Recently I pondered if Directors’ and Officers’ Liability Insurance Coming to Second Life?. We may be getting closer after the Virtual Stock Exchange’s (VSTEX) decision to freeze Investor Merlin’s assets.

This action has raised a lot of eyebrows and a lot of questions. They report that they are transferring assets to Skip Oceanlane, Merlin Investment Bank’s vice president. Should the assets be transferred to Skip? Or to someone else? Should VSTEX liquidate the assets, or should that be left up to Skip? Should VSTEX have listed what the assets are?

I must admit, I don’t know a lot about bankruptcy courts in real life, but it seems as if the role of a bankruptcy court is to determine who should get what assets. If other people are claiming they should get the assets instead of Skip, then probably this needs to get worked out in a Second Life bankruptcy court and VSTEX should hold on to the assets until it is properly determined who should get which assets.

Personally, I don’t have any deposits in Merlin Investment Bank, so I have no standing in this. Since, to the best of my knowledge, there isn’t a bankruptcy court in Second Life yet, any other else that has claims on Investor Merlin’s assets should probably contact VSTEX and VSTEX should get the interested parties to talk. Until there is agreement between interested parties, VSTEX should probably simply hold onto the assets.

As to the liquidation of the assets, that isn’t something that VSTEX should do. Whomever receives the assets needs to determine how they will handle the assets. They may want to liquidate the assets immediately. This would drive the value of the stocks down greatly and result in a smaller return to stakeholders. It might be that is what would be meet the needs of stakeholders. It might be that the assets should be held for a longer period in hopes of receiving both dividends and capital gains. It might be that the assets should be sold off slowly over the coming days, weeks or months, to get the maximum possible return on the assets. These are all decisions that whomever receives the assets should make, and not VSTEX.

Looking at the assets, I see that Investor Merlin held 41,737 shares of AVC. I hold stock in AVC and hope that whomever gets those assets sells them off in an orderly fashion. If they are all sold at once, it will drive the price down to L$ .13 and the average return will be about L$ .15 However, if they are sold off in even amounts over the coming week, AVC stock is unlikely to be significantly impacted, and they will probably return between L$ .18 and L$ .25 Everyone would be better served that way, except for a few day traders that might step in and buy AVC stock down at L$ .13

For the final question of whether or not VSTEX should have listed the assets, I could argue either side. If the assets were being distributed in a real bankruptcy court, I believe that they would end up being publicly listed, so I think there is good justification for what VSTEX has done. Personally, I would vote that VSTEX should list the assets of any person in bankruptcy on their exchange. They should also publicly list the holdings in any company not only of the officers and directors, but also, any major holder. By United States standards, I tend to think of that as anyone who owns more than 5% of a company.

VSTEX has committed to voting on how the exchange will be run, and I believe that standards for freezing assets and listing who has what assets should ultimately be voted on by the community. However, there will always come times when the exchange needs to act quickly without a vote, like it did in this case. It would be inappropriate for us to second guess these actions, and in this case, I believe they behaved quite well.

Full disclosure: I speak with officials at VSTEX on a regular basis. I think they are doing a great job, and because of this, I have been buying shares in VSTEX.