January 30, 2005

CostaGold case Settles - Leaving Ugly Dilemma for Open Governance Issuers

Over on the CostaGold settlement blog (yep, class action is now done by blog!) there is news that the court has granted final approval for the settlement of the seized funds. This hopefully brings the sorry episode to a close, but the black spot on G&SR and the consequent unanswered questions for the future of the sector remain.

To briefly summarise the story (I'm being fast and furious with the facts here): Costagold started up as one of the boom games around Y2K that ploughed into e-gold's booming market. Growth in e-gold was 10 times per year, and the sky was no limit. People wanted to play, and they played anything, including what latter came to be seen as obvious Ponzis or Pyramids or variants.

Costagold amassed a pot of e-gold from these players, and at some point got scared enough to start pulling it out. They sold through G&SR, the joined-at-the-hip exchange provider for e-gold, and that's when things went wrong: As they started exchanging, G&SR seized the e-gold and held it.

Nominally, it was because, G&SR said, they wanted to identify the owners. Skipping the question marks about all this, G&SR now held this pot, and did ... nothing with it. Eventually, some of the nominal owners found their way out of ignomy and filed a class action suit, using a real law firm. The case wound on as these things do, and just last week a settlement was finally agreed.

It is pretty clear that Costagold was a scam, a Ponzi, a fraud. It's also pretty clear that G&SR acted impetuously, and ended up in a very difficult position. What were they supposed to do now that they had seized the metal? Return it? Send it back? Find the original owners? Further, everyone knew it was a game all along, including G&SR and e-gold, so if they were going to act, why did they act when the money came into their reach?

From there, G&SR just made matters worse for themselves. Instead of seeking to resolve the situation, they held on and fobbed off attempts by difficult owners to deal. They made no attempt to unravel the Ponzi, as they had done with the Advance scam a few months before. Further, they moved the gold offshore, into the hands of Bermuda lawyers, and from there, who knows where it went?

When the class action was awarded in December 2003, instead of standing there as a disinterested party holding on to the monies of others, their actions seemed calculated to delay. G&SR filed to appeal! That was of course knocked back by the Appeals court, but still delays occurred.

The problem with all this is that even if G&SR were doing the right thing, their actions left a bad taste in the mouth. It's not good enough to simply follow the laws of the land, and play legal games in court. An Issuer also needs to stand up there and be disinterested, and be seen to be disinterested in the monies that the Issuer has under charge.

Which leaves us with a lesson. And a dilemma: An Issuer of Honour is faced with many challenges, and one of the chief remaining ones is how to deal with Ponzis.

To be fairly critical to us all, I don't think we as a sector have an answer for the Ponzi as yet.

We have much to our credit, and I shall list them: We have answers for other frauds. We've got answers for phishing, and insider fraud. Money laundering is covered, same same for terrorism and the other bogeymen. We know how to deal with theft of reserves, for example. We have privacy systems that lead the way.

But, comprehensively, we do not have a good answer for Ponzis. (I know there are some out there that think that Goldmoney's heavy identity approach kills Ponzis, but the cure is killing the patient as well. It seems that if you trigger their systems, you can be locked out of your own money - trivial amounts, too - for 3 months. Which means it isn't money any more.)

What the G&SR lesson has taught us is that the Issuer should not seize the funds. Even if they did all the right things, the mud will stick, and this will cost them in credibility. Which, as an Issuer, is surely the most important currency of all.

Which brings us back to the dilemma of handling the Ponzis. Is this an unanswerable question? Is there a way where we can push real money out on the net, and not have to face the Attack of the Killer Ponzis? Or do we have to simply accept that everyone is an adult, and they have the right to be fools, parted from their money?

I don't know the answers. But I do feel that this is one big area where the Internet money issuance business is left with an open question, and a challenge for the future.

Posted by iang at January 30, 2005 09:48 AM | TrackBack

Who filed claim on Coastagold? Hypothetically it very well may have been the Issuer himself since the records of who is entitled is subject to his records. What a great way to wash funds, create a class action and pay your self ... interesting! I assume the points are less then the moneywashers. Please note that the Class Member is the person who is listed in e-gold Ltd.'s records as the owner of the account from which an uncompensated spend was made. Checks will be made payable to these Class Members only.

Posted by: Jim at January 30, 2005 12:00 PM

Jim, that's a great point, worthy of a Grisham novel. Perhaps he'd call it _The Pyramid_ being well known for dramatic licence.

It's clearly possible to do that - seize the funds and then run ones own action against oneself. Only the lawyers to pay off! But I think it unlikely, the risks in doing that are inordinate, one is also taking the risk of perjury and the wrath of the court, as well as the user base's outrage when/if such were discovered.

Not to mention, the risk of it all going wrong and the court quite innocently deciding to seize the money itself, or close you down. As a strategy, I could imagine it being tried by some professional money launderers, but it seems even too risky and uncontrollable for them.

Which just leaves Gresham. Think he'll pay for the rights?

Posted by: Iang at January 30, 2005 12:06 PM

So why is the gaping hole in governance not plugged by the court, which should order an audit of e-gold records before the awarding a judgement based upon a known medium for scams. This court sounds like an unlikely source of trusted information. So the Costagold records are attested to as per egold? Really? What mushrooms are they using in the soup?

Posted by: Jim at January 30, 2005 02:08 PM

food for thought...

perhaps the gold was never actually frozen.
perhaps it was being spent all of those years.
perhaps the judge in milwaukee ordered them to repay in USD, not gold.
perhaps dj & barry then wrote up bankrupty papers, forcing the cost of the settlement way down.
perhaps dj & barry are now desperately trying to recover what money is left.
perhaps dj is running out of smoke and mirrors.

Posted by: jan janovich at January 30, 2005 05:24 PM

Reminds me of an argument I had (anonymously of course) on the e-gold mailing list back in early 2000. Here's the conversation, reformatted for blog comment purposes:

Craig Haynie wrote:

So what happens if someone doesn't follow E-Gold's standards? Will they be kicked out? How so if they actually own the e-gold? If it is, in fact, their property, then how can they be deprived of it?

Ian Grigg wrote:

Assuming that e-gold decides to act, there might be these options:

Anonymous (I) wrote:

Craig seemed to be asking more about the propriety of e-gold's seizure than the mechanics. Obviously the company has any number of ways to grab the gold its clients have entrusted to it. The question was whether it was right and proper for it to do so, when the gold belongs to someone else.

Ian wrote:

1. Freeze the account, and resort to some sort of administrative procedure like arbitration.

2. Return the funds by the path that they arrived. As this can be done easily via G&SR, there is no difficulty in doing this at the moment, although your points on the future need addressing.

I wrote:

Return the funds??? So much for non-repudiation! Apparently e-gold vendors would be wise to hold off on shipping products until they have performed an OutExchange and gotten the money safely out of the clutches of e-gold and into a good old-fashioned bank, which
doesn't pull these kind of shenanigans.

Ian wrote:

Which options, and there may be others, are used is really up to e-gold. AFAIK, e-gold have not announced whether they have actually followed these or other options, although I do recall that the e-gold Account Agreement is being changed to more readily reflect these issues.

I wrote:

It's up to e-gold, huh? They get to decide their method of choice to grab their customers' funds. How comforting. And no doubt current account holders are overjoyed to learn that e-gold plans to retroactively change their account agreements. Like Darth Vader, the company declares, "I am altering our agreement. Pray that I do not alter it further!"

Ian wrote:

In summary, there are plenty of options. Whether you like them or not is another issue. Whether they should be used is an issue of extreme judgement, one that e-gold needs to get right for the benefit of all users, and the results of which will be scrutinised, quite correctly, by those same users.

I wrote:

Oh, you think so? For a company that thinks so little of its customers' privacy, e-gold seems quite determined to protect its own. See this little gem from Douglas Jackson's monitoring proposal:

> Once these are stabilized we will almost certainly need to exercise any such actions without public company comment.

No, there will be no scrutiny, correct or otherwise, by the "users". E-gold will perform all its account grabbing safely out of the public eye.

Craig wrote:

A currency exists as a man-made tool, but it has owners, and is a store of wealth. The only way standards can be applied to e-gold would be to deprive people of their ownership rights. Such standards can only be enforced by those who don't own the e-gold.

Ian wrote:

This currency was made by e-gold, who are the owners of the system. They are fairly generally charged with operating the system without taking risks of a system-threatening nature.

I wrote:

They may own the company, and the implementation of the currency, but they don't own the gold. E-gold has no more right to take that (without a lawful court order) than Brinks can abscond with the contents of their armored cars simply because they have temporary possession of the goods.


Posted by: Cypherpunk at January 31, 2005 01:53 PM

Ha! A blast from the past. In fact the Costagold case started up shortly after that I recall, so those dooms being portended by yourself and Craig were indeed ... revisited.

You say this:

"No, there will be no scrutiny, correct or otherwise, by the "users". E-gold will perform all its account grabbing safely out of the public eye."

(I think it was you ... difficult to tell.) But that's not entirely true. Costagold was seized under the public eye, and that issue and a few others like it were seminal in establishing a new reputation for e-gold. If you recall, there was a lot of noise about it on the lists (none by me, as I had withdrawn from actively supporting e-gold on the lists by that point for reasons you can guess at by reading the posts....)

The damage done by that particular episode was quite severe, and would form a plausible explanation why e-gold were never able to resume growth after that period. I say this from a fairly vague knowledge base, as I really didn't pay attention. But in a later life I did hear of this reputation popping up in the oddest places.

Also, you'll note that the Issuer stuck it out and ran the list throughout all this period. And still does to this day albeit with Jim Ray's legendary "moderation". They may have acted against the wishes and even the principles of their customers, but they did not do it out of the public eye.

In this sense, that's as much as open governance can hope for. Now you decide (whether to use e-gold or not). That's the mission - to get you the user to go in there with sufficient information and analysis to make a rational decision.

Posted by: Iang at January 31, 2005 02:28 PM
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