I spoke with ‘Nicholas Portocarrero’ tonight at length, on the record. I am going to do something I rarely do and run this transcript exactly as it occurred, without cleaning it up or editing it into something more reader-friendly. I’m not really in top form here, but I feel that this is a very honest interaction, and I don’t want to destroy that with editing. The text speaks for itself. I think that it will be particularly interesting to Ginko depositors. “VB” is Virtually Blind editor Benjamin Duranske. “NP” is Ginko Financial head ‘Nicholas Portocarrrero.’

VB: I think people want to know a lot more about you, especially now, and if there’s any chance of you getting Ginko out of this safely… this is a good way to start. So I’m asking, on the record, why start it?

NP: It’s been a long time, it’s hard for me to say for sure what I was thinking at the time. However, what I stated in a previous interview with… I’m not sure who is essentialy it. Basicaly I was reading thebiography of a local banker, he is best known as the Baron of Maua

VB: I think I heard of him.

NP: At the time, or rather, earlier, I had thought about things I could do in SL The two things just connected and I decided to give it a try

VB: Can I inturrupt, and ask a personal question? How old are you? It might not mean anything, but a lot of your associates in Ginko appear to be fairly young, and I think people want to know, whatever the answer is.

NP: I’m in my 20s, that’s all I’ll say

VB: Okay. So you wanted to try banking methods in SL?

NP: Not so much methods, but the business

VB: Can you explain a little more? What was your goal in starting Ginko?

NP: Well, the goal was to create a bank. To build a business based on the banking industry, in some way. It wasn’t really very well defined, at least not that I can recall. I just wanted to build a bank.

VB: Did you think that you would be able to pay 100% yearly interest (.19 daily) at the beginning? That’s what Ginko advertised, and intially offered, I remember.

NP: Yes.

VB: Why?

NP: I’m not sure how to answer that. It was simply an objective fact. In the beggining, even if I were to fail, it would be fairly easy to just pay people from personal income.

VB: You figured, if it didn’t work, you could cover the depositors funds personally?

NP: Yes.

VB: That’s not possible now though, right?

NP: It wouldn’t be as easy, no. I wouldn’t call it impossible though.

VB: Is that your plan, if it all falls down, to try to cover the withdrawals yourself?

NP: I do not want to commit to any such plan, however I do feel a responsibility to accountholders.

VB: I understand, I’m more trying to figure out what your next steps are. Maybe this is a better question: Does Ginko have assets that cover the depositors claims against it right now?

NP: Not in any liquid form, no.

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VB’s primary coverage of the Ginko Financial bank run can be found in two posts below, but there are a few important facts are worth highlighting today.

• Ginko is, amazingly, having an IPO to try to raise cash. There was actually some limited early activity, but I suspect it was just insiders churning to make it look good. Around 50,000 shares have theoretically traded, netting Ginko about L$25,000. That will cover… let’s see, two and a half withdrawals today. Check out Nobody Fugazi’s piece on this for some solid quick analysis. Here’s the summary: “Shady.” I don’t have even a single Linden in the in-world markets, but my first thought on this was: is there any way to short it?

• ‘Sarah Nerd’ posted a copy of a June 7 forum post about Ginko’s investments (notably, the original post can be found on a WSE board, which is the other stock exchange Ginko has used to raise money). It describes some of Ginko’s in-world investments, but it states that ‘Portocarerro’ is “uncomfortable disclosing anything regarding the off-world side of things,” which, he admits, account for more than half of the money Ginko owes depositors. I’ll leave analyzing the in-world investments to readers who are more familar with the in-world markets (in fact, I’d really appreciate a comment or two on this if anybody knows how these companies are doing off-hand) but have to ask this: why would ‘Portocarrero’ be “uncomfortable” talking about money that has been taken out of Second Life? That’s kind of an odd way to put it.

• I spent some time at Ginko’s main ATM after it started working again today. It was crowded (image, right). In spite of giant signs saying there was a L$10,000 limit, many people tried to take out much more (unsuccessfully, of course). I don’t see any reason to believe that it is slowing. Ginko’s “Deposits” number is down several hundred thousand Linden in the two hours that the grid has been back up and semi-stable. For those of you who are trying to get in and access funds but cannot teleport, here’s a workaround.

• Ginko apparently did not sell any real world assets during the downtime. This adds to my suspicion that they do not have any assets to sell.

We’ll get back to more purely legal issues here soon, but this is clearly very important to many of VB’s readers, and I have received extremely positive feedback on the coverage, so I’ll keep it up until we have some resolution.

Legal Times (a D.C.-based publication) is running one of the better overview articles I’ve read on law in virtual worlds (free registration required). It doesn’t spend too much time on the D.C. angle, so it’s likely to be interesting to most readers. I am quoted a few times, and the reporter also talked to a number of other practitioners and commentators. One thing I liked is that this writer, Attila Berry, though not a Second Life user before, made an avatar, met people in-world, and generally tried to figure out what was appealing about this rather than coming in with preconceived notions.

Anyway, it’s worth reading and maybe bookmarking, because it’s the kind of thing you can send to your incredulous colleagues and family to explain how law in virtual worlds isn’t just a complete waste of your time.

A few highlights:

• D.C. attorney Stevan Lieberman says his firm has brought in about $20,000 worth of business from Second Life.

• David Post, a law professor at Temple University, says he thinks in-world legal systems will make virtual worlds more attractive to business.

• I discuss how it’s important for attorneys practicing in-world to be careful of unauthorized practice of law and conflict of interest rules.

• The reporter beats me to the election results for my own organization, announcing that Field Fisher Waterhouse partner David Naylor is the new President-Elect of the Second Life Bar Association (we’re finishing up an election for the Executive Board right now and I’ll formally announce all the results here when that’s done). David will take over in January, when my term expires.

I’ve been capturing data off of Ginko’s website the last two days, and the numbers do not lie. I am convinced that Ginko Financial is a fraud or is negligently managed. The proof is a little complex, but if you are a Ginko investor, reading this is absolutely worth your time.

At 6:00 PM SLT yesterday, Ginko claimed that it had L$192,378,551 in “Total Deposits.” Three hours later — after a day during which Ginko head ‘Nicholas Portocarrero’ said a “bank run,” occurred — Ginko reported L$194,462,018 in deposits. That means Ginko wants you to believe that its total deposits increased by L$2,100,000 (about US$8000) during the three hours between 6 PM and 9 PM yesterday. That is smack in the middle of the time that most Ginko depositors were actually withdrawing money in a what ‘Portocarrero’ described as a “panic.”

Ginko reported an average of about 59 transactions per hour during this time. That is 177 transactions. So Ginko is asking you to believe that 177 people walked up to Ginko’s ATMs between 6 and 9 PM, in the middle of a bank run, and collectively increased Ginko’s deposit total by 2,100,000 Lindens.

Were you one of those people? Did you deposit a huge amount of money? Do you know anyone who did? Do you know a single person in your whole life who is so stupid that they would have deposited USD $8000 with Ginko last night without making it a loan against some collateral?

I just do not believe it, and if you are a rational person you should not either. My guess is that these 177 people actually took out as much as they could. I was standing around Ginko ATMs talking to people a lot yesterday, and everyone was bitter that they couldn’t withdraw any money. When they were final able to, they took everything they could, and then they kept trying. 177 transactions at the L$5000 limit Ginko imposed all day should have set Ginko back about L$850,000, not netted it L$2,100,000.

But most lies have a small kernel of truth, and that kernel of truth usually helps explain them. Here’s my best guess as to what that kernel of truth is here. Ginko managed to borrow some money against its current assets. That’s what ‘Portocarrero’ told Reuters he was going to try to do (“I’m looking to borrow short term cash using [Ginko assets] as collateral”), so it makes perfect sense that that’s what happened.

I’ll even guess the number. It was $L3,000,000. That covers the roughly L$850,000 that the 177 people who made transactions took, and it accounts for the extra L$2,100,000 that now sits like a big fat stinking lie in Ginko’s “Deposits” column.

And here’s the problem — that’s fraud if they realize what they’re doing, and shockingly negligent if they don’t.

If the L$3,000,000 was an investment against a current asset, it cannot be counted as a “deposit.” I know this is complex, but it’s absolutely correct, and it is incredibly dangerous accounting, for Ginko investors. If they guaranteed that $L3,000,000 loan by promising to give the guy that loaned it to them something else they already owned (a car, part of a second life business, etc.) in the event that they couldn’t pay it back, then it is not a new asset, and it absolutely can not be used to increase the “Total Deposits” number.

If I am right, it means that the number on Ginko’s website for “Total Deposits” can’t be trusted. And if that number can’t be trusted, then none of the numbers there can — and it is only a matter of time before a bank run like today’s is too big for Ginko to get out from under by borrowing more money.

This might still work out okay, for a while. If enough people have abandoned Second Life and left some cash with Ginko, it could easily have enough to weather this storm. If they’re able to keep borrowing against assets and calling the money “deposits,” they can even make things look good.

But if I am right, then it is only a matter of time before that’s not true anymore. You can’t report investments in your company as part of “Total Deposits” and not expect to run out of money pretty quickly, because you are essentially counting one asset as “income” twice. If I am right, it means that the giant number on Ginko’s website — 193 million Linden in total deposits right now, or around three-quarters of a million U.S. dollars — is a farce. And if you have money in Ginko, that better worry you.

For what it’s worth, as of 9:00 AM SLT today, about half of that mysterious “new deposit” money is gone, and withdrawals are still severely limited.

[Update: Ginko has changed the daily withdrawal limit several times, ranging from 5k to 25k, over the last two days. For the most recent limit, check Ginko's website. Note that you cannot see the changes as the old limits are taken off when new ones are put up.]