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Teenage Trader Runs Afoul
Of SEC in Stock-Fraud Case
By MICHAEL SCHROEDER, RUTH SIMON and AARON ELSTEIN
Staff Reporters of THE WALL STREET JOURNAL
Many parents worry about their adolescent boys using the Internet to play violent interactive games or to download pornography. Now it looks as if securities fraud can be added to the list of worries.
The Securities and Exchange Commission said Wednesday that it nabbed its youngest securities-law violator ever, a 15-year-old New Jersey boy. The SEC alleged that Jonathan G. Lebed, beginning at the age of 14, used the Internet to manipulate small-company stocks, reaping gains of $272,826.
Without admitting or denying the findings, the young Mr. Lebed agreed to abide by securities laws and turn over profits and interest totaling $285,000. This is the first time the SEC has alleged that a minor committed stock fraud.
The simplicity and success of the teenager's alleged trading methods, known in popular parlance as a "pump and dump scheme," underscore the Internet's power as a tool for committing fraud. The SEC charged that on 11 separate occasions Jonathan Lebed purchased a block of a thinly traded microcap stock, and then within hours sent "numerous false and/or misleading unsolicited e-mail messages touting the stock he just purchased." He then sold his shares at a profit, the SEC said.
His attorney, Kevin Marino, said that the boy is a normal teenager who likes sports, music and hanging out with his friends, but that he also developed a knack for trading stocks. When he was in eighth grade, he and two friends were among the top finalists in a student stock-picking contest sponsored by CNBC.
Jonathan Lebed (right) in January 1998, while competing with two other Cedar Grove Memorial Middle School eighth graders in a national stock investing tournament.
The young Mr. Lebed, a junior at Cedar Grove High School, said in an interview Wednesday afternoon that he has been investing in the stock market since he was 12. He said he learned about the market by reading books, watching CNBC and CNN, and visiting investing Web sites.
Both he and his parents, Constance and Gregory Lebed, declined to comment on the SEC charges. But his mother, a secretary, said her husband has always been interested in the stock market. "We have CNBC on a lot," she added.
The youth started trading "well-known" stocks with his savings of several thousand dollars through a custodial account opened by his parents, his attorney said. But he soon graduated to stocks with low capitalizations of $3 million to $20 million and low trading volume and became a regular on Internet investment message boards on such sites as Yahoo!, the SEC said.
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Fraud Charges Are Brought Against Touters Using the Web (Sept. 7)
FBI Arrests Man on Charges Related to Press-Release Hoax (Sept. 1)
Beginning in early 1998, he was regularly writing on Silicon Investor, another financial Web site. While many people choose to talk about stocks on these sites using a pseudonym, the young Mr. Lebed registered on Silicon Investor under his real name as a resident of Greenwich, Conn., and, asked for occupation or title, he called himself "The Great One."
As for favorite stocks, he wrote on Silicon Investor, "You have to pay for this information."
"We all thought he was 40 years old," says Kerry Carmichael, a frequent Silicon Investor participant. "He talked a good game."
The SEC zeroed in on the youth's transactions between Aug. 23, 1999 and Feb. 4, when he was trading in OTC bulletin board stocks. He would buy a large share -- 17% to 46% -- of a day's volume of a thinly traded stock, the agency said.
From his bedroom computer, he would then start posting hundreds of false messages on message boards touting the stock using fictitious names, the SEC said.
In order to be certain he wouldn't miss the price increase while he was in school the next day, he put in a "limit order" setting a minimum price to sell the stock, said Ronald Long, administrator of the SEC's Philadelphia office.
On Jan. 5, for example, he bought 18,000 shares of Man Sang Holdings Inc., a Chinese jewelry company, at prices between $1.37 and $2, according to the SEC. He began posting one of his typical one-page messages recounting the company's financials and calling the stock "the most undervalued stock in history," the SEC said. The next day, the SEC said, trading volume soared to more than a million shares at a peak price of $4.68; the teenager sold that day for a $34,959 profit. The SEC said Man Sang had no knowledge of the manipulation. A spokesman couldn't be reached for comment.
Other stocks included Manchester Equipment Co., Just Toys Inc., Yes Entertainment Inc., Fotoball USA Inc., West Coast Entertainment Inc., Havana Republic Inc., Classica Group Inc. and Firetector Inc., according to SEC documents. His profits on each trade ranged from $11,000 to $74,000, the SEC said. None of the companies was charged with any wrongdoing.
Mr. Long said that when SEC officials first approached the young trader last spring he claimed he had done nothing illegal. "Everybody does this," he said the boy told investigators.
Mr. Long said the teenager's parents were aware of their son's growing trading account, but there was no indication that they knew anything about his alleged illegal activities. Nor is there any evidence that the young Mr. Lebed engaged in the activity with other students, he said.
Recent SEC cases show that violators are getting increasingly younger. In March, a group of Georgetown University law students and the mother of one of the students settled allegations that they manipulated small-company stocks on the Internet.
The students operated an online subscription stock-tip service called FastTrades.com. They allegedly ran afoul of the law when they didn't always disclose that they invested in the hot stocks they recommended. In addition, the SEC alleged many of the students' online message postings were false and misleading.
Last month, a 23-year-old former community college student from El Segundo, Calif., was arrested on securities-fraud charges for allegedly posting a bogus news release on the Internet, causing shares in fiber-optics company Emulex Corp. to plunge dramatically in a matter of minutes.
The young Mr. Lebed, the SEC said, broke securities laws because, using fictitious names, he posted baseless predictions about stock-price increases and other false information about company prospects. The SEC said that personally benefiting from such a scheme is illegal.
In the CNBC contest, the young Mr. Lebed and his two friends placed seventh, posting a 139% gain in just three months. Students were given $10,000 in fake money to trade with; at the end of the contest, CNBC reported, Jonathan Lebed's team had nearly $24,000. They called their team The Triple Threat, after a popular professional wrestling team.
The young Mr. Lebed said he has been interested "in business and finance and investing" since he was 11. "It intrigued me watching all the numbers go by on television," he said, adding, "I like mathematics."
When he began investing about a year later, he said, one of his earliest picks was America Online. "I heard about how America Online was going to unlimited access," he said. "I bought shares of AOL at $25. The next day it was up a few points." The youth added that he sold the stock when it hit $30.
Another early purchase was THQ Inc., a developer of interactive entertainment software. "I liked professional wrestling and THQ had a wrestling video game," he said. "I spotted that at about $9 or so. That did extremely well."
Mr. Lebed added that people have asked him to start investment clubs, but "I just haven't had time to do anything like that." He said he has started two Internet businesses in recent months. One, pr.host.com, runs a Web site that stores files for people who want to create Web sites. The second, eprolutions.com, helps people market and advertise their Web sites. He said both ventures are profitable.
"He's a phenomenally successful investor," said Mr. Marino, the attorney. "He and his family feel it's a satisfactory settlement and are happy to have it behind him."
Write to Michael Schroeder at mike.schroeder@wsj.com, Ruth Simon at ruth.simon@wsj.com, and Aaron Elstein at aaron.elstein@wsj.com |
