FEDERAL COURT REJECTS SEC INTERNET INITIATIVE

Boston, MA – January 31, 2001 -- In a stunning rebuke to an initiative of the Securities and Exchange Commission to regulate Internet activity, Federal District Court Judge Joseph L. Tauro has dismissed the SEC’s case against the operators of one of the Internet’s most popular fantasy games, “StockGeneration”. In a seven-page opinion issued Friday but released just yesterday, the Court granted the motion of SG Limited to dismiss the SEC’s case against it, agreeing with SG that their website is but a fantasy game, and does not involve the fraudulent sale of securities.

“This was a case of gross overreaching by the SEC. They simply failed to understand the Internet’s rapidly developing role in the field of entertainment.”

“We are delighted that the court acted so definitively by granting our motion to dismiss and shutting down this litigation at step one”, said an SG spokesperson.

SG (or “StockGeneration”) operates a fantasy stock exchange game on the Internet. Players pay to play, and “buy” and “sell” fantasy stocks under made up names like “Fountain of Youth”. The website clearly states that it is there for “entertainment purposes only.” Although the site never advertised, its popularity spread by word of mouth, and by last spring there were over 325,000 players from over 70 countries worldwide. When the game was shut down by the SEC last summer, it had already paid out millions of dollars to winners.

In June of last year, the SEC went into Court, claiming that SG was fraudulently selling securities, and obtained an Ex Parte Order essentially shutting down the site and freezing the bank accounts that were used to pay game winners. The SEC also filed a civil Complaint in federal court, alleging violations of the securities laws.

On October 5, 2000, SG filed a Motion to Dismiss the SEC’s complaint through its counsel, Dan Small of Boston. In his filings and oral arguments before Judge Tauro on January 16, Small argued that the SEC had exaggerated the facts to get the Ex Parte Order, and overreached its authority in bringing a securities case against the operators of a fantasy game.

In its decision granting the Motion to Dismiss, the Court agreed, holding that, “substance must prevail over form” and that, “It is difficult to imagine more clear and forceful language alerting potential participants that they would be playing a game, not making an investment.” The Court also rejected the SEC’s claim that this was an illegal “pyramid scheme”, or that it was some kind of “investment contract”. Rather, it found that the site was, “clearly marked and defined as a game”.

In a statement following the decision, Small stated that, “We are delighted that the Court was unequivocal in rejecting the SEC’s claims at this early stage. That the SEC would put the full force of its resources behind this indicates a total lack of understanding of the Internet as a source of entertainment for millions of people all over the world.”

Small is a partner with the Boston firm Butters, Brazilian & Small, based in Boston.

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