financial markets

Not even two weeks after I moderated a panel on regulating Financial Markets in Second Life, The Second Life investment community is buzzing with speculation about fraud at the World Stock Exchange. First, WSE investors encountered locked ATMs (the inworld terminals at which to transact with WSE accounts), accompanied by this cryptic note on http://www.wselive.com/ from LukeConnell Vandeverre, CEO of WSE:

"The World Stock Exchange is closed for important updates. The WSE will be open and trading will resume at 12PM PDT, Tuesday 24th July 2007. Thank you for your patience."

Then, WSE investors saw this entry from Mystik Boucher, CEO of Mystik Designs (MDS) one of the larger and more successful companies listed on WSE:

"A few short days ago, it had come to the attention of LukeConnell that the WSE had been hacked and lost over 3.2mil/L. I come into this story, well, because it was the Chairman of Board @ MDS who has allegedly hacked the WSE. On Saturday I received an e-mail from Patsy Linden stating that my account was placed on Hold due to an Administrative Review."

Those who were at the panel will remember that LukeConnell, like the COO of the competing exchange (Maelstrom Baphomet of AVIX), argued that SL stock exchanges are "a game." This news is undoubtedly causing some to ask "Are we having fun yet?"

Well, I had a chance to interview Mystik and hopefully provide a little more insight and information while we wait for WSE to reopen, and perhaps provide their own statements. Please keep in mind an important caveat--I have not had a chance to get corroboration from anyone, so I am simply representing Mystik's position here. (Anyone who wants to set the record straight, IM Beyers Sellers in SL, or email me at rjb9@cornell.edu).

With that in mind.....Mystik reports that LukeConnell Vandeverre, CEO of WSE, told Mystik that the CFO of MDS, Thurston Hallard, and his alt, had been making bogus deposits, followed by withdrawals. Thurston has previously claimed that Luke had given him rights to modify the money account for WSE, suggesting that this *might* have been a hack from within SL, rather than directly accessing the website through real-life channels. (That may have some important implications for the parties involved, and Linden Lab's involvement). Linden Lab has responded by suspending both Thurston's and Mystik's account (because naturally they had frequent cash transfers), but Mystik has been told that the suspensions should be resolved today, and Mystik is "very optimistic on the outcome."

Mystik responded in several ways to this news. First, she has removed Thurston Hallard from his post as CFO. She has also chosen to delist from WSE, over objections from other Board members (and *not* at the request of LukeConnell or WSE). As she put it, "We're walking from WSE. We're one of the strongest buys there and our name will not be tarnished due to their lack of security implementation."

Delisting is a pretty significant step, given that MDS has a market cap of about L$13 Million, or around $50,000 US. This is a pretty big company, by SL standards, clearing (in profit) about $80K US on an annual basis, with their work on web/SL integration, land builds and related work. Mystik says that she has a shareholder list, and will be buying shares back to keep the major shareholders on board, and she wants to "make sure they are rewarded."

OK, that gets most of the key facts (according to Mystik) on the table regarding the nature of the transaction and its immediate effects. In my next post, I am going to delve into some more speculative and controversial issues...but I know there are a number of investors who are feeling up in the air now, so I am going to post this now.

Last Friday I moderated a panel discussion on financial markets. We quickly hit our limit of 50 avatars on Dr. Dobb's Island's, and convinced them to risk crashing the sim to let in a few more. And a few more.....ultimately, we had 70 people attending, including several members of the RL and SL press. Nick tells me this was by far the best-attended Metaversed geek-meet so far.

Three topics were particularly contentious. First, when I noted the *possibility* that the markets could be "viewed as a game," the audience chat when off the charts, mostly in vehement disagreement. However, the exchange leaders clearly agreed with the view that the exchanges are a game.

From there, the discussion moved right into the prevalence of fraud. The heads of the exchanges (Maelstrom Baphomet representing AVIX, LukeConnell Vendeverre representing WSE) emphasized the relatively low rate of fraud, and their strong attempts to limit it, but from the extensive post-panel audience discusion, many were clearly unconvinced.

Some people seemed to think that the efforts of the Second Life Exchange Commission (SLEC, headed by TraderJohn Susa) were encouraging, but that led to the third point of controversy: whether self-appointed regulators would do more harm then good, by being in the pocket of the exchanges, or annointed friends of the Lindens.

I tried to remain carefully objective during the panel, but for the record, here is my own take on these three issues. First, I don't believe that the exchanges are a game. After all, these exchanges have raised about $1.5 Million (US, not linden), and there is no objective other than whatever the individuals involve are seeking (which I am guessing is money).

Second, I think fraud is a real concern in this markets, and the exchanges themselves could do more to improve investor confidence, such as having better disclosure about trades, and better separation between managers who issue shares and the businesses they control. (More first-life disclosure would be nice too).

Finally, while I understand the *potential* for problems with self-appointed regulators being extortionists or annointed busy-bodies, I think those concerns are far outweighed by the likely benefits of regulation done right. I hope the SLEC will be able to succeed in their task, or if not them, another group.

Were you at the panel? What did you think?