Re: 2/25/01 - NY Times: Jonathan Lebed: Stock Manipulator, S.E.C. Nemesis -- and 15 years old (part 2 of 2)
Right from the start, the S.E.C. treated the publicity surrounding the case of Jonathan Lebed at least as seriously as the case itself. Maybe even more seriously. The Philadelphia office had brought the case, and so when the producer from "60 Minutes" called to say he wanted to do a big segment about the world's first teenage stock market manipulator, he called the Philadelphia office. "Normally we call the top and get bumped down to some flack," says Trevor Nelson, the "60 Minutes" producer in question. "This time I left a message at the S.E.C's Philadelphia office, and Arthur Levitt's office called me right back." Levitt, being the S.E.C. chairman, flew right up from Washington to be on the show.
To the S.E.C., it wasn't enough that Jonathan Lebed hand over his winnings: he had to be vilified; people had to be made to understand that what he had done was a crime, with real victims. "The S.E.C. kept saying that they were going to give us the name of one of the kid's victims so we could interview him," Nelson says. "But they never did."
I waited a couple of months for things to cool off before heading down to Washington to see Arthur Levitt. He was just then finishing up being the longest-serving chairman of the S.E.C. and was taking a victory lap in the media for a job well done. He was now 69, but as a youth, back in the 1950's and 1960's, he had made a lot of money on Wall Street. At the age of 62, he landed his job at the S.E.C. -- in part, because he had raised a lot of money on the street for Bill Clinton -- where he set himself up to defend the interests of the ordinary investor. He had declared war on the financial elite and pushed through rules that stripped it of its natural market advantages. His single bravest act was Regulation FD, which required corporations to release significant information about themselves to everyone at once rather than through the Wall Street analysts.
Having first determined I was the sort of journalist likely to see the world exactly as he did, he set out to explain to me the new forces corrupting the financial markets. "The Internet has speeded up everything," he said, "and we're seeing more people in the markets who shouldn't be there. A lot of these new investors don't have the experience or the resources or a professional trader. These are the ones who bought that [expletive] that Lebed was pushing."
"Do you think he is a sign of a bigger problem?"
"Yes, I do. And I find his case very disturbing . . . more serious than the guy who holds up the candy store. . . . I think there's a considerable risk of an anti-business backlash in this country. The era of the 25-year-old billionaire represents a kind of symbol which is different from the Horatio Alger symbol. The 25-year-old billionaire looks lucky, feels lucky. And investors who lose money buying stock in the company of the 25-year-old billionaire. . . . "
He trailed off, leaving me to finish the thought.
"You think it's a moral issue."
"I do."
"You think Jonathan Lebed is a bad kid?"
"Yes, I do."
"Can you explain to me what he did?"
He looked at me long and hard. I could see that this must be his meaningful stare. His eyes were light blue bottomless pits. "He'd go into these chat rooms and use 20 fictitious names and post messages. . . . "
"By fictitious names, do you mean e-mail addresses?"
"I don't know the details."
Don't know the details? He'd been all over the airwaves decrying the behavior of Jonathan Lebed.
"Put it this way," he said. "He'd buy, lie and sell high." The chairman's voice had deepened unnaturally. He hadn't spoken the line; he had acted it. It was exactly the same line he had spoken on "60 Minutes" when his interviewer, Steve Kroft, asked him to explain Jonathan Lebed's crime. He must have caught me gaping in wonder because, once again, he looked at me long and hard. I glanced away.
"What do you think?" he asked.
Well, I had my opinions. In the first place, I had been surprised to learn that it was legal for, say, an author to write phony glowing reviews of his book on Amazon but illegal for him to plug a stock on Yahoo just because he happened to own it. I thought it was -- to put it kindly -- misleading to tell reporters that Jonathan Lebed had used "20 fictitious names" when he had used four AOL e-mail addresses and posted exactly the same message under each of them so that no one who read them could possibly mistake him for more than one person. I further thought that without quite realizing what had happened to them, the people at the S.E.C. were now lighting out after the very people -- the average American with a bit of money to play with -- whom they were meant to protect.
Finally, I thought that by talking to me or any other journalist about Jonathan Lebed when he didn't really understand himself what Jonathan Lebed had done, the chairman of the S.E.C. displayed a disturbing faith in the media to buy whatever he was selling.
But when he asked me what I thought, all I said was, "I think it's more complicated than you think."
"Richard -- call Richard!" Levitt was shouting out the door of his vast office. "Tell Richard to come in here!"
Richard was Richard Walker, the S.E.C.'s director of enforcement. He entered with a smile, but mislaid it before he even sat down. His mind went from a standing start to deeply distressed inside of 10 seconds. "This kid was making predictions about the prices of stocks," he said testily. "He had no basis for making these predictions." Before I could tell him that sounds a lot like what happens every day on Wall Street, he said, "And don't tell me that's standard practice on Wall Street," so I didn't. But it is. It is still O.K. for the analysts to lowball their estimates of corporate earnings and plug the stocks of the companies they take public so that they remain in the good graces of those companies. The S.E.C. would protest that the analysts don't actually own the stocks they plug, but that is a distinction without a difference: they profit mightily and directly from its rise.
"Jonathan Lebed was seeking to manipulate the market," said Walker.
But that only begs the question. If Wall Street analysts and fund managers and corporate C.E.O.'s who appear on CNBC and CNNfn to plug stocks are not guilty of seeking to manipulate the market, what on earth does it mean to manipulate the market?
"It's when you promote a stock for the purpose of artificially raising its price."
But when a Wall Street analyst can send the price of a stock of a company that is losing billions of dollars up 50 points in a day, what does it mean to "artificially raise" the price of a stock? The law sounded perfectly circular. Actually, this point had been well made in a recent article in Business Crimes Bulletin by a pair of securities law experts, Lawrence S. Bader and Daniel B. Kosove. "The casebooks are filled with opinions that describe manipulation as causing an 'artificial' price," the experts wrote. "Unfortunately, the casebooks are short on opinions defining the word 'artificial' in this context. . . . By using the word 'artificial,' the courts have avoided coming to grips with the problem of defining 'manipulation'; they have simply substituted one undefined term for another."
Walker recited, "The price of a stock is artificially raised when subjected to something other than ordinary market forces."
But what are "ordinary market forces"?
An ordinary market force, it turned out, is one that does not cause the stock to rise artificially. In short, an ordinary market force is whatever the S.E.C. says it is, or what it can persuade the courts it is. And the S.E.C. does not view teenagers' broadcasting their opinions as "an ordinary market force." It can't. If it did, it would be compelled to face the deep complexity of the modern market -- and all of the strange new creatures who have become, with the help of the Internet, ordinary market forces. When the Internet collided with the stock market, Jonathan Lebed became a market force. Adolescence became a market force.
I finally came clean with a thought: the S.E.C. let Jonathan Lebed walk away with 500 grand in his pocket because it feared that if it didn't, it would wind up in court and it would lose. And if the law ever declared formally that Jonathan Lebed didn't break it, the S.E.C. would be faced with an impossible situation: millions of small investors plugging their portfolios with abandon, becoming in essence professional financial analysts, generating embarrassing little explosions of unreality in every corner of the capital markets. No central authority could sustain the illusion that stock prices were somehow "real" or that the market wasn't, for most people, a site of not terribly productive leisure activity. The red dog would be off his leash.
I might as well have strolled into the office of the drug czar and lit up a joint.
"The kid himself said he set out to manipulate the market," Walker virtually shrieked. But, of course, that is not all the kid said. The kid said everybody in the market was out to manipulate the market.
"Then why did you let him keep 500 grand of his profits?" I asked.
"We determined that those profits were different from the profits he made on the 11 trades we defined as illegal," he said.
This, I already knew, was a pleasant fiction. The amount Jonathan Lebed handed over to the government was determined by haggling between Kevin Marino and the S.E.C.'s Philadelphia office. The S.E.C. initially demanded the $800,000 Jonathan had made, plus interest. Marino had countered with 125 grand. They haggled a bit and then settled at 285.
"Can you explain how you distinguished the illegal trades from the legal ones?"
"I'm not going to go through the case point by point."
"Why not?"
"It wouldn't be appropriate."
At which point, Arthur Levitt, who had been trying to stare into my eyes as intently as a man can stare, said in his deep voice, "This kid has no basis for making these predictions."
"But how do you know that?"
And the chairman of the S.E.C., the embodiment of investor confidence, the keeper of the notion that the numbers gyrating at the bottom of the CNBC screen are "real," drew himself up and said, "I worked on Wall Street."
Well. What do you say to that? He had indeed worked on Wall Street -- in 1968.
"So did I," I said.
"I worked there longer than you."
Walker leapt back in. "This kid's father said he was going to rip the [expletive] computer out of the wall."
I realized that it was my turn to stare. I stared at Richard Walker. "Have you met Jonathan Lebed's father?" I said.
"No I haven't," he said curtly. "But look, we talked to this kid two years ago, when he was 14 years old. If I'm a kid and I'm pulled in by some scary government agency, I'd back off."
That's the trouble with 14-year-old boys -- from the point of view of the social order. They haven't yet learned the more sophisticated forms of dishonesty. It can take years of slogging to learn how to feign respect for hollow authority.
Still! That a 14-year-old boy, operating essentially in a vacuum, would walk away from a severe grilling by six hostile bureaucrats and jump right back into the market -- how did that happen? It occurred to me, as it had occurred to Jonathan's lawyer, that I had taken entirely the wrong approach to getting the answer. The whole point of Jonathan Lebed was that he had invented himself on the Internet. The Internet had taught him how hazy the line was between perception and reality. When people could see him, they treated him as they would treat a 14-year-old boy. When all they saw were his thoughts on financial matters, they treated him as if he were a serious trader. On the Internet, where no one could see who he was, he became who he was. I left the S.E.C. and went back to my hotel and sent him an e-mail message, asking him the same question I asked the first time we met: why hadn't he been scared off?
Straight away he wrote back:
"It was about 2-3 months from when the S.E.C. called me in for the first time until I started trading again. The reason I didn't trade for those 2-3 months is because I had all of my money tied up in a stock. I sold it at the end of the year to take a tax loss, which allowed me to start trading again. I wasn't frightened by them because it was clear that they were focused on whether or not I was being paid to profile stocks when the fact is I was not. I was never told by them that I was doing something wrong and I was never told by them not to do something."
By September 1999, Jonathan Lebed was playing at the top of his game. He had figured out the advantage, after he had bought shares in a small company, in publicizing his many interests. "I came up with it myself," he said of the idea. "It was obvious from the newspapers and CNBC. Of course stocks respond to publicity!"
After he had picked and bought his stock, he would write a single message about it and stick it up in as many places on Yahoo Finance as he could between 5 and 8 in the morning, when he left home for school. There were no explicit rules on Yahoo Finance, but there were constraints. The first was that Yahoo limited the number of messages he could post using one e-mail address. He would click onto Yahoo and open an account with one of his four AOL screen names; a few minutes later, Yahoo, mysteriously, would tell him that his messages could no longer be delivered. Eventually, he figured out that they must have some limit that they weren't telling people about. He got around it by grabbing another of his four AOL screen names and creating another Yahoo account. By rotating his four AOL screen names, he found he could get his message onto maybe 200 Yahoo message boards before school.
He also found that when he went to do it the next time, with a different stock, Yahoo would no longer accept messages from his AOL screen names. So he was forced to create four more screen names and start over again. Yahoo never told him he shouldn't do this. "The account would be just, like, deleted," he said. "Yahoo never had a policy; it's just what I figured out." The S.E.C. accused Jonathan of trying to seem like more than one person when he promoted his stocks, but when you see how and why he did what he did, that is clearly false. (For instance, he ignored the feature on Yahoo that enables users to employ up to seven different "fictitious names" for each e-mail address.) It's more true to say that he was trying to simulate an appearance on CNBC.
Over time, he learned that some messages had more effect on the stock market than others. "I definitely refined it," he said of his Internet persona. "In the beginning, I would write, like, very professionally. But then I started putting stuff in caps and using exclamation points and making it sound more exciting. That worked better. When it's more exciting, it draws people's attention to it compared to when you write like, dull or something." The trick was to find a stock that he could get excited about. He sifted the Internet chat rooms and the shopping mall with three things in mind: 1) "It had to be in the area of the stock market that is likely to become a popular play"; 2) "it had to be undervalued compared to similar companies"; and 3) "it had to be undiscovered -- not that many people talking about it on the message boards."
Over a couple of months, I drifted in and out of Jonathan Lebed's life and became used to its staccato rhythms. His defining trait was that the strangest things happened to him, and he just thought of them as perfectly normal -- and there was no one around to clarify matters. The threat of being prosecuted by the U.S. Attorney in Newark and sent away to a juvenile detention center still hung over him, but he didn't give any of it a second thought. He had his parents, his 12-year-old sister Dana and a crowd of friends at Cedar Grove High School, most of whom owned pieces of Internet businesses and all of whom speculated in the stock market. "There are three groups of kids in our school," one of them explained to me. "There's the jocks, there's the druggies and there's us -- the more business oriented. The jocks and the druggies respect what we do. At first, a lot of the kids are, like, What are you doing? But once kids see money, they get excited."
The first time I heard this version of the social structure of Cedar Grove High, I hadn't taken it seriously. But then one day I went out with Jonathan and one of his friends, Keith Graham, into a neighboring suburb to do what they liked to do most when they weren't doing business, shoot pool. We parked the car and set out down an unprosperous street in search of the pool hall.
"Remember West Coast Video?" Keith said drolly.
I looked up. We were walking past a derelict building with "West Coast Video" stenciled on its plate glass.
Jonathan chuckled knowingly. "We owned, like, half the company."
I looked at him. He seemed perfectly serious. He began to tick off the reasons for his investment. "First, they were about to open an Internet subsidiary; second, they were going to sell DVD's when no other video chain. . . . "
I stopped him before he really got going. "Who owned half the company?"
"Me and a few others. Keith, Michael, Tom, Dan."
"Some teachers, too," Keith said.
"Yeah, the teachers heard about it," Jonathan said. He must have seen me looking strangely at him because he added: "It wasn't that big a deal. We probably didn't have a controlling interest in the company, but we had a fairly good percentage of the stock."
"Teachers?" I said. "The teachers followed you into this sort of thing."
"Sometimes," Jonathan said.
"All the time," Keith said. Keith is a year older than Jonathan and tends to be a more straightforward narrator of events. Jonathan will habitually dramatize or understate some case and emit a strange frequency, like a boy not quite sure how hard to blow into his new tuba, and Keith will invariably correct him. "As soon as people at school found out what Jonathan was in, everybody got in. Like right way. It was, like, if Jonathan's in on it, it must be good." And then the two boys moved on to some other subject, bored with the memory of having led some teachers in the acquisition of shares of West Coast Video. We entered the pool hall and took a table, where we were joined by another friend, John. Keith had paged him.
My role in Jonathan Lebed's life suddenly became clear: to express sufficient wonder at whatever he has been up to that he is compelled to elaborate.
"I don't understand," I said. "How would other kids find out what Jonathan was in?"
"It's high school," said Keith, in a tone reserved for people over 35. "Four hundred kids. People talk."
"How would the teachers find out?"
Now Keith gave me a look that told me that I'm the most prominent citizen of a new nation called Stupid. "They would ask us!" he said.
"But why?"
"They saw we were making money," Keith said.
"Yeah," said Jonathan, who, odd as it sounds, exhibits none of his friend's knowingness. He just knows. "I feel, like, that most of my classes, my grades would depend not on my performance but on how the stocks were doing."
"Not really," Keith said.
"O.K.," Jonathan said. "Maybe not that. But, like, I didn't think it mattered if I was late for class."
Keith considered that. "That's true," he said.
"I mean," Jonathan said, "they were making like thousands of dollars off the trades, more than their salaries even. . . . "
"Look," I said, "I know this is a stupid question. But was there any teacher who, say, disapproved of what you were doing?"
The three boys considered this, plainly for the first time in their lives.
"The librarian," Jonathan finally said.
"Yeah," John said. "But that's only because the computers were in the library, and she didn't like us using them."
"You traded stocks from the library?"
"Fifth-period study hall was in the library," Keith said. "Fifth-period study hall was like a little Wall Street. But sometimes the librarian would say the computers were for study purposes only. None of the other teachers cared."
"They were trading," Jonathan said.
The mood had shifted. We shot pool and pretended that there was no more boring place to be than this world we live in. "Even though we owned like a million shares," Jonathan said, picking up the new mood. "It wasn't that big a deal. West Coast Video was trading at like 30 cents a share when we got in."
Keith looked up from the cue ball. "When you got in," he said. "Everyone else got in at 65 cents; then it collapsed. Most of the people lost money on that one."
"Hmmm," Jonathan said, with real satisfaction. "That's when I got out."
Suddenly I realized that the S.E.C. was right: there were victims to be found from Jonathan Lebed's life on the Internet. They were right here in New Jersey. I turned to Keith. "You're Jonathan's victim."
"Yeah, Keith," Jonathan said, laughing. "You're my victim."
"Nah," Keith said. "In the stock market, you go in knowing you can lose. We were just doing what Jon was doing, but not doing as good a job at it."
Michael Lewis, a contributing writer for the magazine, is making a television series about the Internet for the BBC.
nytimes.com |
