Podcast - Finding Humor in Law
What happens when the government treats online "play money" like real securities?
In this episode of "The Trial Lawyer's Handbook," litigation attorney Dan Small recounts a civil enforcement action brought by the U.S. Securities and Exchange Commission (SEC) against SG Limited, an early internet stock market game created by programmers overseas that built a large U.S. player base. He explains the SEC's attempt to characterize the game's virtual shares as unregistered securities and resulting allegations that the platform functioned as a Ponzi scheme, leading to a court-ordered freeze of approximately $5.5 million. Mr. Small walks through SG Limited's defense and the strategic choice to keep the case grounded in a clear, common-sense narrative, emphasizing that the platform presented itself as entertainment, not an investment. The episode spotlights the power of storytelling in trial advocacy, illustrated by how the district court responded to SG Limited's arguments in ultimately dismissing the SEC's case.
Much like video games have a sequel, however, the story does not end there. In the next episode, Mr. Small continues the narrative at the appellate level.
Listen to more episodes of The Trial Lawyer's Handbook here.
Mr. Small is also the author of the American Bar Association (ABA) book Lessons Learned from a Life on Trial: Landmark Cases from a Veteran Litigator and What They Can Teach Trial Lawyers.
Dan Small: Welcome to another episode of "The Trial Lawyer's Handbook." In this episode we'll discuss the SG Limited civil SEC case, based in part on my latest ABA book, "Lessons Learned from a Life on Trial."
In the late 1990s, as the internet became more widely accessible and usable, a wave of new internet games developed, attracting game developers and players from all around the world. Suddenly, it didn't matter where the game was created or where the players were located. Online gaming knew few barriers and was growing fast.
In this environment, a couple of young computer programmers in Hungary and elsewhere got together and developed an internet stock market game. They made up several fantasy companies with fun names and descriptions. Players would pay some money to join the game and pick their companies. Then the price of the stocks would go up and down randomly, based, as best as I could tell, on what the game's organizers had for breakfast or some other whim. No rhyme or reason for any of it.
Silly? Yes, it was, and absurdly simple compared to today's highly sophisticated computer games. But their timing caught the wave of new internet games, and it took off around the world. Although none of the organizers were from the U.S., the largest number of players ended up being Americans.
Everyone was having fun. The reviews were great, and the number of players grew exponentially, largely by word of mouth. It cost something to play, but no one was losing big bucks and everyone understood it was just a game. As the game's website made clear, even if the English from Hungary was not clear, "Players entering the website is solely for players' own personal entertainment."
Alas, the U.S. Securities and Exchange Commission, or SEC, was neither entertained nor amused. The SEC filed a civil complaint against the game company, SG Limited, in federal court in Boston under U.S. securities laws, including an ex parte motion to freeze SG's bank accounts. In doing so, it froze about $5.5 million.
Without getting too far into the weeds, the SEC had two basic claims. First, that the "shares" of these virtual companies were, in fact, securities. SG had failed to register these securities with the SEC, and thus they had violated the law. Second, that this was a Ponzi scheme, essentially "robbing Peter to pay Paul."
At the time, I had a small law firm in Boston with two good friends and good lawyers, Butters, Brazilian and Small. SG Limited came to me to defend them in the SEC's lawsuit, and I went to court with a motion to dismiss the case and unfreeze the money. In our memo in support of the motion and our lengthy oral argument before Judge Tauro, I argued that although the SEC might not have a sense of humor, the law did, or at least it should. This was unquestionably just a game with make-believe stocks and willing players. These were not legal securities, and the players were not being fooled or defrauded.
As trial lawyers we wear many hats: advocates, teachers, deal makers, writers, preachers and more. But first and foremost, we are storytellers. Taking the law and the evidence and weaving together the story that helps the judge or the jury understand and relate to our case. To be effective, we can't just recite the facts. We have to tell a story to help them feel what happened.
For many years I've kept a wonderful Native American proverb on my wall. It says: "Tell me the facts and I'll learn, tell me the truth and I'll believe. But tell me a story, and it will live in my heart forever." That should be the mantra for anyone wanting to try cases: Find the story of your case and develop the best way to tell it.
SG Limited is one of my favorite examples. It was a technical securities issue that actually was a great story. A couple of young programmers from around the world sitting at their keyboards, connecting with each other and making up a funny fantasy that people loved to play. The fun and the game were clear throughout, including from the "companies" themselves. The one I love best was literally, I kid you not, the "fart company," whose purpose was to harness and sell methane gas from (you guessed it) human flatulence. Ridiculous? Of course it was. That was part of the fun.
And that was the key point. The essence of a security had to be a basis in reality. The essence of a Ponzi scheme was fraud. My argument was if "robbing Peter to pay Paul" by itself without fraud was against the law, even if both Peter and Paul understood it was just a game, then Las Vegas would have to shut down tomorrow. After all, following the SEC's argument, what is a casino but a giant, nonstop Ponzi scheme without the fraud? The casino can only pay me my winnings at the tables because someone else — actually, lots of someone else's — is losing.
I walked the court through the language of the game's website, freely admitting that the English wasn't perfect, but that the message was clear. Ultimately the story was more persuasive than the technical legal argument. Looking at the website, Judge Tauro found, "It's difficult to imagine more clear and forceful language alerting potential participants that they would be playing a game not making an investment." On that basis, the court found that these were not securities under the law, nor was it an illegal Ponzi scheme. The district court granted our motion to dismiss the SEC's case. The story had won the day.
Stay tuned for the next chapter in the story in the next episode.