In the second installment of our coverage of the WSE situation, I clarify the nature of the alleged theft, and discuss its impact on WSE and Mystik Design (whose CFO allegedly engineered the theft. I also tread ground familiar to anyone involved in allegations like this: what really shakes confidence, whether among voters or investors, is not the [alleged] crime, it's the [alleged] coverup.
What Happened
Here are some more details on the alleged theft. Thurston Hallard was, until this weekend, Chairman of Mystik Design (MDS). According to Mystik Boucher, LukeConnell Vendeverre, CEO of WSE, gave Thurston some rights to modify the scripts used for the ATMs that WSE clients use to make deposits and withdrawals. Thurston apparently used these rights to make bogus deposits, and then withdrew L$3.2 Million from WSE Huet, the avatar used to store the money used to provide the bank with liquidity for cash transactions. (Think of Huet as the cash in the teller’s drawer at your neighborhood bank.)
As soon as the alleged theft was discovered, both Thurston Hallard and Mystik Boucher’s Second Life accounts were suspended by Linden Lab. Mystik, who was CEO of MDS, was under suspicion because she had quite naturally had a number of cash transactions with Thurston. Mystik Boucher’s account has been reinstated, while Thurston Hallard’s has not. Linden apparently has been reassured that Mystik was uninvolved.
Alleged Coverup
In my interview yesterday with Mystik Boucher, CEO of Mystik Design (MDS), Mystik stated that LukeConnell Vandeverre, the WSE CEO, intended to cover up the hack and theft. According to Mystik, Luke hoped to "keep a very tight lid on it, like it never happened." Mystik’s blog entry makes that impossible now. Mystik reports that Luke has frozen her accounts with WSE. Because she had access to the accounts after Luke was aware of Thurston Hallard’s alleged involvement, and did not freeze her accounts until she went public, it seems plausible to infer that this was in retaliation for her decision to report the theft to the SL community. Moreover, WSE has deleted a number of recent announcements by MDS previously posted on www.WSELive.com, including an announcement that MDS is voluntarily delisting from WSE due to a lack of confidence in management.
Luke has provided no public statement on the theft, which is highly unusual for a financial institution that relies heavily on investor confidence.
Mystik also makes a more troubling assertion: she claims that "LukeConnell and the CFO of Linden Labs plan[ned] on a full cover-up of this, LukeConnell told me personally." Mystik notes (and I wish to emphasize) that she has only Luke’s word on the willingness of Linden Lab CFO, John (Zee Linden) Zdanowsky, to aid and abet a coverup. Mystik only has Luke’s statement about John’s involvement. I contacted John personally, and his comments suggest that his involvement is highly unlikely. Perhaps unsurprisingly, John was unwilling to go on the record without approval from LL’s marketing czar. According to Catherine Smith, Director of Marketing for Linden Lab, Linden plans to issue a public statement soon.
Impact on WSE
While L$3.2 Million is small relative to the total capitalizations of the stocks traded on WSE, it may be large relative to WSE’s cash reserves. (WSE has raised hundreds of millions of Lindens for listed companies, but most of that is tied up in investments.) However, it is not clear whether cash constraints are responsible for the delays in reopening WSE’s ATMs, which provide the means for cash deposits and withdrawals. Reopening has been delayed several times, and is now scheduled for today (3pm, SLT).
More serious than the cash squeeze would be a loss of investor confidence. Any bank lives on the willingness of investors to maintain their accounts, which they will only do if they are sure they will be able to withdraw their money sometime in the future. I don’t see too much evidence of a bank run on the horizon, although about 20 people were waiting at the World Stock Exchange on the Hope Capital Sim at 3pm SLT yesterday, when the ATMs were to reopen.
Investors and listing firms are likely to want to know more about WSE’s policies regarding modification rights to key scripts, as well as the current cash position of WSE. Also, Investor Allen, CEO of the competing exchange AVIX, has expressed surprise that Luke allowed so much money to accumulate in the publicly-known WSE Huet. (Again, think of the bank example: Investor Allen compares it to having too much money in the teller’s drawers, rather than stored more securely in a vault.)
The allegation of cover-up is perhaps going to be even more damaging to WSE’s credibility, as investors may wonder how quickly they will be informed of other unpleasant surprises.
Impact on Mystik Designs (MDS)
It is always difficult to project how allegations against an officer will affect a company. Both Mystik and Investor Allen confirm that they are preparing to talk about listing MDS on AVIX, which might happen as soon as today or tomorrow. However, MDS will still face the challenge of regaining public confidence. Personally, I expect to see some public statements soon, from both MDS and AVIX, announcing an agreement.
This story continues to develop. I will keep you posted. If you have information or comments, please contact me either through Second Life (IM Beyers Sellers) or email me at rjb9@cornell.edu.
Thanks for this straightforward coverage that follows basic journalistic principles. Metaversed is fast becoming my go-to source for information on SL and other virtual worlds because of reportage like this.
This video is kinda timely, shame they didnt cover teh scandal:
Hi, Nick! Actually the problem is, the script for this piece had to be submitted just about the time Beyers and you posted on WSE yesterday, but the anchors on Life4U will be mentioning WSEgate (did I just coin that?) on the weekly magazine on Friday.
We're already collecting materials for a followup story.
Thanks!
Shava
Not much investigative journalism here, actually. Luke has been opening his mouth a lot at WSE, but not posting on the website. Nice connection of dots, though.
http://www.wayneporter.com/2007/07/25/virtual-investing-cover-up-stewart...
Metaversed covered it as per their style- we don't know it all yet- but the above you will find a few answers per Mystik.
Curious to know more about the reason Luke gave Thruston permission to modify the scripts for WSE ATM machines.
Don't know- what was the procedure? What was the guidelines? What were the rules and regs? No idea...NO TRANSPARENCY.
But seems to be the crux to all of this. a real exchange must be regulated, policies, and oversight watch. Yes it is a setback, but one that was probably long in the making. Read investment statements. You have talented scripters and coders running "Public companies". C'mon. Most have never heard of SOX compliance...they are creatives, scripters and DYI people.
I am more for finding solutions than pointing fingers- because these exchanges can teach tough lessons and good lessons. Hopefully everyone learns. If the "Exchanges" are smart they would work together, collaborate and set rigid standards out for all and may best exchange win....unless it falls under new gambling rules.
If investors are smart- they will demand this. Otherwise it is like darts.
There is absolutely no way to know who did the crime in a situation like this if you weren't involved directly with the avatars, getting chat logs, Skypes, RL meetings, etc. So any attempt to report it will inevitably risk falling into the clutches of one or another interested party. Robert does an admirable job of getting the story, but he can be no more sure than anybody that he does have the story and much more has to come out. (Duranske makes a completely unnecessary implied jab about other SL news sources, as covering SL is damn hard, like covering black cats in a black box; many of us *do* follow *exactly these journalistic principles of saying 'alleged' but simply don't have "Cornell University Professor" next to our names to give us the trust level he needs).
Unfortunately, in Second Life, there is a tendency of allegations being made about hacks by the very people who did the hack, or their close -- and now ex- friends. It's the oldest story in the book to claim that your own account was hacked and "an intern" or "my roomate" or "my little brother" who got on the computer and did X, Y, or Z bad thing.
Sorry, but we simply *have* to ask why Mystik is so quickly exonerated. Sure, she sounds like the adult here, and an honourable person, and she has the added luster of the Lindens appearing to clear her by releasing her account. But do the Lindens really have the story? And can't we ask more about a story where the Chairman of a company is guilty of a heist, but the CEO is innocent?
Why, indeed is a stock market with ostensibly secure ATMS suddenly giving access to the scripts for the sensitive transactions of deposits and withdrawls to a company *listed on* the exchange?! What's up with that? I know from even having Ginko and Slex as terminals on my land, with those companies as tenants, that I have to be very careful to give them their own parcel with autoreturn and police invisiprim hacks or any suspicious activity around their terminals. I can't imagine any company in SL with a terminal suddenly opening up its scripts to a *user* of that terminal; and what's more, to give that user not only script access but avatar access to the cash account WSE Huet. It just speaks to the rampant intermingling of the "stock exchange," and its managers and the "companies" listed on them.
I'm also *completely* unpersuaded by the decision to move over to AVIX, and I have to ask *this* question, too: was the "heist" engineered to enable MDS to escape from the bad business of WSE, which has increasingly become discredited and has had people leaving it, in order to make the transition to AVIX? I mean, if you've just lost money you can't recover, and are likely to lose more as you leave WSE and some investors lose confidence, is listing on a new exchange, equally as dubious, the right move to be making?
They really ought to describe themselves as the Ukrainian Samo-Pomoch' Society or the Croatian People's Credit Union and then we will lower our expectations accordingly, and understand that it's just a group of fellow countrymen wanting to help each other out with credit and loans to cover their new lives as immigrants, and just hope they don't shoot each other over the debts.
>I am more for finding solutions than pointing fingers- because these exchanges can teach tough lessons and good lessons. Hopefully everyone learns. If the "Exchanges" are smart they would work together, collaborate and set rigid standards out for all and may best exchange win....unless it falls under new gambling rules.
Sorry, Wayne, but I'm not buying all this "let's all get into a circle and sing Kumbayah" stuff. Crime is crime. Theft it theft. Being "new at the game" or "not versed in how stock markets work" or "part of building new institutions in a virtual world" doesn't exonerate you from charges of theft if you hack a script and steal stuff. You don't steal and move money from accounts because your finger slipped on the mouse, or you didn't know how to script the LSL command "//getpayment" or whatever. Please. Let's be adults here. Virtuality is no excuse for bad behaviour in reality, which is theft.
The tough lessons *can't* be learned by people who so commingle the stock exchange management, their own companies and directors and other companies with which they have intermingled relationships. These would all seem laughable in RL.
You'd have to walk back the cat 100 miles and get these characters first to make a public financial report, that is audited by an independent auditing form, and have some kind of published business plan with their financials publicly visible. If you could get even just that far, with some sort of assessment body that could evaluate their property and their claims of income, then you'd actually be able to speak of "companies" instead of "my friends playing store with me".
Virtuality doesn't let you off the hook and enable you to skip steps on basic methods of accountability, that are achieved first and foremost of the companies themselves.
Good points Prokofy, responsibility is the same everywhere - even in Virtual, especially against customers, investors, when big expectations and money are involved!
Robbie Kiama, Meta Mart www.MetaverseMart.com
It seems from Adam Reuters' coverage of the story, Thurston is a former employee of Hope Capital/WSE, and that's how he comes to use insider knowledge.
So is that true? That it's not just close connections between the management of the stock exchange and a major company listed, but that the Chairman of the Board of Mystic Designs is also a former employee of Hope Capital?
Luke's story given to Reuters differs significantly from Mystik's given here. He says here (http://secondlife.reuters.com/stories/2007/07/25/world-stock-exchange-hi...)
"“It appears that a past employee of Hope Capital, who assisted in fixing previous bugs in our ATM, had decided to try and use their inside knowledge of our ATM communication channel to their advantage,” said Vandeverre (real name: Luke Connell of Melbourne, Australia). “We are hoping that most of the linden dollars will be returned.”
Mystik's story given to Robert says this:
"ccording to Mystik Boucher, LukeConnell Vendeverre, CEO of WSE, gave Thurston some rights to modify the scripts used for the ATMs that WSE clients use to make deposits and withdrawals. Thurston apparently used these rights to make bogus deposits, and then withdrew L$3.2 Million from WSE Huet, the avatar used to store the money used to provide the bank with liquidity for cash transactions."
Well, which is it? or are they the same story?
And did the heist also indicate that Thurston had inside knowledge of an impending LL policy to have dramatic effect on markets, the outlawing of casinos?
"Sorry, Wayne, but I'm not buying all this "let's all get into a circle and sing Kumbayah" stuff. Crime is crime. Theft it theft. Being "new at the game" or "not versed in how stock markets work" or "part of building new institutions in a virtual world" doesn't exonerate you from charges of theft if you hack a script and steal stuff. You don't steal and move money from accounts because your finger slipped on the mouse, or you didn't know how to script the LSL command "//getpayment" or whatever. Please. Let's be adults here. Virtuality is no excuse for bad behaviour in reality, which is theft.
The tough lessons *can't* be learned by people who so commingle the stock exchange management, their own companies and directors and other companies with which they have intermingled relationships. These would all seem laughable in RL."
They can be learned by others and I agree it is laughable in RL. e.g. explaining SOX compliance. These nascent exchanges are hardly exchanges.
So let's be adults- did he steal money? or did he steal Lindens? Are Lindens money? Depends on who you ask...either way the action was unethical...don't mean to look down on the crime, but in my reality (chasing botnets, criminal gangs, under-age pron pushers, where the numbers can get up in millions of US dollars) this is just a small virtual lesson- an early warning shot.
I still think there is more to the story...and many questions unanswered...
http://www.wayneporter.com/2007/07/29/wse-my-interview-or-lack-of-answer...
I don't know...but hope we find out.