Law Journal Says Ginko Financial Probable Ponzi; Yield Down 60% in 16 Months
February 23rd, 2007 by Benjamin Duranske
[Editor's Note, August 11, 2007: Virtually Blind has been running extensive follow-up coverage of the collapse of Ginko. You can find it by searching "Ginko" in the sidebar, or following this link. The original article appears below these notes. Ginko has closed its website, and liquidated its debts by forcibly converting all account holders to "Ginko Perpetual Bonds." These bonds are only tradable on a Second Life stock exchange one-third owned by Ginko's former head, and trading them involves paying a fee that goes to him. The bonds currently sell for pennies on the dollar.]
[Editor's Note, August 5, 2007: Based on what I have learned in covering the collapse, I am now completely certain that Ginko is paying its obligations to previous depositors with new depositors' money rather than investing that money. As such, over two years of speculation about whether Ginko is a Ponzi scheme is over -- it undeniably is. I am typically very cautious with statements like this, but known facts prove that this is what is happening. As such, I recommend that no one make any further deposits Ginko, that victims report the scam to Linden Lab via abuse reports, and that land owners remove Ginko ATMs to protect their tenants unless Ginko voluntarily disables deposits.]
[Editor's Note: On July 27, 2007, Ginko Financial suspended withdrawals, apparently in the wake of Linden Lab's decision to ban casinos. Because of Ginko's near-complete opacity of policy and investments, it is unclear exactly how the casino ban is impacting Ginko. As of 9:00 AM SLT, Ginko's website states that withdrawals are again allowed, although temporarily limited to $L5k ($19 USD) per day per depositor (down from $L300k ($1100 USD)). However, the users I spoke to attempting to withdraw funds today were unable to withdraw even that amount. VB repeats its advice that people thinking of depositing money at Ginko carefully evaluate this company and the risks that they, personally, are willing to take, before depositing.]
[Editor's Note: On June 19, 2007, Ginko Financial raised its interest rate from 0.09% daily to 0.13% daily, which tends to indicate it is, at least for now, financially viable. VB maintains, however, that the bigger-picture criticisms of Ginko remain valid, and suggests that investors should approach any company with near-complete opacity of policy and investments very carefully. Ginko's current interest rate can be found here.]
—————————————————————————————————————————-
Originally published, Feb. 23, 2007.
A thoroughly-footnoted February 12, 2007 article in the online edition of Journal of the Business Law Society at the University of Illinois College of Law stops just short of joining virtual land baroness Ailin Graef (‘Anshe Chung’) and others in calling well-known Second Life savings bank “Ginko Financial” a ponzi scheme.
People have been beating this drum since shortly after Ginko’s formation, but a consistently slipping interest rate paired with statements Ginko Financial owner ‘Nicholas Portocarrero’ made in a recent Reuters interview, suggest that the allegations may deserve a fresh look.
A ponzi scheme involves enticing new investors with claims of huge returns, and using their money to pay off earlier investors (rather than paying investors part of the profits from a legitimate business enterprise or investment).
Whether or not you have money on deposit with Ginko Financial, the University of Illinois College of Law article is worth paying attention to because a crash at Ginko, which now claims over L$118m (about US$475,000) in deposits, would likely generate multiple lawsuits targeting both the owners of Ginko Financial and Second Life creator Linden Lab itself. It would also significantly ratchet up pressure for regulatory scrutiny of in-world financial transactions.
Why the concern from the students at the University of Illinois College of Law? To start with, the usual criticisms of Ginko: zero transparency regarding investments, potential underfunding of available withdrawals, and management’s steadfast refusal to remedy either problem.
But there’s a new wrinkle — Ginko Financial’s consistently-dropping interest rate was reduced again on February 1, 2007, and is now significantly less than half the rate Ginko was offering just 16 months ago.
In addition, Ginko Financial’s owner ‘Nicholas Portocarrero’ recently told Reuters that Ginko keeps only around 5% (and “sometimes less”) of its deposited funds available in-world in $L for immediate withdrawal by depositors, and Ginko provides no specific information about where or how the remaining 95% of the funds are held or invested.
VB sought comment from ‘Portocarrero’ in-world and via a form on the Ginko Financial website for this article (no other contact information is available). ‘Portocarrero’ declined, saying he is “not currently available for interviews.” ‘Portocarrero’ has not revealed his real identity.
Related Posts on Virtually Blind
- Ginko Financial Suspends then Limits Withdrawals; Head ‘Nicholas Portocarrero’ Calls it a “Bank Run,” Tells Depositors to “Calm Down”: "One of Second Life's high-interest, self-styled "banks," Ginko..." (10 comments)
- Commentary: Ginko Wrapup – No AVIX, IPO, or Funds: "[Editor's Note, August 5, 2007: VB is providing ongoing coverage of..." (74 comments)
- Commentary: Ginko Financial is Either Fraudulently or Negligently Managed: "I've been capturing data off of Ginko's website the last two days,..." (41 comments)