No harm done by 15-year-old's scheme? Check other investors
Personal Finance | Jeff Brown
Sunday, September 24, 2000
Philadelphia Inquirer
Let's admit it: When we heard about the 15-year-old New Jersey
boy who had taken a bunch of greedy day-traders for more than
a quarter of a million dollars, lots of us had a chuckle.
Clever boy!
We love con artists. Remember Newman and Redford in The Sting?
So we get a kick out of Jonathan G. Lebed, described in various
news accounts last week as a precocious, smart-alecky kid from
Cedar Grove, N.J., who bamboozled untold numbers of older
investors from a computer in his bedroom.
But maybe this kid did more damage than we had thought.
On Wednesday, the Securities and Exchange Commission announced
it had settled a civil fraud charge against Lebed, the first ever
brought against a minor. Without admitting or denying guilt,
Lebed had agreed to hand over $272,826 in illegal profits,
earned in "pump-and-dump" frauds involved in trading 11
stocks from Aug. 23, 1999, when Lebed was 14, to Feb. 4.
The SEC said Lebed used online brokerage accounts to
buy stocks in little-known companies. Then he used a string
of aliases to disseminate hundreds of enthusiastic Internet
postings about the stocks on a number of Yahoo Finance message boards.
After driving the stock prices up, he sold for quick profits
ranging among the 11 cases from $11,000 to $74,000. In one
of the cutest details, the SEC said Lebed had sometimes used
automatic "limit" orders to make sure his profitable bets
were cashed in while he was at school.
But the SEC took notice of the unusual price moves and Lebed's
big bets. The kid was caught, the money repaid. No real harm done.
Not worth ruining the kid's life over, anyway. Case closed.
Well, sure, no one wants to see a 15-year-old boiled in
oil. But isn't there something wrong with this picture? If Lebed had
knocked over an armored car, we would expect him to go to jail,
even if he gave the money back. And this wasn't a momentary lapse
in judgment: It was carefully orchestrated and repeated 11 times.
Stock market scams, alas, rarely result in prison terms.
The SEC doesn't have the authority to file criminal charges,
and prosecutors shy away from nonviolent cases that are hard to win.
Stock fraud is difficult to explain to juries, and criminal
intent in such crimes is hard to prove beyond a reasonable doubt.
The SEC's civil settlement with Lebed follows a standard form.
He merely promises not to do it again, and "disgorges" the
illegal profits. Of course, he might have a time explaining
this to a college admissions officer.
Some of his victims, however, might not put this behind them
so easily. Despite the settlement, they won't be made whole.
The disgorged funds are likely to end up in the U.S. Treasury,
not back in accounts of defrauded investors, says Ronald C. Long,
administrator of the SEC's Philadelphia district office, which
investigated the case. It probably would be too hard to determine
just which investors had actually been led astray by
Lebed's messages, Long said.
Beyond that, the $285,000, which includes interest, probably
wouldn't go very far. The real loss to investors was probably
much higher - probably in the millions.
Take just one of the 11 cases, as described by the SEC. Lebed
bought 18,000 shares of Man Sang Holdings Inc. on Jan. 5 at prices
ranging from $1.375 to $2. After he posted a slew of messages
predicting the Hong Kong pearl distributor's stock would zoom
to $20 "very soon," the price more than doubled the next day,
peaking at $4.69. Lebed immediately sold, making just under
$35,000 on his 18,000 shares.
But his trades were just a drop in the bucket. Nearly 1.1 million
Man Sang shares traded on Jan. 6 at the higher prices produced by
Lebed's postings. That compares with 100 shares that traded on
Dec. 30, a week before the scam, at around $1.125.
Many of the sellers in the Jan. 6 transactions undoubtedly made
killings as unwitting beneficiaries of Lebed's manipulation. But
the buyers suffered deep losses. Even if all of those 1,074,900 shares
had been bought at the day's lowest price of $3.125, investors would
have lost well over $1 million by the time the price fell back to
around $2 a week later. (The stock now trades around $1.50.)
Man Sang is just one of the 11 stocks Lebed manipulated, so
it's easy to imagine that, all told, investors lost millions.
The most unusual feature of this case, of course, is Lebed's
age at the time of the trading. How could a 14-year-old manage all this?
According to the SEC's Long, Lebed traded through a custodial
account set up for him by his father. Long says no law prohibits
children from trading. And although brokerages require that trade
orders in these minor's accounts be submitted by adults, there's
no way the brokerage can know who's pressing the
keys when an online order comes in.
Long adds that Lebed's legal violations occurred not in the
brokerage account, but in the Internet postings, which, as we
all know, are wide open to children.
There was no evidence the father knew about the son's board
messages, though Lebed senior did know his son was racking
up big trading gains, Long said. The SEC concluded that the father
was not at fault. At a time when parents have been prosecuted
for letting their kids get hold of guns, shouldn't they be
held accountable as enablers of Internet stock fraud?
So has justice been served? Given the damage done, the settlement
seems to let Lebed and his dad off pretty easy. But stay tuned.
Stock-manipulation cases can lead to criminal charges if a state
or federal prosecutor is so inclined.
And there's always the chance of a suit by defrauded investors.
There are sure to be a lot of folks who see this as much
more than teenage shenanigans.
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