Re: 10/20/00 - WSJ: Teenage Stock Manipulator Got Away With Most Trades
October 20, 2000
--------------------------------------------------------------------------------
Teenage Stock Manipulator
Got Away With Most Trades
By MICHAEL SCHROEDER and RUTH SIMON
Staff Reporters of THE WALL STREET JOURNAL
With great fanfare, the Securities and Exchange Commission announced last month it had nailed a teenager for using Internet message boards to manipulate stocks, pocketing gains of $272,826.
The youngster, Jonathan G. Lebed, of Cedar Grove, N.J., who just turned 16, instantly became a folk hero to some and a symbol of all that is wrong about the greed of these stock-crazed times to others.
There was one tidbit the SEC, which insists on full disclosure by companies in announcing important news, didn't disclose in its complaint: While it forced the teenager to disgorge $285,000, including interest, he actually made about $800,000 trading small-company stocks -- meaning he kept more than $500,000 in profits.
Why was Mr. Lebed -- who started trading online from his bedroom at age 13 with several thousand dollars in a custodial account opened by his parents -- allowed to get away with many of his trades?
Regulators say they alleged wrongdoing in the cases they felt they had abundant evidence. "We charged violations with clear instances of fraud," says SEC enforcement chief Richard Walker. The SEC complaint, which Mr. Lebed settled without admitting or denying guilt, has scant details about his postings and gives only one example of his trading.
Mr. Lebed's attorney, Kevin Marino, says the trades regulators didn't pursue closely mirror those that SEC officials said were part of an illegal "pump-and-dump scheme" that was "every bit as serious as other Internet fraud cases we brought."
Initially, Mr. Marino notes, the SEC wanted to recover the young trader's total earnings -- which the SEC doesn't dispute -- but Mr. Marino refused. Negotiations centered on how much the boy would turn over, and the final settlement of $285,000 was "somewhat arbitrary," he says, adding that he doesn't understand the SEC's basis for selecting some trades and not others.
Teenage Trader Runs Afoul of SEC in Stock-Fraud Case (Sept. 21)
The modus operandi in the 16 trades that the SEC let slide followed the same pattern of the 11 trades for which the commission extracted the settlement, Mr. Marino says. The youngster identified companies -- such as Yes Entertainment Inc. and Havana Republic Inc., two for which he was cited -- with low price and trading activity, according to both Mr. Marino and the SEC. That is because it is easier to move the price of a smaller company than a big one such as, say, General Motors Corp., the SEC says. He would buy shares of the small company he had targeted, and plaster Internet message boards with postings -- sometimes hundreds of them -- hyping the stock on Silicon Investor and Yahoo!, according to the SEC.
He touted one company, for example, as the "next stock to gain 1,000%" and as "the most undervalued stock ever," the SEC complaint says. Often he would use numerous aliases, allowing him to create the impression that other investors were interested in a single stock, the SEC says. When other investors snapped up shares, and the stock rose, Mr. Lebed would unload his, the SEC says.
Among the message-board names that Mr. Lebed used were "charmdw," "wmmkjj" and "dmaj431." On Feb. 3, on the Yahoo message board for Firetector Inc., charmdw wrote, "This stock will explode this week." Mr. Lebed bought 20,000 Firetector shares the day of the posting and sold Feb. 4, according to people familiar with his trading.
(Mr. Lebed is being investigated by the U.S. Attorney's office in Newark, N.J., in connection with possible criminal charges, according to a person with knowledge of the probe. The U.S. Attorney's office declined to comment.)
The teenager had a reputation even before he settled his case with regulators. "If I have to nominate one Penny Stock Moron for the Hall of Shame, it would have to be Jonathan Lebed," a message-poster wrote May 25 on Silicon Investor.
Others, however, wondered why the SEC went after him, given that stock touting on the Internet is an everyday activity. "It's like a plague," says Floyd Schneider, a mortgage banker who lives in Newton, N.J. Mr. Schneider says he has sent the SEC information on "dozens" of examples of individuals who he believes were trying to manipulate stock prices on the Internet. "Nothing was ever done," he says.
Want to receive an e-mail alert when Heard on the Net columns are published? See the E-Mail Setup page for details on how to subscribe.
Many lawyers say there is a good reason Mr. Lebed became a target. Besides stopping the youngster's troublesome conduct, the SEC action also generated valuable publicity. "Almost every case the SEC brings is a message case," says Harvey Pitt, a former SEC general counsel. In the Lebed case, the message was that stock manipulation is a serious matter, not a childish prank, he says. "People will sit up and take notice of a case that involves a 15-year-old," Mr. Pitt says. "The fact that you might have 55-year-olds doing the same thing is just not as compelling."
Mr. Lebed, a Cedar Grove High School junior, showed a knack for trading in the eighth grade, when he and two friends were among the finalists in a student stock-picking contest sponsored by CNBC.
Remarkably, he has been on the SEC's radar screen for several years. Beginning in early 1998, at age 13, he was regularly writing on Silicon Investor, a financial Web site, and had formed a stock-picking Web site called StockDogs.com. The SEC called the youth's parents several times to warn that their son's activities might be improper. When Web site continued to tout stocks, the young man was called in to meet with enforcement attorneys at the SEC's New York office on Oct. 28, 1998.
Accompanied by his mother, and a family friend, the young Mr. Lebed was quizzed about his Web site and stock-trading activities. At the end of the meeting, the Lebed family friend asked the SEC to explain whether the boy's trading was improper and whether they could offer guidance on how he could alter his practices -- to which SEC officials responded that they don't give legal advice, according to a transcript of the meeting. The transcript also shows that the SEC viewed the young man's activities as a "very serious matter" and that "the parents are going to enforce this."
At Mrs. Lebed's urging, her son shut down his Web site, but he continued his trading activity.
Mr. Marino doesn't deny that Mr. Lebed made exaggerated statements in postings about the potential of stock prices for individual companies, but the lawyer says it isn't illegal. "It's in the nature of puffing -- it's an opinion," Mr. Marino says. "Some of his more enthusiastic statements or predictions about where the price might go could be seen as misleading. It's difficult to characterize those statements as false."
Mr. Marino adds that Mr. Lebed's online messages almost always offered a disclaimer that investors should do their own research, and claims that his client did a lot of research, spoke to some company chief executives and even visited some of the companies he promoted.
"In settling the case, we're not suggesting there was no factual basis for the allegations contained in the order," Mr. Marino says. "What we are saying is that to characterize what Lebed did as clear violation of a law and to suggest that this is a clear black-and-white area is not only to distort the truth, but also to raise significant questions about why wildly bullish price predictions are made and ignored by the SEC every day of the week."
The SEC maintains there is a big difference between the normal stock-touting messages on Internet, and what Mr. Lebed was doing. Regulators say they aren't interested in and don't have the resources for probing every message that hypes a stock. "That's not our goal," explains Mr. Walker. "We see outrageous pitches all the time ... and yet many have absolutely no impact. Message board people shoot them down and discredit them immediately."
Hype crosses the line and becomes illegal, the SEC says, when someone knowingly provides false or misleading statements with the clear intent to affect a stock's price, and then defrauds others by trading the shares.
The huge volume of Mr. Lebed's Internet postings indicated his "intent" to move the market, Mr. Walker says. "Lebed would put out 500 messages under different names," he says. "We inferred that it was for the purpose of creating an illusion that this was a good security and ... that it wasn't just one person saying this."
When Mr. Lebed predicted -- without any basis, according to Mr. Walker -- that a stock would climb to $20 from $2, or that it would increase 1,000%, he clearly violated the law. "If someone puts in a recommendation with a price prediction that a stock will double, and he doesn't have a reasonable basis, that's illegal," Mr. Walker says. "That's the easy case."
In SEC settlements, defendants usually agree not to talk about the case. So, why is Mr. Lebed's lawyer calling attention to the fact that the SEC settlement didn't force his client to disgorge all of his profits, but just $285,000, including interest?
Mr. Marino says he believes the SEC violated the spirit of the settlement. "Part of the reason we agreed to settle was to avoid the kind of distraction there would have been from litigating the case. We implored the SEC not to publicize Jonathan Lebed's name for that reason," he says.
Mr. Walker of the SEC says the agency handled publicity for this case as it does for all other enforcement actions.
Mr. Lebed, his lawyer says, isn't doing any trading currently. But the settlement doesn't ban him from investing in stocks, and his lawyer says he plans to do so in the future.
Write to Michael Schroeder at mike.schroeder@wsj.com and Ruth Simon at ruth.simon@wsj.com
interactive.wsj.com |
