Ban­non’s days at con­trols of firm that aided gam­ing cheats

IGE made mil­lions us­ing low-wage Chi­nese work­ers to amass vir­tual goods

The Washington Post Sunday - - FRONT PAGE - BY SHAWN BOBURG AND EMILY RAUHALA

Stephen K. Ban­non had al­ready been suc­cess­ful in Hol­ly­wood and on Wall Street when he flew to Hong Kong in mid-2005 to learn more about a promis­ing new op­por­tu­nity.

A start-up called In­ter­net Gam­ing En­ter­tain­ment, or IGE, had found a novel way to make mil­lions of dol­lars each month in the ex­plod­ing on­line video-game in­dus­try. Work­ing from the 19th floor of a sky­scraper in Hong Kong, the com­pany sold vir­tual goods for real money — mag­i­cal swords and capes and other ac­cou­trements that granted videogame play­ers power and ac­cess in more than a dozen pop­u­lar on­line role-play­ing games.

There was one prob­lem, though: The com­pa­nies that owned and op­er­ated these fan­tasy games pro­hib­ited what IGE was do­ing, and even con­sid­ered it il­le­gal. Sev­eral IGE ex­ec­u­tives told The Wash­ing­ton Post that they thought Ban­non could help

change that. Ban­non agreed to be­come the com­pany’s vice chair­man.

“The whole rea­son Ban­non came on was to try to le­git­imize the busi­ness,” said David Chris­tensen, who was hired as the com­pany’s vice pres­i­dent of busi­ness devel­op­ment about the same time as Ban­non. In the end, it didn’t work. The story of Ban­non’s six years with IGE and its suc­ces­sor com­pa­nies has re­mained largely un­ex­plored, even as Ban­non has be­come one of the most in­flu­en­tial po­lit­i­cal fig­ures in the White House. His af­fil­i­a­tion with the com­pany cuts against his cur­rent im­age as a cru­sad­ing cham­pion of blue-col­lar man­u­fac­tur­ing jobs and as a fierce op­po­nent of glob­al­ism. It also shows Ban­non’s will­ing­ness to be part of a com­pany that op­er­ated in what one le­gal ex­pert called “a clas­sic gray mar­ket.”

Ban­non helped per­suade pri­vate eq­uity firms, in­clud­ing his for­mer em­ployer Gold­man Sachs, to in­vest tens of mil­lions of dol­lars in the ven­ture, which re­lied partly on la­bor from low-wage play­ers in China to earn the video-game cred­its that IGE then sold to gamers around the world. In 2007, how­ever, IGE faced pres­sure from gam­ing com­pa­nies, a class-ac­tion law­suit, an in­ves­ti­ga­tion by au­thor­i­ties in Florida and fi­nan­cial stress. Ban­non soon steered IGE away from its vir­tual-goods busi­ness.

In­ter­views with a half-dozen for­mer em­ploy­ees and ex­ec­u­tives of IGE, and hun­dreds of in­ter­nal com­pany doc­u­ments, re­veal for the first time how the com­pany worked to avoid de­tec­tion by gam­ing op­er­a­tors — for ex­am­ple, us­ing the iden­ti­ties of un­wit­ting U.S. res­i­dents to cre­ate gam­ing ac­counts and con­nect­ing to proxy servers so its ac­tiv­i­ties would be harder to trace to its Hong Kong of­fice.

It is not clear how much Ban­non knew about these tac­tics, which were in place be­fore he started and con­tin­ued af­ter­ward. He did not re­spond to re­quests for com­ment or an email with de­tailed ques­tions.

A for­mer child ac­tor’s big idea

IGE was the brain­child of Brock Pierce, a for­mer child ac­tor in Hol­ly­wood who had roles in the 1990s fam­ily films “The Mighty Ducks” and “First Kid.”

Pre­co­cious and quick-wit­ted as a teenager, Pierce was also an avid gamer who had an en­tre­pre­neur­ial streak. In 2003, at 22, he and a part­ner opened an of­fice in an in­dus­trial dis­trict of Hong Kong. The small of­fice was a round-the­clock op­er­a­tion, with its 15 em­ploy­ees tak­ing orders from gamers around the world, for­mer em­ploy­ees said.

Pierce, reached by phone, asked a re­porter to email ques­tions to him but did not re­spond to sub­se­quent emails or mul­ti­ple mes­sages on his cell­phone.

For wealthy gamers, IGE of­fered an al­lur­ing propo­si­tion. In­stead of toil­ing for days, weeks or months to ad­vance beyond the early stages of an on­line role­play­ing game, they could sim­ply buy the vir­tual goods that granted pow­ers or un­locked realms.

“It wasn’t un­heard of for gamers to come to our web­site and spend $10,000” on a fully out­fit­ted char­ac­ter in a video game, said Greg Jel­niker, who joined the com­pany in 2005 as its vice pres­i­dent of op­er­a­tions but said he was later pushed out by Ban­non.

In April 2004, ac­cord­ing to in­ter­nal com­pany records, IGE took in more than $2.7 mil­lion in rev­enue for vir­tual goods in four pop­u­lar on­line games, in­clud­ing “EverQuest” and “Lin­eage II.” A year later, rev­enue for that same month rose to $6.7 mil­lion, those records show.

Flush with cash, IGE snapped up com­peti­tors in the emerg­ing in­dus­try. It moved to a sleek glass sky­scraper called Ox­ford House that also housed CNN’s Hong Kong of­fice. It be­gan re­cruit­ing sea­soned ex­ec­u­tives from gam­ing and other in­dus­tries, who were daz­zled by what they saw in the cash-for-cred­its busi­ness.

Most of the com­pa­nies that owned the on­line games pro­hib­ited trad­ing vir­tual goods for real money — IGE’s core busi­ness — and they worked to stop the prac­tice, clos­ing down ac­counts by the hun­dreds. These com­pa­nies charged gamers a monthly sub­scrip­tion to ac­cess and play the on­line role-play­ing games.

James Grim­mel­mann, a pro­fes­sor at Cor­nell Univer­sity who spe­cial­izes in In­ter­net law, said IGE was op­er­at­ing in “a clas­sic gray mar­ket,” mean­ing that sell­ing vir­tual goods for real cash — though not nec­es­sar­ily il­le­gal — was not in­tended or au­tho­rized by the gam­ing com­pa­nies.

Four for­mer em­ploy­ees in­ter­viewed by The Post all ac­knowl­edged as much and re­it­er­ated a com­mon sen­ti­ment that pre­vailed at the time.

“The idea was, let’s take it out of the gray mar­ket and make it le­git­i­mate,” Jel­niker said.

IGE ex­ec­u­tives thought they could do this by per­suad­ing the game com­pa­nies to sup­port the prac­tice. They rea­soned that if they showed the gam­ing com­pa­nies how much money play­ers were will­ing to pay and agreed to share it with them, the com­pa­nies would drop their ob­jec­tions and part­ner with start-ups like IGE.

Ban­non be­came a key part of that ef­fort in 2005.

At the time, Ban­non was a Hol­ly­wood fi­nancier and for­mer Gold­man Sachs banker who had branched into doc­u­men­tary film­mak­ing.

“Ban­non’s role was fundrais­ing and even­tu­ally try­ing to take the com­pany public,” Chris­tensen said.

Ban­non lived in La­guna Beach, Calif., at the time and was also serv­ing on the board of another com­pany. But he took time to learn about IGE’s busi­ness, Chris­tensen said.

“He fa­mil­iar­ized him­self with the busi­ness pretty deeply be­cause he was talk­ing to out­side fi­nance groups,” said Chris­tensen, who was based in IGE’s Los An­ge­les of­fice.

A for­mer ex­ec­u­tive who spoke on the con­di­tion of anonymity to dis­cuss pri­vate de­tails of the ar­range­ment said that Ban­non was given a small own­er­ship stake in the com­pany in ex­change for his ad­vi­sory role. Ban­non be­gan work­ing closely with Pierce and vis­it­ing Hong Kong to learn more about IGE’s op­er­a­tions, ac­cord­ing to for­mer em­ploy­ees.

Michael An­ge­les, an op­er­a­tions man­ager in Hong Kong at the time, said Ban­non was in­tro­duced to him in mid-2005 as “a big in­vestor who would come in and start to help with the com­pany.” At the time, Ban­non was tour­ing the Hong Kong of­fice, sit­ting in on man­age­ment meet­ings and in­tro­duc­ing him­self to the se­nior man­age­ment, An­ge­les said.

Ban­non vis­ited the Hong Kong op­er­a­tion ev­ery few months, for­mer em­ploy­ees said, some­times bring­ing busi­ness ex­ec­u­tives that em­ploy­ees imag­ined might be the big in­vestor that IGE needed.

“We sort of felt some­thing big was go­ing to hap­pen,” An­ge­les said.

Low-pay­ing ‘gold farms’

The month Ban­non joined, IGE opened an of­fice in Shang­hai. The new of­fice be­came an im­por­tant hub in the net­work that sup­plied the vir­tual cur­rency that IGE sold, of­ten re­ferred to as “gold.” That sup­ply chain was also part of what made IGE so con­tro­ver­sial.

“Gold farms” were pop­ping up across China at the time. Lowwage Chi­nese work­ers ac­cu­mu­lated gam­ing cred­its by play­ing around the clock and sell­ing the cred­its to bro­kers. The “gold farms” paid young work­ers as lit­tle as 25 cents per hour, ac­cord­ing to a 2005 New York Times story that ex­am­ined con­di­tions in­side what it said had be­come known as “vir­tual sweat­shops.”

While these “gold farm­ers” were not un­der the di­rect em­ploy of IGE, it was an open se­cret in­side the com­pany that IGE bought cred­its from them, for­mer em­ploy­ees said.

“The re­al­ity is, most of the gold was be­ing farmed in China by a bunch of guys in tiny lit­tle cu­bi­cles who played these games for a cou­ple of bucks a day,” said Jel­niker, the for­mer IGE ex­ec­u­tive, an ac­count that was echoed by another for­mer ex­ec­u­tive with di­rect knowl­edge of the ar­range­ment. “Our op­er­a­tion in Shang­hai would con­sol­i­date all these farm­ing ac­counts and trans­fer [the gold] to the op­er­a­tion in Hong Kong.”

IGE’s growth, its en­tire busi­ness model, rested on a sim­ple truth.

“Play­ers in the West didn’t have time, but they had money,” said Lars Lien, who joined IGE in 2004 as head of cus­tomer sup­port and worked there for about a year. “The re­verse was true in China. Peo­ple didn’t have money, but they had plenty of time.”

Em­ploy­ees in Hong Kong han­dled the re­tail side of the busi­ness, a com­bi­na­tion of cus­tomer ser­vice in both the real and vir­tual worlds.

Most of the on­line games al­lowed play­ers to trade or give other char­ac­ters vir­tual loot. IGE em­ploy­ees con­trolled hun­dreds of ac­counts in these games and would have their avatars meet cus­tomers’ avatars in­side the games to trans­fer the vir­tual goods af­ter re­ceiv­ing a re­al­world pay­ment by credit card.

Gam­ing com­pa­nies reg­u­larly banned ac­counts that were sus­pected of be­ing linked to real­money trans­ac­tions.

For­mer em­ploy­ees de­scribed a cat-and-mouse game.

IGE em­ploy­ees were in­structed to con­ceal their ac­tiv­i­ties both in­side and out­side the games, ac­cord­ing to two for­mer em­ploy­ees and com­pany doc­u­ments. They did this by tak­ing steps that would shield their lo­ca­tions in Hong Kong and China, as well as their iden­ti­ties, from gam­ing com­pa­nies.

“There was a lot of ef­fort to con­ceal our op­er­a­tions both in China and Hong Kong,” Jel­niker said.

An un­dated em­ployee-train­ing pre­sen­ta­tion ob­tained by The Post in­structed IGE work­ers never to type cer­tain words in public fo­rums in­side the games. The list in­cluded “IGE” and “Names of any of our af­fil­i­ated sites.”

Ad­di­tion­ally, IGE em­ploy­ees in the Hong Kong of­fice cre­ated ac­counts for the com­pany’s de­liv­ery avatars us­ing the names and home ad­dresses of un­wit­ting U.S. res­i­dents picked at ran­dom in a phone di­rec­tory, An­ge­les said. The com­pany used dial-up phone ser­vice that con­nected to servers in the United States, mak­ing it ap­pear that they were us­ing com­put­ers there rather than in Hong Kong, ac­cord­ing to An­ge­les and Jel­niker.

“We were spend­ing $20,000 a month on dial-up ser­vice,” Jel­niker said.

Nei­ther Jel­niker nor An­ge­les re­call whether Ban­non was ever briefed on these mea­sures.

In­ter­nal com­pany doc­u­ments show why IGE was be­ing so care­ful. Gam­ing com­pa­nies were ban­ning their ac­counts by the hun­dreds. IGE kept a tally. In a four­week pe­riod be­tween Jan­uary and Fe­bru­ary 2006, for ex­am­ple, gam­ing com­pa­nies closed down more than 800 ac­counts con­trolled by IGE, in­ter­nal doc­u­ments show.

Even so, busi­ness was sky­rock­et­ing. By Oc­to­ber 2005, IGE’s monthly rev­enue had risen to $8.5 mil­lion, with more than $5 mil­lion of that com­ing from pur­chases re­lated to the hugely pop­u­lar game “World of War­craft,” cor­po­rate records show.

‘The adult in the room’

In Fe­bru­ary 2006, IGE and Ban­non cel­e­brated a ma­jor coup.

A group of pri­vate eq­uity firms, led by Gold­man Sachs, agreed to in­vest $60 mil­lion, ac­cord­ing to for­mer IGE em­ploy­ees.

Some of the in­vestors had doubts, given the pro­hi­bi­tion from gam­ing com­pa­nies, but de­cided to jump in af­ter see­ing the ex­plo­sive rev­enue growth, ac­cord­ing to a per­son fa­mil­iar with the in­vest­ment who spoke on the con­di­tion of anonymity.

“There were is­sues and con­cerns about how own­ers of the games would re­act,” the per­son said. “But there was also a con­sumer re­al­ity where hun­dreds of thou­sands of gamers were do­ing this . . . . We thought it was go­ing to be very lu­cra­tive.”

Gold­man pro­vided $30 mil­lion through its Prin­ci­pal Strate­gies group, a now-de­funct di­vi­sion that traded us­ing the firm’s own money, ac­cord­ing to the for­mer IGE ex­ec­u­tive. Oak In­vest­ment Part­ners con­trib­uted $20 mil­lion and Mav­er­ick Cap­i­tal another $10 mil­lion, ac­cord­ing to this per­son. Gold­man, Oak and Mav­er­ick de­clined to com­ment.

The per­son fa­mil­iar with the in­vest­ment said that Ban­non gave the Wall Street in­vestors con­fi­dence, es­pe­cially given the rel­a­tive youth of Pierce, the com­pany’s chief ex­ec­u­tive.

“Ban­non was the adult in the room,” the per­son said. “You’re deal­ing with the gam­ing com­mu­nity; you’re deal­ing with kids. He did in­spire con­fi­dence.”

But the com­pany was find­ing lit­tle suc­cess in its most im­por­tant task: per­suad­ing game op­er­a­tors to ac­cept real-money trans­ac­tions in­side their games. The big­gest of their tar­gets was Blizzard En­ter­tain­ment, maker of the game “World of War­craft,” which had be­come the largest mon­ey­maker for IGE. Chris­tensen met with ex­ec­u­tives at Blizzard, but they de­murred.

“They felt this isn’t the right thing for us to be do­ing,” Chris­tensen said.

These vir­tual worlds had their own cal­i­brated economies, de­signed around the va­garies of sup­ply and de­mand for vir­tual goods within the game. Gold farm­ers up­set this bal­ance, much as a re­al­world gov­ern­ment might by print­ing ex­ces­sive amounts of money.

“All of a sud­den you have way too much gold com­ing into the vir­tual econ­omy,” said Lien, the for­mer IGE em­ployee. “You see mas­sive in­fla­tion. It’s like any other econ­omy. For that rea­son, the game de­vel­op­ers re­ally hated this.”

In May 2006, Blizzard got more ag­gres­sive against what it called “cheat­ing.” The com­pany is­sued a news re­lease say­ing that it had banned more than 30,000 ac­counts.

A Blizzard rep­re­sen­ta­tive did not re­turn mul­ti­ple emails or phone mes­sages.

IGE and its sup­pli­ers suf­fered a “huge loss” af­ter the crack­down, ac­cord­ing to a no­tice that was posted on IGE’s web­site in China and cap­tured by the Web ar­chive Way­back Ma­chine. Many of the shut­tered ac­counts had ac­cu­mu­lated vir­tual stock­piles that van­ished when the ac­counts were closed. The IGE no­tice added that “we will no longer use the term ‘farmer’ to ad­dress our sup­pli­ers in any doc­u­ment or oc­ca­sion, and we will not ac­knowl­edge or re­spond to the term. We will re­place it with the term ‘pro­fes­sional gamer.’ ”

By Jan­uary 2007, IGE’s vir­tu­al­cur­rency busi­ness was in free fall, los­ing more than $500,000 a month, ac­cord­ing to a law­suit filed later by co-founder Alan De­bon­neville in a dis­pute over com­pen­sa­tion.

IGE was strug­gling to pay its sup­pli­ers, prompt­ing un­paid gold farm­ers to protest out­side the Shang­hai of­fice in late April, ac­cord­ing to Chi­nese news re­ports. A man who said he was owed money walked into the of­fice bran­dish­ing what ap­peared to be a gun but turned out to be fake, ac­cord­ing to Liu Yang, a for­mer IGE em­ployee who wrote about the in­ci­dent on Zhihu.com, the Chi­nese equiv­a­lent of the so­cial­net­work­ing site Quora. Yang de­clined an in­ter­view re­quest.

The tur­moil per­suaded IGE to aban­don its core busi­ness.

It sold its vir­tual-cur­rency trad­ing arm to a com­peti­tor called At­las Tech­nol­ogy Group in April 2007, ac­cord­ing to court doc­u­ments. The fol­low­ing month, a gamer in Florida lodged a clas­s­ac­tion law­suit against IGE al­leg­ing that IGE had vi­o­lated sub­scriber agree­ments for “World of War­craft.” The suit al­leged that IGE had “re­ceived tens of mil­lions, if not hun­dreds of mil­lions, of dol­lars by sell­ing World of War­craft vir­tual prop­erty or cur­rency . . . gen­er­ated by cheap la­bor in third world coun­tries.”

The law­suit was later set­tled, with IGE promis­ing not to sell vir­tual cur­rency in “World of War­craft” for five years.

In June 2007, Pierce stepped down as chief ex­ec­u­tive, and Ban­non took his place.

“Steve brings a wealth of ex­pe­ri­ence that will serve the com­pany well mov­ing for­ward,” Pierce wrote in a news re­lease.

In August of that year, Blizzard En­ter­tain­ment asked the Florida at­tor­ney gen­eral to in­ves­ti­gate “com­pa­nies at­tempt­ing to profit il­le­gally from” the video game, ac­cord­ing to doc­u­ments re­leased to The Post in re­sponse to a public-records re­quest.

About four months later, the at­tor­ney gen­eral is­sued a sub­poena to IGE as part of an in­ves­ti­ga­tion into whether the com­pany was vi­o­lat­ing the state’s De­cep­tive and Un­fair Trade Prac­tices Act, records show. “IGE is ef­fec­tively steal­ing part of the game as­sets from their right­ful owner, Blizzard, and turn­ing this theft into a profit,” a Florida pros­e­cu­tor wrote in a court fil­ing jus­ti­fy­ing the sub­poena.

Au­thor­i­ties ul­ti­mately dropped the in­ves­ti­ga­tion af­ter IGE turned over doc­u­ments show­ing that it had got­ten out of the cash-for­cred­its busi­ness. The case was closed in Septem­ber 2008.

IGE was the sub­ject that year of an ar­ti­cle by Julian Dibbell in Wired magazine head­lined, “The De­cline and Fall of an Ul­tra Rich On­line Gam­ing Em­pire.” Ban­non’s ten­ure man­ag­ing the em­bat­tled firm had just be­gun.

A new fo­cus

Ban­non steered the com­pany, which had changed its name to Affin­ity Me­dia Hold­ings, away from its con­tro­ver­sial core busi­ness, fo­cus­ing in­stead on In­ter­net chat rooms and fo­rums for gamers, some of which IGE had ac­quired be­fore it got out of the vir­tual-cur­rency busi­ness.

Ban­non be­came fas­ci­nated with the col­lec­tive power of the gamers who gath­ered on these sites, ac­cord­ing to jour­nal­ist Joshua Green, who wrote a book, “Devil’s Bar­gain,” about Ban­non’s rise in the Trump ad­min­is­tra­tion. Sell­ing vir­tual cur­rency was highly un­pop­u­lar among many gamers, and they railed against IGE in these chat rooms, putting pres­sure on the com­pa­nies that op­er­ated the games not to part­ner with IGE.

“These guys, these root­less white males, had mon­ster power,” Ban­non told Green.

Ban­non said he hoped to harness that power with Bre­it­bart News, the web­site he ran start­ing in 2012 un­til he joined the Trump cam­paign last year.

Affin­ity Me­dia Hold­ings sta­bi­lized un­der Ban­non’s lead­er­ship. Ban­non re­mained chief ex­ec­u­tive of Affin­ity and an af­fil­i­ated com­pany called IMI Ex­change un­til 2011. IMI Ex­change, based in Seoul, ran an auc­tion web­site that al­lowed gamers to trade vir­tual goods di­rectly. Un­like with IGE, no real cur­rency was ex­changed, and no third party took a cut from the gamers.

The per­son fa­mil­iar with the in­vest­ment from Gold­man Sachs and two other Wall Street firms said IMI be­came the com­pany’s “prin­ci­pal as­set.” IMI was sold last sum­mer to a public com­pany for $42 mil­lion, ac­cord­ing to public doc­u­ments in South Korea, about 30 per­cent less than the ini­tial amount the pri­vate eq­uity firms had in­vested in IGE.

It seems to have worked out bet­ter for Ban­non.

Public doc­u­ments in South Korea show that Affin­ity Me­dia owned about 6 per­cent of IMI Ex­change when it was sold last year. Ban­non’s fi­nan­cial dis­clo­sure form for his White House job as Pres­i­dent Trump’s chief strate­gist shows that he made be­tween $100,000 and $1 mil­lion last year from Affin­ity Me­dia, in­come that was de­scribed as “cap­i­tal gains.”

OB­TAINED BY THE WASH­ING­TON POST

PHOTO IL­LUS­TRA­TIONS BY THE WASH­ING­TON POST

LEFT: Part of an un­dated IGE em­ployee-train­ing pre­sen­ta­tion high­lights terms work­ers should never use in public fo­rums in­side games. RIGHT: A sec­tion of an in­ter­nal com­pany doc­u­ment to­tals the IGE ac­counts closed by gam­ing com­pa­nies dur­ing four weeks of 2006.

JABIN BOTSFORD/THE WASH­ING­TON POST

TOP: White House chief strate­gist Stephen K. Ban­non served as vice chair­man of In­ter­net Gam­ing En­ter­tain­ment. LEFT: IGE’s Shang­hai of­fice, shown in July 2005, was re­spon­si­ble for pur­chas­ing vir­tual goods from low-wage Chi­nese work­ers.

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