Stock Generation
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Stock Generation was a website that ran from 1998 to early 2000 and is now part of Internet lore as the longest-running, most infamous Ponzi scheme in the history of the Internet. Stock Generation allowed people to trade virtual companies using real money and promised enormous returns on investment.
The website was run from an off-shore island in the Caribbean, and the U.S. Securities and Exchange Commission was unable to cite Stock Generation's founders and owners (members of the Russian conglomerate MMM) for securities violations. In late 1999, participants began to experience difficulties in redeeming their virtual shares. Finally, in 2000, the market "crashed", which caused losses of at least $5.5 million to hundreds of participants. On March 20, 2000, SG unilaterally suspended all pending requests to withdraw funds and sharply reduced participants' account balances in all companies except the privileged company. Two weeks later, SG peremptorily announced a reverse stock split, which caused the share prices of all companies listed on the virtual stock exchange, including the privileged company, to plummet to 1/10,000 of their previous values. 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. (http://www.usatoday.com/tech/columnist/2001/09/27/sinrod.htm)
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 (http://www.sec.gov/divisions/enforce/claims/sgltd.htm). The court ruled in favor of Stock Generation, stating that the site adequately described the market as "a game" not an investment vehicle. 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." The game was promptly shut down. (see opinion of Chief Judge Michael Boudin at: http://laws.lp.findlaw.com/getcase/1st/case/011176&exact=1)
