.g. all the way down to 0) for company 11. That caveat, as defined in the basic rules of the game pertaining to these companies (Rule 26.6), [lower-alpha 2] was another way for Stock Generation to justify their claims that this was a gambling website, rather than an investment vehicle.
Stock Generation was reluctant to invoke Rule 26.6's devaluation clause throughout most of the time the game was active. Instead they chose to apply another rule (known as Rule 13) [lower-alpha 1] which permitted Stock Generation to reduce individual account balances by recalculating them as if all the funds had been originally invested in the "privileged" company 9. For instance, an user that chose to invest their $50 sign-up bonus in the company 11's shares, kept the funds there for a year and then sought to withdraw all at once, could see their balance going down from $204,800 (100% monthly rate, compounded twice a week) to $157 (10% monthly rate compounded twice a week) and the transaction history would state that he had invested all those funds in the company 9 shares rather than in the company 11.
Rule 13 allowed Stock Generation to avoid massive five or six figure withdrawals, thus allowing the system to last over 2 years, with its share prices increasing over 10,000-fold (as opposed to Stock Generation's predecessor, the MMM which only lasted about 6 months, with its stock price increasing "only" 127-fold). Judging from the complaints on the SG bulletin board, application of rule 13 had become widespread by early 2000, as demands for withdrawals increased. On March 20, 2000, Rule 13 was applied to every account. [1]
The devaluation clause in Rule 26.6 was applied about two weeks later, for the first time since the game was launched. The value of the company 10's share was cut in half. Company 11 shares underwent a 1-for-10,000 reverse split, with the actual share price plummeting to less than 1/100,000th of its value (from over $1 per share to $0.10 per "new" share, worth 10,000 old ones). On the same day, Stock Generation reduced the price of the company 9 shares from $16.90 to $0.84 - in clear violation of their own rules as those shares were guaranteed never to decrease in value. By that point, Stock Generation's users began reporting the game to both Dominican authorities and the SEC; in return, the site's administrators began banning players that criticized them on finance forums such as at Delphi. [1]
Stock Generation continued to operate for several weeks after that, offering returns of up to 150% a month, but further legal troubles led to their website being halted by June 1, 2000.
The description below is a quotation of the public information from the United States Court of Appeals for the First Circuit, as decided in SEC v. SG, Ltd et al., 265 F.3d 42 (1st Circuit 2001): [7]
"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". 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.
A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any form of financial instrument, even though the underlying legal and regulatory regime may not have such a broad definition. In some jurisdictions the term specifically excludes financial instruments other than equities and fixed-income instruments. In some jurisdictions it includes some instruments that are close to equities and fixed income, e.g., equity warrants.
A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks, which represent ownership claims on businesses; these may include securities listed on a public stock exchange, as well as stock that is only traded privately, such as shares of private companies which are sold to investors through equity crowdfunding platforms. Investment in the stock market is most often done via stockbrokerages and electronic trading platforms. Investment is usually made with an investment strategy in mind.
A closed-end fund (CEF) or closed-ended fund is a collective investment model based on issuing a fixed number of shares which are not redeemable from the fund. Unlike open-end funds, new shares in a closed-end fund are not created by managers to meet demand from investors. Instead, the shares can be purchased and sold only in the market, which is the original design of the mutual fund, which predates open-end mutual funds but offers the same actively-managed pooled investments.
Australian Securities Exchange Ltd is an Australian public company that operates Australia's primary securities exchange, the Australian Securities Exchange. It was formed on 1 April 1987, through incorporation under legislation of the Australian Parliament as an amalgamation of the six state securities exchanges, and merged with the Sydney Futures Exchange in 2006.
A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV in Europe and open-ended investment company (OEIC) in the UK.
The mutual fund scandal of 2003 was the result of the discovery of illegal late trading and market timing practices on the part of certain hedge fund and mutual fund companies.
An exchange-traded fund (ETF) is a type of investment fund and exchange-traded product, i.e. they are traded on stock exchanges. ETFs are similar in many ways to mutual funds, except that ETFs are bought and sold from other owners throughout the day on stock exchanges while mutual funds are bought and sold from the issuer based on their price at day's end. An ETF holds assets such as stocks, bonds, currencies, futures contracts, and/or commodities such as gold bars, and generally operates with an arbitrage mechanism designed to keep it trading close to its net asset value, although deviations can occasionally occur. Most ETFs are index funds: that is, they hold the same securities in the same proportions as a certain stock market index or bond market index. The most popular ETFs in the U.S. replicate the S&P 500 Index, the total market index, the NASDAQ-100 index, the price of gold, the "growth" stocks in the Russell 1000 Index, or the index of the largest technology companies. With the exception of non-transparent actively managed ETFs, in most cases, the list of stocks that each ETF owns, as well as their weightings, is posted daily on the website of the issuer. The largest ETFs have annual fees of 0.03% of the amount invested, or even lower, although specialty ETFs can have annual fees well in excess of 1% of the amount invested. These fees are paid to the ETF issuer out of dividends received from the underlying holdings or from selling assets.
Penny stocks are common shares of small public companies that trade for less than one dollar per share.
A money market fund is an open-ended mutual fund that invests in short-term debt securities such as US Treasury bills and commercial paper. Money market funds are managed with the goal of maintaining a highly stable asset value through liquid investments, while paying income to investors in the form of dividends. Although they are not insured against loss, actual losses have been quite rare in practice.
In finance, an investment strategy is a set of rules, behaviors or procedures, designed to guide an investor's selection of an investment portfolio. Individuals have different profit objectives, and their individual skills make different tactics and strategies appropriate. Some choices involve a tradeoff between risk and return. Most investors fall somewhere in between, accepting some risk for the expectation of higher returns.
Securities fraud, also known as stock fraud and investment fraud, is a deceptive practice in the stock or commodities markets that induces investors to make purchase or sale decisions on the basis of false information, frequently resulting in losses, in violation of securities laws.
The Stock Exchange of Mauritius (SEM) ; is an organization responsible for the operation of Mauritius's primary stock exchange located at Port Louis. The SEM operates two markets: the Official Market and the Development & Enterprise Market (DEM). There are 40 companies listed on the Official Market representing a Market Capitalization of nearly US$5.3 billion, the DEM presently has 48 companies listed with a market capitalisation of nearly US$1.5 billion as at 31 July 2012. SEM is one of the leading Exchanges in Africa and a member of the World Federation of Exchanges.
In finance, a reverse stock split or reverse split is a process by which shares of corporate stock are effectively merged to form a smaller number of proportionally more valuable shares.
The S&P/ASX 200 index is a market-capitalization weighted and float-adjusted stock market index of stocks listed on the Australian Securities Exchange. The index is maintained by Standard & Poor's and is considered the benchmark for Australian equity performance. It is based on the 200 largest ASX listed stocks, which together account for about 82% of Australia's sharemarket capitalisation.
Share repurchase is the re-acquisition by a company of its own shares. It represents an alternate and more flexible way of returning money to shareholders.
Fund.com Inc. is a US-based financial services information publishing company and fund platform that focuses on the fund management industry. Its aims were to provide a destination website for investments, including mutual funds, hedge funds, money market funds, exchange-traded funds (ETFs), closed-end funds, index funds, commodity funds and other types of pooled investment vehicles.
Stock is all of the shares into which ownership of a corporation is divided. In American English, the shares are collectively known as "stock". A single share of the stock represents fractional ownership of the corporation in proportion to the total number of shares. This typically entitles the stockholder to that fraction of the company's earnings, proceeds from liquidation of assets, or voting power, often dividing these up in proportion to the amount of money each stockholder has invested. Not all stock is necessarily equal, as certain classes of stock may be issued for example without voting rights, with enhanced voting rights, or with a certain priority to receive profits or liquidation proceeds before or after other classes of shareholders.
An investment fund is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group such as reducing the risks of the investment by a significant percentage. These advantages include an ability to:
Securities market participants in the United States include corporations and governments issuing securities, persons and corporations buying and selling a security, the broker-dealers and exchanges which facilitate such trading, banks which safe keep assets, and regulators who monitor the markets' activities. Investors buy and sell through broker-dealers and have their assets retained by either their executing broker-dealer, a custodian bank or a prime broker. These transactions take place in the environment of equity and equity options exchanges, regulated by the U.S. Securities and Exchange Commission (SEC), or derivative exchanges, regulated by the Commodity Futures Trading Commission (CFTC). For transactions involving stocks and bonds, transfer agents assure that the ownership in each transaction is properly assigned to and held on behalf of each investor.
A meme stock is a stock that gains popularity among retail investors through social media. The popularity of meme stocks is generally based on internet memes shared among traders, on platforms such as Reddit's r/wallstreetbets. Investors in such stocks are often young and inexperienced investors. As a result of their popularity, meme stocks often trade at prices that are above their estimated value based on fundamental analysis, and are known for being extremely speculative and volatile.