August 4 at 11:15 AM
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 video-game 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.
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-the-clock 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 role-playing game, they could simply buy the virtual goods that granted advanced powers or unlocked new virtual 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 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 IGE needed.
“We sort of felt something big was going to happen,” Angeles said.
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. Low-wage 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 real-world payment by credit card.
Gaming companies regularly banned accounts that were suspected of being linked to real-money 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 four-week 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 financial records show.
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 real-world 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 virtual-currency 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 social-networking site Quora. Yang declined an interview request.
The turmoil convinced 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 class-action 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-for-credits business. The case was closed in September 2008.
IGE was the subject that year of an extensive story 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.
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.”
Michael Kranish in Washington and Luna Lin in Beijing contributed to this report.