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To: Jeffrey S. Mitchell who wrote (919)	11/25/2000 4:00:11 AM
From: Jeffrey S. Mitchell	Respond to of 12465

Re: 10/25/00 - SEC Speech: Regulation vs. Enforcement in an On-Line World Speech by SEC Staff: Regulation vs. Enforcement in an On-Line World by Richard H. Walker Director, Division of Enforcement, U.S. Securities & Exchange Commission The Bond Market Association's 6th Annual Legal and Compliance Seminar New York October 25, 2000 As a matter of policy, the Commission disclaims responsibility for any private publications or statements by any of its employees. The views expressed are those of the author, and do not necessarily represent the views of the Commission or the author's colleagues on the staff. Good afternoon. Thank you George for your kind introduction and for the elegant way that you handled the fact that I’ve bounced around the Commission for nearly a decade now without being able to hold down a single job for more than a couple of years. I’ve known George, and many of his colleagues at Merrill Lynch, since first joining the Commission. There are few who can match George’s efforts in promoting a culture where good corporate citizenship and compliance come above all else. I’d also like to thank the Bond Market Association for inviting me to this distinguished conference and for asking me to be your luncheon speaker. This is, in fact, the first opportunity I’ve had to attend this conference since becoming Enforcement Director and the first time I’ve addressed issues affecting the debt markets. In doing my homework for today, I was struck by how many different types of bonds there are – literally thousands. They come in all different shapes and sizes, including: the "Aircraft Carrier" bond which I’m sad to report is in default; the "Jonathan Lebed" bond, otherwise known as the "teenage stock manipulator" bond, which has no maturity; and -- Yankees fans, hold your lunch rolls -- the "Roger Clemens" bond which has no principle. The fact that I’ve not previously talked about debt markets may not be such a bad thing for many of you. As Enforcement Director – a title some in the industry alternatively refer to as "the Prince of Darkness" – I’m not accustomed to spreading cheer among market participants when I speak. I take no offense when I hear people say, "Don’t take this the wrong way, but I hope we never see each other again." While it is true that each year the Enforcement Division brings many more cases involving fraud in the sale of equities, as opposed to debt instruments, no one should doubt our commitment to ensuring that the debt markets remain no less safe and fair than the stock market. The reasons why the SEC cares about the debt markets should be clear. First, a staggering number of investor dollars are at risk in these markets. Domestic issuance of fixed-income securities jumped to $10.9 trillion in 1999, a 6.6 percent increase over 1998 levels. And, second, investor dollars in the debt markets are not simply at risk, they are also at work. The bond market touches all aspects of our lives – from the cost of building roads and schools to corporate investments in areas such as research and development, and plants and equipment. The bond market’s muscle is perhaps even more evident in Washington than on Wall Street. While I have tried to avoid the "inside the Beltway" mentality that characterizes the thinking of many Washingtonians, I can tell you nonetheless that the bond market’s clout is clearly a fact of political life. After the bond market’s favorable reaction to President Clinton’s first term economic program, democratic-adviser James Carville was quoted as saying, "I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody." We’ve worked closely with the Bond Market Association to safeguard our debt markets. Our relationship with you provides a strong example of the effectiveness of a public-private sector partnership. Of course, as with any partnership, we do not always see eye to eye. From an enforcement perspective, I think the topic on which we have differed most is how to strike an appropriate balance between enforcement and regulation. The difficult task of determining how best to influence and shape conduct of market participants --whether through enforcement, by legislation, regulation, or by allowing free market forces to operate unimpeded -- is a subject that has been debated for decades. It’s also a subject that I have had the opportunity to consider in each of my different positions at the Commission. I would like to share some of my views on this topic with you today. For those of you now contemplating a second cup of coffee, let me hasten to say in defense of this topic that there is a good reason why the time is ripe to revisit the issue. We stand on the brink of a new millenium and our markets -- including our bond markets -- are experiencing explosive change, particularly as a result of technology. It is fair to ask how the new online markets fit into a structure of regulation originally designed for an off-line world. Should we address these changes in our markets through a new regulatory scheme or through enforcement of existing rules in a manner that is consistent with their prohibitions yet responsive to evolving conditions? This issue has come to the fore recently as people have questioned how longstanding principles such as the requirement of suitability or the prohibitions against market manipulation apply in an Internet marketplace. Such issues were showcased in the Internet report issued last year by Commissioner Laura Unger. In sharing my thoughts with you, I note that the views I express are my own and are not necessarily shared by the Commission or its staff. Let me start with a little background. As you all know, our main antifraud weapon, Section 10(b), was signed into law in 1934. Congress deliberately provided expansive reach to Section 10(b). Thomas Gardiner Corcoran, a drafter of the Exchange Act, testified to Congress that Section 10(b) was "a catch-all clause to prevent manipulative devices." He went on to say that, "The Commission should have the authority to deal with new manipulative devices." While it’s doubtful that Tommy the Cork had the Internet in mind, he clearly recognized that the world was not static and that the antifraud prohibitions had to be expansive in order to address the evolving world of manipulative schemes. Congress vested in the Securities and Exchange Commission authority both to enforce the antifraud provisions, and to adopt regulations to prevent fraud and other misconduct. The seeds for the debate over how best to strike an appropriate balance between enforcement and regulation were sown at that time. Over the years, the Commission has exercised its rulemaking authority under Section 10(b) sparingly. For the most part, we have attacked fraud through the enforcement process. While I suppose this will come as a shock to no one, I truly believe that the enforcement process offers advantages over rulemaking. First, the Commission’s enforcement tools enable us to respond more nimbly to change. A new spin on an old fraud can be attacked quickly with our existing investigative and prosecutorial powers. Drafting and adopting effective rules, on the other hand, typically requires the accumulation over time of evidence of a particular type or pattern of misconduct, followed by a lengthy notice and comment period. Thus, rulemaking always leaves us a little behind the curve. Moreover, as technology and the markets evolve rapidly, we can only expect to lose ground more quickly. Specific regulatory prohibitions are static, and inevitably reflect assumptions – and limitations -- prevalent at the time of their adoption, but not necessarily at any time in the future. Second, the enforcement process enables the Commission to take targeted action against those engaged in misconduct, without necessarily implicating the conduct of those engaged in similar, but legal, activity. Enforcement actions require the Commission to make far fewer difficult determinations about where to draw lines among types of conduct. These line-drawing decisions must be made particularly carefully in the rulemaking context because, like moths to a flame, parties subject to regulation are inevitably drawn closer and closer to the line. This tendency means that rulemaking can have the perverse effect of encouraging certain "close to the line" conduct. Furthermore, because rulemaking requires the Commission to draw lines among categories of conduct, rather than among the facts of particular cases, we incur the risk that our rules will be both over-inclusive and under-inclusive. As a result, we may burden conduct that otherwise would remain legal, while failing to curtail certain practices that we had hoped to stop. Our approach to insider trading over the years is illustrative of our philosophy regarding enforcement and regulation. Certainly, combating insider trading has been one of the crowning successes of our enforcement program. And we’ve achieved success in this area without a single rule or regulation, until two days ago. Even though insider trading is not defined, I believe that most people know what it is and understand that it is illegal. Adopting rules that prohibit precise types of trading would necessarily place beyond our reach other types of trading not covered – trading that may be just as unfair as that captured by a rule. The adoption of rules would also reopen for debate issues that have been long resolved by the courts. The reason we acted recently to adopt two insider trading rules is equally instructive of our philosophy regarding enforcement and regulation. Rule 10b5-1 was adopted to eliminate the uncertainty that has arisen from various court cases as to whether it is necessary to prove that a person actually used inside information or whether it is sufficient simply to show that the person traded while aware of such information. The court decisions addressing this issue have reached different conclusions. We believed that a rule would provide greater certainty and save years of effort to clarify the standard in the courts. Rule 10b5-2 was adopted for similar reasons. While some have said that we are too sparing in the use of our rulemaking authority and that we should identify prohibited conduct with greater specificity, others have asserted that the Commission is not sparing enough in its rulemaking efforts. This was the position taken by some of the opponents to our recent rulemaking initiative, Regulation FD. Such opponents asserted that we should proceed by bringing enforcement actions against those who engaged in selective disclosure, rather than imposing new regulatory requirements on all. Finally, some of our critics appear to be just plain contrarians. Whatever approach the Commission takes – whether it’s engaging in rulemaking or proceeding by enforcement – they say we should be doing the opposite. Let me give you an example of what I am talking about, based on statements made a single day apart by that "other" securities industry trade association. In an April 5 amicus brief filed with the Ninth Circuit in the Rauscher yield burning case, that association, joined by this one, argues: If the SEC feels that industry practices are insufficient, the solution is not to punish those who rely on those practices but to use the SEC’s rule-making authority to promulgate a standard that the SEC prefers. In a comment letter filed the very next day pertaining to Regulation FD, the same association argued: A governmental regulation is a blunt instrument.... The Commission [could] address more directly the specific abuses that concern it, including [by] vigorous enforcement of the existing insider trading prohibitions. This approach would be far preferable to imposing an oppressive regulation of all issuers in order to get a relatively small number of abusive cases. The best way to sum up the juxtaposition of these arguments is the old "heads I win, tails you lose" line. So where does this leave us? I’ve told you, not surprisingly, that my preference is to address misconduct in the marketplace through the enforcement process, except when controlling case law prevents us from doing so or conflicting case law creates unreasonable uncertainty. But it may surprise you to hear that I do not believe enforcement authority should be unfettered. True, a metal badge would be nice, but I’m not looking for a gun. Probably the Commission’s most important consideration in bringing an enforcement action addressing novel conduct is whether the defendant was on notice that his or her conduct was illegal. Market participants are put on notice of illegal behavior under Section 10(b) by several sources, including: judicial and SEC precedents, SEC staff guidance, and NASD guidance, such as Notices to Members. Sometimes the notice that we deem to be fair notice does not satisfy the desire of market participants for precise rules that provide absolute certainty. Take, for example, the standard governing mark-ups. Here, we’ve provided broad guidelines that leave considerable room for individualized judgments in particular situations. Efforts by the Commission and other regulators to provide more specific guidance in the area of mark-ups have been derailed and illustrate the tensions that exist between rulemaking and enforcement. In the wake of some recent enforcement actions charging violations arising out of material, but very small, undisclosed mark-ups, the call for regulation has again sounded. Some have urged us, in effect, to engage in rate-making and publish an elaborate and lengthy schedule of tariffs for each and every security imaginable. This does not seem particularly practical to me. In the first place, I’m not sure we have the expertise to do so. More importantly, however, our markets are dynamic and it is our responsibility to promote, rather than impede, competition. I fear that a schedule of published rates would set both a floor and a ceiling for mark-ups and could discourage further competition. The Commission, on the other hand, has made a number of proposals that would, at least indirectly, address the issue of mark-ups, by providing greater transparency in the corporate bond market. These proposals would require the NASD to adopt transaction reporting rules for corporate debt that would make transaction prices available on a real-time basis. As previously mentioned, the more transparent our markets are, the more difficult it is to charge prices that are excessive or out of line with published quotations. I’m pleased that the Bond Market Association has been working with the Commission and the NASD to implement the rules necessary to achieve this goal. I’ve discussed why I think the enforcement process more flexibly responds to ever changing conditions in the marketplace in most situations. But I should also spend a minute talking about when rulemaking is appropriate. This brings us, logically, to Regulation FD, our new rule prohibiting selective disclosure that became effective two days ago. The reason we pursued rulemaking to prevent selective disclosure was because existing legal precedents – principally the Dirks case – placed barriers in the path of bringing enforcement actions to stop a practice universally regarded as unfair. Perhaps these barriers explain why opponents of the rule urged us to proceed by enforcing existing insider trading rules – they knew the rules were inadequate. Another argument that was asserted in opposition to the rule was that there was insufficient proof that selective disclosure was occurring to the extent necessary to warrant a rule across the boards. This argument is frequently raised to block rulemaking initiatives. For example, the Big 5 accounting firms who oppose our auditor independence rules argue that there is no proof that the performance of consulting services for audit clients impairs the objectivity of auditors. In the case of Reg. FD, there was in fact proof that selective disclosure was occurring, including an entire Bloomberg website devoted to situations in which analyst conference calls have been closed to media and investors. Regardless of whether there is demonstrable proof of wrongdoing or illegal behavior, the courts have made clear that the Commission is free to act prophylactically to prevent activity that it finds may harm investors or the markets. For example, in disposing of a challenge to Rule G-37 several years ago, the D.C. Circuit said: "Although the record contains only allegations, no smoking gun is needed where, as here, the conflict of interest is apparent, the likelihood of stealth great, and the legislative purpose prophylactic." The task of striking an appropriate balance between enforcement and regulation is more difficult and controversial today than ever before. With technology transforming our markets, and an accompanying rise in Internet securities fraud, many have questioned whether the old rules fit in the new online world, and whether the Commission ought to proceed by regulation or enforcement of existing rules in these unchartered waters. We have devoted significant resources to fighting Internet securities fraud and have brought over 200 actions since we began policing the Internet in 1995. Nearly all of these cases involve equities, and most focus on either illegal touting or "pump and dump" manipulation schemes. We have found, without exception, that wrongdoing we have witnessed on the Internet fits squarely within our existing statutory framework. Nevertheless, some have argued that our statutes were never intended to cover Internet fraud. To one degree or another, defendants in several of our cases have all argued that the securities laws apply differently in cyberspace than in a bricks and mortar world. For example, we charged Tokyo Joe, a burrito restaurant owner turned web site operator, with several violations including touting securities on his web site. In defense, his lawyer was quoted as saying: I would have hoped that the SEC would have dealt with these types of issues such as free speech and exchange of information over the Internet through regulation and not litigation. I reject the argument that when fraud is perpetrated on a new medium, rulemaking is more appropriate than enforcement. The First Amendment has never protected fraud and it does not do so in cyberspace. Tokyo Joe quickly learned this lesson when his motion to dismiss was recently denied. And Section 10(b) applies in the same way to conduct on-line and off. Its broad proscriptions address prohibited conduct and provide no exemptions based on the medium used. Just because the Internet has spawned new techniques for facilitating traditional frauds does not mean that existing statutory prohibitions do not apply. No where is this more apparent than in the area of market manipulation – the intentional interference with the free forces of supply and demand to affect the price of a security. The laws prohibiting manipulation require proof of both manipulative intent and effect. Historically, this has been evidenced by devices such as wash sales, matched orders or marking the close that have taken days, weeks or months to accomplish. But these indicia of a manipulation are not required to prove the requisite intent and purpose. And their absence does not give rise to a regulatory gap that precludes enforcement of the law where proof of manipulative intent and effect is otherwise present. In an Internet world, the time it takes to manipulate a security has shrunk from days to minutes, and the techniques for accomplishing a manipulation have been simplified. A single mass e-mail or "spam" sent by the click of a mouse can more easily and cheaply reach investors and artificially influence trading than hundreds of cold calls from an old-fashioned boiler room or months of trading among confederates who control a stock’s float. Yet the purpose and effect in both instances is the same, and the prohibitions against manipulation apply equally in both contexts as well. This is a message that Jonathan Lebed, a 16 year-old stock manipulator who appeared on 60 minutes last Sunday, his parents, his lawyer, and various members of the media appear not to understand. And it’s a message worth reiterating as people have asked whether the fundamental prohibition against market manipulation applies to conduct on the Internet. Trust me, it does. Here’s what Lebed did. He purchased large blocks of thinly traded microcap stocks, often accompanying these trades with limit orders to sell. He then posted hundreds of identical messages, commonly known as "spam," to Yahoo! Finance message boards using multiple screen names. The messages typically touted the company by claiming, among other things, that the stock was about to "take-off," would be the next to gain 1,000%, and was "the most undervalued stock ever." In a number of postings, he made very specific price predictions, for instance, that the stock would go from $2 to $20, while at the same time placing limit sell orders at much lower prices. In at least one posting, he falsely claimed that the company was about to enter into a contract that would have generated large revenues. Lebed typically repeated the postings a second time early in the morning of the next day before going to school. In every instance, the price and volume of the stocks he touted increased, in some cases to 52-week-high levels. And he always sold out his positions at a profit, usually within 24 hours. Lebed admitted that he authored and posted the messages in order to cause the stock price to rise so that he could make a profit, both of which, in fact, occurred. Indeed, he conceded on national television that he was manipulating the stocks. It’s not very often that we find stronger proof of manipulative purpose and effect. Nothing beats an admission. And yet, for some reason – perhaps because this conduct took place over the Internet – even prominent financial newspapers have had a difficult time comprehending that the case involves market manipulation, plain and simple. Some of the press and others have gotten completely sidetracked and have attempted to defend Lebed’s conduct by demonizing Wall Street and suggesting that what Lebed did is really no different than what Wall Street analysts do every day. Of course, to the extent an analyst intentionally manipulates a security, misleads investors through widespread Internet postings under multiple names, makes unsubstantiated price predictions or other statements that lack a reasonable basis, or scalps a recommendation by selling when the analyst is telling others to buy, the analyst has a serious problem. But to suggest that these are "standard brokerage house procedures" is sophomoric. What is perhaps most disturbing about this case is the reaction we’ve seen from the Lebed family and from others who seem to treat Jonathan as a cult hero. Both Lebed junior and senior have said, "What’s the problem? There were no victims." Maybe the Lebeds should have used some of Jonathan’s profits to buy a dictionary rather than a Mercedes. Just because you can’t always see them or identify them does not mean victims don’t exist. Those who unwittingly bought at an inflated price – only to be burned when the stock collapsed – meet any dictionary definition of victim. Mr. Lebed also says he is "proud" of his son and distinguishes his son’s securities violations from smoking pot in the garage or stealing hubcaps. I wonder how many investors who’ve lost money as a result of Jonathan’s manipulations would agree with this sentiment. A hubcap is worth about $20. Smoking pot -- as harmful and foolish as it may be -- does not injure innocent bystanders. Securities manipulation, by contrast, deprives people of hard-earned dollars needed for retirement, education and the like. So Mr. Lebed is right in saying his son’s conduct is different from smoking pot or stealing hubcaps. It’s worse. The Internet continues to open up vast new horizons for all of us. I hope it will not cause us to compromise our moral principles and values, or lose the ability to differentiate between right and wrong. While it may seem that I’ve traveled pretty far afield from talking about activities in the debt markets, I hope that my remarks will not be lost on this crowd as E*bond offerings and trading begin to arrive. This past year we’ve witnessed issuers and investment banks transform themselves into online merchants of all kinds of debt securities. We saw a number of firsts in this regard: Freddie Mac launched the first-ever bond offering via the Internet, a $6 billion five-year issue; Ford Motor Credit marketed the first corporate issue online, a $1.2 billion three-year bond; and The first online municipal offerings arrived, including a $530 million offering by Puerto Rico. We also began to see what I think will be a defining characteristic of online bond offerings – greater participation in this market by retail investors. In February, the World Bank launched a $3 billion deal, which marks the first online deal marketed not just to institutional investors but to retail investors as well. As the online market for debt heats up, I think it only natural that more regulatory scrutiny and enforcement will follow. And if the past is any predictor of the future, I’m sure we’ll be hearing the same arguments about the proper roles of regulation and enforcement that we’ve heard in the past. Those selling debt securities online – or their amici – will likely argue that they could not have known how or if the securities laws applied to conduct online. Let me set the record straight today – a markup that is excessive offline remains so online; an investment that is not suitable when recommended offline remains so online; and misleading risk disclosure in a paper prospectus remains misleading when presented in an electronic format. So as we move forward to embrace technological advancements, make sure you remain true to the principles that have guided our markets for more than 60 years. These principles have served us well. As we like to say at the Commission, our markets maintain the reputation as being the fairest and safest in the world. Faithful adherence to these principles will ensure that our new online markets continue to provide benefits and protections to investors and issuers alike. Thank you. sec.gov

To: Jeffrey S. Mitchell who wrote (919)	1/15/2001 10:22:16 PM
From: Jeffrey S. Mitchell	Respond to of 12465

Re: 1/14/01 - NY Times: Work First, Invest Later? Not These Days; In High School, Hallways Buzz With Stock Tips January 14, 2001 WORK FIRST, INVEST LATER? NOT THESE DAYS In High School, Hallways Buzz With Stock Tips By RANDALL LANE -------------------------------------------------------------------------------- [picture: Michelle V. Agins/ The New York Times; Alexander Danielides, 14, at home in Manhattan. He has been following the stock market since he was 9.] -------------------------------------------------------------------------------- [picture: Nancy Wegard for The New York Times; Mitchell Slater, a vice president at Merrill Lynch, used a book, ``A Money Adventure,'' to explain investing to a third-grade class in Westfield, N.J.] -------------------------------------------------------------------------------- Like many other investors, Alexander Danielides was smitten by the 1994 best seller "The Warren Buffett Way." Applying some techniques immortalized by Mr. Buffett, the investing legend, he tripled his stake in Motorola, is now long in General Electric and keeps a wary eye on Compaq Computer and America Online — waiting until last quarter's results are announced to see if they underperformed Wall Street expectations. Alexander is 14; he read the Buffett book when he was 9. A sophomore at the Bronx High School of Science, Alexander says that he spends an hour a night researching stocks on the Internet and that he watches the Bloomberg television network intently. Yet, compared with some of his classmates, he has only moderate interest in the stock market. A member of the debating team and a die-hard Yankees fan, he avoids the hallway banter about Federal Reserve moves and insider selling that regularly commands the attention of the 20-plus members of the school's stock market club. "I'm not one of those kids who gets amazed when a new earnings report comes out," he said. What is most remarkable about Alexander's story is that it is wholly unremarkable. Over the last five years, the Internet has produced two new types of stock speculators: day traders and teenagers like Alexander. But while day trading appears to be a fad that died with last year's bear market — Ameritrade Holdings, an online broker favored by day traders, added to the evidence on Monday when it announced that its first- quarter commission revenue would be less than $45 million, down from $132 million a year ago — the rise in trading by teenagers appears to continue unabated. It has become as enmeshed in the high school experience as football practice and yearbook meetings. "It's not just the nerdy kids asking questions anymore," said Mitchell Slater, a first vice president at Merrill Lynch who lectures each month in New York area schools at assemblies filled with students as old as high school seniors and as young as third graders. "The jocks, the cheerleaders, the druggies — they all want to talk about the market." Some 12 percent of adolescents aged 12 to 17 now own stocks, versus 7 percent two years ago, according to a Merrill Lynch survey. That works out to more than three million youths nationwide. But the number who use those two tried-and-true places for extra teenage money — savings accounts and piggy banks — remained flat or declined over the same period, the study found. Most young investors hold their stock passively, often in a trust, experts say, but a sizable segment is trading actively for personal accounts over the Internet. Just how sizable is unclear. Most e-brokerage firms declined to provide statistics, though Datek, a favorite online firm among aggressive traders and the No. 4 online broker in volume last year, says that 2 percent of its customers, 13,000 in all, are minors trading via custodial accounts. If that ratio is extrapolated across the pool of online stock traders, the total number of young traders runs to more than 200,000. That's a lot of kids, mostly from affluent families, trading a lot of money. While the majority have accounts in the low thousands of dollars, a precocious and generally well- financed few have portfolios in the six-figure range, anecdotal evidence suggests. (By comparison, the median stock portfolio for all shareholders in 1998 was $28,000, the New York Stock Exchange said.) The phenomenon worries some psychologists. "I know 16- and 17- year-olds whose parents give them $1,000 like it's play money," said Dr. Stephen Goldbart, co-director of the Money, Meaning and Choices Institute in San Francisco, which runs seminars about coping with wealth. "They're giving them access to a very powerful — and socially acceptable — avenue to addiction." Young investors no longer have to look to adults for advice, either — the Internet provides it. Many Web sites, including some designed specifically for teenagers, teach investing concepts. Besides offering the basics, some give instructions in more sophisticated and tempting techniques like buying on margin, shorting stocks, trading in commodities and even avoiding taxes by buying municipal bonds. The image of teenage stock trading was hardly helped last September, when the Securities and Exchange Commission accused 15- year-old Jonathan G. Lebed of Cedar Grove, N.J., of using Internet chat rooms to manipulate low-priced stocks. To settle the case, Jonathan agreed to return $285,000 of his gains plus interest. "I'm proud of my son," his father said at the time. Still, many observers of teenage investing argue that Jonathan's case was the aberration, not the rule. They say the vast majority follow a fairly conservative strategy, obeying the traditional axioms of buying and holding, not churning portfolios, and of investing only in what you understand. The first stock ever bought by Chris Stallman, 17, a high school junior in Bradley, Ill., was Walgreen — an easy choice, considering that his father is a pharmacist for the company. That was two years ago. Chris has since bought the maker of his favorite kind of computer, Dell Computer, as well as a few blue chips like Merck. Along the way, he has turned his $2,400 college account into $8,000, despite the market's fall last year and after using $500 to pay his tax bill. "Some girls in the high school have asked me to marry them," he said. "They think I'm going to be rich." Zachary Skolnick, 16, a junior at the Branson School in Ross, Calif., is a technology buff who makes $50 an hour helping a local law firm solve its computer problems. Seeding a $4,000 stock portfolio with those proceeds, he now focuses on his favorite area, with a decided nod to quality and earnings: Microsoft, Intel, Cisco Systems and Nokia. Zachary, who has been trading since he was 13, often talks stocks with his father. "We try to help each other out," he said. And he spends his nights thinking up computer models and stock screening programs. Yet he said he had never considered day trading. "Unless you have a larger portfolio where the commissions don't eat up the assets, it doesn't make sense," he said, sounding like a pro. For now, he is content to swap tips in his school's 12-member investment club, which makes group purchases based on a two-thirds vote. Members recently debated whether to buy into Krispy Kreme, a snacking favorite among several members that was the second-best performer among initial public offerings last year. The club eventually decided against it. "We didn't feel that doughnuts were a key growth area," Zachary said. It was a smart move: although Krispy Kreme's shares rose after the vote, they closed on Friday at $67.31, nearly 40 percent off their 52-week high. The fact that smart teenagers like Zachary can be taken seriously as investors comes as a direct dividend of the Internet, which allows young traders the most precious commodity of all: anonymity. As comfortable surfing the Web as reading a book, they can uncover the same kind of data — earnings forecasts, S.E.C. filings, analyst reports — that until recently would have been the sole domain of well-heeled adults. They can post questions and comments in chat rooms and bulletin boards — and receive serious answers. And they can trade stocks at feasible commissions and without having to call a broker with the worry that their voice might crack. "You couldn't get an investment adviser to talk to a kid six years ago," said Ginger Thompson, a onetime investment banker who in 1999 founded Doughnet, a Web site dedicated to financial management for teenagers. Young people "don't need one now," she added. Of course, there is a difference between having the tools to trade and understanding how to use them. Many groups, both for profit and not, have begun large- scale youth education programs. Two years ago, the National Association of Investors Corporation, an umbrella group of investor clubs, started a teenage membership program, complete with a newsletter, Young Money Matters. More than 2,500 youths pay the $20 annual membership fee. "We want to get the foundation built, so they're not thinking about the quick buck but instead looking longer term," said Jeffery Fox, the group's education chief. Even more popular, however, are online trading games. Every semester, the Securities Industry Association runs the Stock Market Game, a 10-week simulated market for students in grades 4 through 12: Teams are given a hypothetical $100,000 to invest while studying a complementary curriculum in math, economics and social studies. Five years ago, the game had 400,000 participants; now the number tops 600,000. CNBC also runs a contest, with a more tangible prize. Since 1998, teams with names like "Stockluvers" and the "Dollar Dollies" have competed for a chance to be flown to New York for an appearance on the network's "Power Lunch" program. Squads from almost 13,500 schools competed last fall, up from 2,500 schools 18 months ago. The games provide more than education. They build interest — and confidence. Alexander, Chris and Zachary all played the Stock Market Game with varying success before moving from chits to cash. "Now I'd rather do it with real money," Alexander said. These three teenagers are typical in another way: they are male. A survey by Teenage Research Unlimited, based in Northbrook, Ill., found that 25 percent more teenage boys than girls reported owning stocks, and the company's experts said the ratio grew far more lopsided as trading became more active. In one sign of the overall interest, at least a half-dozen summer camp programs on investments have popped up, including one at Haverford College outside Philadelphia that features instruction from the Wharton School of the University of Pennsylvania. Another, at Bentley College, near Boston, buses campers into the city for field trips in the financial district. More than a dozen Web sites now cater to young investors. Doughnet, Ms. Thompson's site, draws 150,000 unique users monthly and is unabashedly pro-investing — showing teenagers how to set up trading accounts. Ms. Thompson said she believes that young people should have the right to invest as they please. "They're allowed to drive and kill themselves on the road," she said, "but not invest their money?" Ms. Thompson, who has worked at Donaldson Lufkin Jenrette, First Boston and as a marketing executive at MTV Networks, added that, as in love perhaps, a teenager is better off getting some experience when he or she is young and the stakes are low. "They lose money once; they learn a powerful lesson," said Ms. Thompson, who plans to open an account for her 12-year-old daughter this year. "A thousand dollars is a huge amount of money to a teenager. That's why they learn more than most adults." But like most adults, most younger investors probably also managed to avoid overall losses during the surging bull market of the late 1990's. And coming of age as an investor during that time was a bit like a neophyte gambler winning big on his first trip to Las Vegas, said J. Michael Faragher, who for 15 years has been co-director of the Center for Addiction Studies at Metro State College in Denver. "This is going to set up a memory trace that isn't going to go away, and will be coded in the brain," he said. Dr. Faragher said the wild swings in the market — which have only become wilder in recent months — are particularly troublesome for teenagers. "Being an adult, I can put that in context, but an adolescent really can't," he said. "It's potentially very dangerous." Dr. Goldbart, of the Money, Meaning and Choices Institute, likened the potential pitfalls of early market successes to the plight often faced by child actors. "Self-esteem," he said, "can go up and down with the market in the course of a day or two." As a remedy, both Dr. Goldbart and Dr. Faragher support strict parental controls on brokerage accounts. Theoretically, those controls already exist. It is technically illegal for minors to trade securities; that is why teenagers must open custodial accounts, which are set up in the child's name but require parental approval for any transaction. But the Internet does not recognize a child's face or voice and, as with the keys to the family's second car, passwords are usually difficult to reclaim once they are turned over. In many cases, the adults don't seem to want them back, especially when the youths are trading with their own money. Roberto Weis, a construction manager in Fort Lauderdale, Fla., oversaw his son, Alexandre, as he invested a $2,500 windfall from his bar mitzvah. Comfortable that his son was picking up the fundamentals, Mr. Weis gave him full control over his DLJ Direct account at the age of 14. In the ensuing three years, Alexandre has turned that stake into $5,000, even after the year's market decline. Mr. Weis was comfortable enough with his son's skill — Alexandre brags that his portfolio has outpaced his dad's — that he entrusted him with the savings accounts of his 16-year-old brother, Rodolfo, and 12-year-old sister, Veronica. Now Alex runs what is basically a Weis family mutual fund, with assets in the $10,000 range, focusing on technology companies. Alexandre, who has seen his own and his siblings' accounts drop by 25 percent since last spring, acknowledged that the bear market of 2000 had shaken him up a bit. And that's a healthy feeling, said Mr. Slater of Merrill Lynch, among others. "Teenagers have seen what happens when greed takes over," he said. Still, unlike day traders, young investors are not bailing out of the market. Alexandre repeats the mantra of millions of investors, including many of his peers — that the stock market is the premier investing vehicle for long-term investors, especially when their horizons are 60 or 70 years. He has spent the last year bringing down the average cost of stocks he already owns and likes by buying more shares. Chris Stallman, the 17-year-old Walgreen shareholder, remains similarly bullish for the long term. Nearly two years ago, he and a friend started TeenAnalyst.com, the first site created by teenage traders for teenage traders. "Investing," the site's motto screams out with a verve more reminiscent of naughtier activities, "it's not just for adults anymore!" Run out of his bedroom, the site, visited by 10,000-plus unique users a month, offers simple articles and a variety of services that demonstrate the vitality — and perplexing nature — of the youth market. Adult-looking pages offers teenagers free trial subscriptions to Fast Company magazine and a $240-a-year stock newsletter, while a banner ad for credit cards flashes a contest to win $25,000 off your annual mortgage or rent. (No word on whether this can be applied to the family home.) Because the current generation of teenagers is already a viable market, and may eventually prove to be the largest pool of stock traders in history, many brokerage firms have overcome image concerns and moved cautiously into marketing to young investors. Some, like Merrill Lynch, take the education route. A. G. Edwards of St. Louis runs its own stock market simulation, Big Money Adventure, with levels ranging from "Rainbow Castle," for 2- to6-year-olds, to the Star-Traders game for teenagers. Each week, Edwards gives T-shirts to the winners. Still, other brokerage firms seem to worry about being accused of concocting a stock market version of Joe Camel. Ameritrade refused to provide any numbers about its teenage business, and a press representative from ETrade tried to go "on background" just for the purpose of confiding that, no, ETrade wanted nothing to do with this article. But the genie is out of the bottle. "Teens see the opportunity to build wealth in ways that generations before them never did," Ms. Thompson said. In many ways, it is becoming just another facet of being a teenager. Just as they talk sports or dates, Zachary and Alex and Alexander, among others, say that they now talk investing at the dinner table with their parents, and that their parents' friends ask for investing advice. Chris Stallman said teachers and administrators at his school, instead of asking him about the latest bands, have been asking him for stock picks. He refuses to give specific recommendations, however, instead sticking with pat answers like "go with blue chips." "I don't want to give a stock pick to the principal," he said. "Then it goes down, and I'll be in detention." Copyright 2001 The New York Times Company nytimes.com

To: Jeffrey S. Mitchell who wrote (919)	2/24/2001 3:39:31 AM
From: Jeffrey S. Mitchell	Read Replies (3) \| Respond to of 12465

Re: 2/25/01 - NY Times: Jonathan Lebed: Stock Manipulator, S.E.C. Nemesis -- and 15 years old (part 1 of 2) February 25, 2001 Jonathan Lebed: Stock Manipulator, S.E.C. Nemesis -- and 15 years old By MICHAEL LEWIS -------------------------------------------------------------------------------- Photograph by Katy Grannan -------------------------------------------------------------------------------- Forum • Did Jonathan Lebed Really Commit a Crime? forums.nytimes.com@@.f1aefe2 -------------------------------------------------------------------------------- Photograph by Katy Grannan When he isn't doing business, Jonathan, left, likes to shoot pool with John DiPrenda and Jared Glugeth. -------------------------------------------------------------------------------- On Sept. 20, 2000, the Securities and Exchange Commission settled its case against a 15-year-old high-school student named Jonathan Lebed. The S.E.C.'s news release explained that Jonathan -- the first minor ever to face proceedings for stock-market fraud -- had used the Internet to promote stocks from his bedroom in the northern New Jersey suburb of Cedar Grove. Armed only with accounts at A.O.L. and ETrade, the kid had bought stock and then, "using multiple fictitious names," posted hundreds of messages on Yahoo Finance message boards recommending that stock to others. He had done this 11 times between September 1999 and February 2000, the S.E.C. said, each time triggering chaos in the stock market. The average daily trading volume of the small companies he dealt in was about 60,000 shares; on the days he posted his messages, volume soared to more than a million shares. More to the point, he had made money. Between September 1999 and February 2000, his smallest one-day gain was $12,000. His biggest was $74,000. Now the kid had agreed to hand over his illicit gains, plus interest, which came to $285,000. When I first read the newspaper reports last fall, I didn't understand them. It wasn't just that I didn't understand what the kid had done wrong; I didn't understand what he had done. And if the initial articles about Jonathan Lebed raised questions -- what did it mean to use a fictitious name on the Internet, where every name is fictitious, and who were these people who traded stocks naively based on what they read on the Internet? -- they were trivial next to the questions raised a few days later when a reporter asked Jonathan Lebed's lawyer if the S.E.C. had taken all of the profits. They hadn't. There had been many more than the 11 trades described in the S.E.C's press release, the lawyer said. The kid's take from six months of trading had been nearly $800,000. Initially the S.E.C. had demanded he give it all up, but then backed off when the kid put up a fight. As a result, Jonathan Lebed was still sitting on half a million dollars. At length, I phoned the Philadelphia office of the S.E.C., where I reached one of the investigators who had brought Jonathan Lebed to book. I was maybe the 50th journalist he'd spoken with that day, and apparently a lot of the others had had trouble grasping the finer points of securities law. At any rate, by the time I asked him to explain to me what, exactly, was wrong with broadcasting one's private opinion of a stock on the Internet, he was in no mood. "Tell me about the kid." "He's a little jerk." "How so?" "He is exactly what you or I hope our kids never turn out to be." "Have you met him?" "No. I don't need to." Cedar Grove is one of those Essex County suburbs defined by the fact that it is not Newark. Its real-estate prices rise with the hills. The houses at the bottom of each hill are barely middle class; the houses at the top might fairly be described as opulent. The Lebeds' house sits about a third of the way up one of the hills. When I arrived one afternoon not long ago, the first person to the door was Greg Lebed, Jonathan's 54-year-old father. Black hair sprouted in many directions from the top of his head and joined together somewhere in the middle of his back. The curl of his lip seemed designed to shout abuse from a bleacher seat. He had become famous, briefly, when he ordered the world's media off his front lawn and said, "I'm proud of my son." Later, elaborating on "60 Minutes," he said, "It's not like he was out stealing the hubcaps off cars or peddling drugs to the neighbors." He led me to the family dining room, and without the slightest help from me, worked himself into a lather. He got out a photocopy of front-page stories from The Daily News. One side had a snapshot of Bill and Hillary Clinton beside the headline "Insufficient Evidence' in Whitewater Case: CLINTONS CLEARED"; the other side had a picture of Jonathan Lebed beside the headline "Teen Stock Whiz Nailed." Over it all was scrawled in Greg's furious hand, "U.S. Justice at Work." "Look at that!" he shouted. "This is what goes on in this country!" Then, just as suddenly as he had erupted, he went dormant. "Don't bother with me," he said. "I get upset." He offered me a seat at the dining-room table. Connie Lebed, Jonathan's 45-year-old mother, now entered. She had a look on her face that as much as said: "I assume Greg has already started yelling about something. Don't mind him; I certainly don't." Greg said testily, "It was that goddamn computer what was the problem." "My problem with the S.E.C.," said Connie, ignoring her husband, "was that they never called. One day we get this package from Federal Express with the whatdyacallit, the subpoenas inside. If only they had called me first." She will say this six times before the end of the day, with one of those marvelous harmonicalike wails that convey a sense of grievance maybe better than any noise on the planet. If only they'da caaaawwwwlled me. "The wife brought that goddamn computer into this house in the first place," Greg said, hurling a thumb at Connie. "Ever since that computer came into the house, this family was ruined." Connie absorbed the full frontal attack with an uncomprehending blink, and then said to me, as if her husband had never spoken: "My husband has a lot of anger. He gets worked up easily. He's already had one heart attack." She neither expects nor receives the faintest reply from him. They obey the conventions of the stage. When one of them steps forward into the spotlight to narrate, the other recedes and freezes like a statue. Ten minutes into the conversation, Jonathan slouched in. Even that verb does not capture the mixture of sullenness and truculence with which he entered the room. He was long and thin and dressed in the prison costume of the American suburban teenager: pants too big, sneakers gaping, a pirate hoop dangling from one ear. He looked away when he shook my hand and said "Nice to meet you" in a way that made it clear that he couldn't be less pleased. Then he sat down and said nothing while his parents returned to their split-screen narration. At first glance, it was impossible to link Jonathan in the flesh to Jonathan on the Web. I have a file of his Internet postings, and they're all pretty bombastic. Two days before the FedEx package arrived bearing the S.E.C.'s subpoenas, for instance, he logged onto the Internet and posted 200 separate times the following plug for a company called Firetector (ticker symbol FTEC): "Subj: THE MOST UNDERVALUED STOCK EVER "Date: 2/03/00 3:43pm Pacific Standard Time "From: LebedTG1 "FTEC is starting to break out! Next week, this thing will EXPLODE. . . . "Currently FTEC is trading for just $2 1/2! I am expecting to see FTEC at $20 VERY SOON. "Let me explain why. . . . "Revenues for the year should very conservatively be around $20 million. The average company in the industry trades with a price/sales ratio of 3.45. With 1.57 million shares outstanding, this will value FTEC at . . . $44. "It is very possible that FTEC will see $44, but since I would like to remain very conservative . . . my short-term target price on FTEC is still $20! "The FTEC offices are extremely busy. . . . I am hearing that a number of HUGE deals are being worked on. Once we get some news from FTEC and the word gets out about the company . . . it will take-off to MUCH HIGHER LEVELS! "I see little risk when purchasing FTEC at these DIRT-CHEAP PRICES. FTEC is making TREMENDOUS PROFITS and is trading UNDER BOOK VALUE!!!" And so on. The author of that and dozens more like it now sat dully at the end of the family's dining-room table and watched his parents take potshots at each other and their government. There wasn't an exclamation point in him. not long after his 11th birthday, Jonathan opened an account with America Online. He went onto the Internet, at least at first, to meet other pro-wrestling fans. He built a Web site dedicated to the greater glory of Stone Cold Steve Austin. But about the same time, by watching his father, he became interested in the stock market. In his 30-plus years working for Amtrak, Greg Lebed had worked his way up to middle manager. Along the way, he accumulated maybe $12,000 of blue-chip stocks. Like half of America, he came to watch the market's daily upward leaps and jerks with keen interest. Jonathan saved him the trouble. When he came home from school, he turned on CNBC and watched the stock-market ticker stream across the bottom of the screen, searching it for the symbols inside his father's portfolio. "Jonathan would sit there for hours staring at them," Connie said, as if Jonathan is miles away. "I just liked to watch the numbers go across the screen," Jonathan said. "Why?" "I don't know," he said. "I just wondered, like, what they meant." At first, the numbers meant a chance to talk to his father. He would call his father at work whenever he saw one of his stocks cross the bottom of the television screen. This went on for about six months before Jonathan declared his own interest in owning stocks. On Sept. 29, 1996, Jonathan's 12th birthday, a savings bond his parents gave him at birth came due. He took the $8,000 and got his father to invest it for him in the stock market. The first stock he bought was America Online, at $25 a share -- in spite of a lot of adverse commentary about the company on CNBC. "He said that it was a stupid company and that it would go to 2 cents," Jonathan chimed in, pointing at his father, who obeyed what now appeared to be the family rule and sat frozen at the back of some mental stage. AOL rose five points in a couple of weeks, and Jonathan had his father sell it. From this he learned that a) you could make money quickly in the stock market, b) his dad didn't know what he was talking about and c) it paid him to exercise his own judgment on these matters. All three lessons were reinforced dramatically by what happened next. What happened next was that CNBC -- which Jonathan now rose at 5 every morning to watch -- announced a stock-picking contest for students. Jonathan had wanted to join the contest on his own but was told that he needed to be on a team, and so he went and asked two friends to join him. Thousands of students from across the country set out to speculate their way to victory. Each afternoon CNBC announced the top five teams of the day. To get your name read out loud on television, you obviously opted for highly volatile stocks that stood a chance of doing well in the short term. Jonathan's team, dubbing itself the Triple Threat, had a portfolio that rose 51 percent the first day, which put them in first place. They remained in the Top 3 for the next three months, until in the last two weeks of the contest they collapsed. Even a fourth-place finish was good enough to fetch a camera crew from CNBC, which came and filmed the team in Cedar Grove. The Triple Threat was featured in The Verona-Cedar Grove Times and celebrated on television by the Cedar Grove Township Council. "From then, everyone at work started asking me if Jonathan had any stock tips for them," said Greg. "They still ask me," said Connie. By the Spring of 1998, Jonathan was 13, and his ambitions were growing. He had glimpsed the essential truth of the market: that even people who called themselves professionals are often incapable of independent thought and that most people, though obsessed with money, have little ability to make decisions about it. He knew what he was doing, or thought he did. He had learned to find everything he wanted to know about a company on the Internet; what he couldn't find, he ran down in the flesh. It became part of Connie Lebed's life to drive her son to various corporate headquarters to make sure they existed. He also persuaded her to open an account with Ameritrade. "He'd done so well with the stock contest, I figured, Let's see what he can do," Connie said. What he did was turn his $8,000 savings bond into $28,000 inside of 18 months. During the same period, he created his own Web site devoted to companies with small market capitalization -- penny stocks. The Web site came to be known as Stock-dogs.com. ("You know, like racing dogs.") Stock-dogs.com plugged the stocks of companies Jonathan found interesting or that people Jonathan met on the Internet found interesting. At its peak, Stock-dogs.com had maybe 1,500 visitors a day. Even so, the officers of what seemed to Jonathan to be serious companies wrote to him to sell him on their companies. Within a couple of months of becoming an amateur stock-market analyst, he was in the middle of a network of people who spent every waking hour chatting about and trading stocks on the Internet. The mere memory of this clearly upset Greg. "He was just a little kid," he said. "These people who got in touch with him could have been anybody." "How do you know?" said Jonathan. "You've never even been on the Internet." "Suppose some hacker comes in and steals his money!" Greg said. "Next day, you type in, and you got nothing left." Jonathan snorted. "That can't happen." He turned to me. "Whenever he sees something on TV about the Internet, he gets mad and disconnects my computer phone line." "Oh, yeah," Connie said, brightening as if realizing for the first time that she lived in the same house as the other two. "I used to hear the garage door opening at 3 in the morning. Then Jonathan's little feet running back up the stairs." "I haven't ever even turned a computer on!" Greg said. "And I never will!" "He just doesn't understand how a lot of this works," explained Jonathan patiently. "And so he overreacts sometimes." Greg and Connie were born in New Jersey, but from the moment the Internet struck, they might as well have just arrived from Taiwan. When the Internet landed on them, it redistributed the prestige and authority that goes with a general understanding of the ways of the world away from the grown-ups and to the child. The grown-ups now depended on the child to translate for them. Technology had turned them into a family of immigrants. "I know, I know," Greg said, turning to me. "I'm supposed to know how it works. It's the future. But that's his future, not mine!" "Anyway," Connie said, drifting back in again. "That's when the S.E.C. called us the first time." The first time? Jonathan was 14 when Connie agreed to take him to meet with the S.E.C. in its Manhattan offices. When he heard the news, Greg, of course, hit the roof and hopped on the high-speed train to triple bypass. "He'd already had one heart attack," Connie explained and started to go into the heart problems all over again, inspiring Greg to mutter something about how he wasn't the person who brought the computer into the house and so it wasn't his responsibility to deal with this little nuisance. At any rate, Connie asked Harold Burk, her boss at Hoffmann-La Roche, the drug company where she worked as a secretary, to go with her and Jonathan. Together, they made their way to a long conference table in a big room at 7 World Trade Center. On one side of the table, five lawyers and an examiner from the S.E.C.; on the other, a 14-year-old boy, his mother and a bewildered friend. This is how it began: S.E.C.: Does Jonathan's father know he's here today? Mrs. Lebed: Yes. S.E.C.: And he approves of having you here? Mrs Lebed: Right, he doesn't want to go. S.E.C.: He's aware you're here. Mrs. Lebed: With Harold. S.E.C.: And that Mr. Burk is here. Mrs Lebed: He did not want to -- this whole thing has upset my husband a lot. He had a heart attack about a year ago, and he gets very, very upset about things. So he really did not want anything to do with it, and I just felt like -- Harold said he would help me. The S.E.C. seemed to have figured out quickly that they are racing into some strange mental cul-de-sac. They turned their attention to Jonathan or, more specifically, his brokerage statements. S.E.C.: Where did you learn your technique for day trading? Jonathan: Just on TV, Internet. S.E.C.: What TV shows? Jonathan: CNBC mostly -- basically CNBC is what I watch all the time S.E.C.: Do you generally make money on your day trading? Jonathan: I usually don't day trade; I just try to -- since I was home these days and I was very bored, I wanted something to do, so I was just trading constantly. I don't think I was making money. . . . S.E.C.: Just looking at your April statement, it looks like the majority of your trading is day trading. Jonathan: I was home a lot that time. Mrs. Lebed: They were on spring vacation that week. Having established and then ignored the boy's chief motive for trading stocks -- a desire to escape the tedium of existence -- the authorities then sought to discover his approach to attracting attention on the Internet. S.E.C.: On the first page [referring to a hard copy of Jonathan's Web site, Stock-dogs.com] where it says, "Our 6- to 12-month outlook, $8," what does that mean? The stock is selling less than 3 but you think it's going to go to 8. Jonathan: That's our outlook for the price to go based on their earnings potential and a good value ratio. . . . S.E.C.: Are you aware that there are laws that regulate company projections? Jonathan: No. Eventually, the S.E.C. people crept up on the reason they had noticed Jonathan in the first place. They had been hot on the trail of a grown-up named Ira Monas, one of Jonathan Lebed's many Internet correspondents. Monas, eventually jailed on unrelated charges, had been employed in "investor relations" by a number of small companies. In that role, he had fed Jonathan Lebed information about the companies, some of which turned out to be false and some of which Jonathan had unwittingly posted on Stock-dogs.com. The S.E.C. asked if Monas had paid Jonathan to do this and thus help to inflate the price of his company's stocks. Jonathan said no, he had done it for free because he thought the information was sound. The S.E.C. then expressed its doubt that Jonathan was being forthright about his relationship with Monas. One of the small companies Monas had been hired to plug was a cigar retail outlet called Havana Republic. As a publicity stunt, Monas announced that the company -- in which Jonathan came to own 100,000 shares -- would hold a "smoke-out" in Midtown Manhattan. The S.E.C. now knew that Jonathan Lebed had attended the smoke-out. To the people across the table from Jonathan, this suggested that his relationship with a known criminal was deeper than he admitted. S.E.C.: So you decided to go to the smoke-out? Jonathan: Yes. S.E.C.: How did you go about that? Jonathan: We walked down the street and took a bus. S.E.C.: Who is "we." Jonathan: Me and my friend Chuck. S.E.C.: O.K. Jonathan: We took a bus to New York. S.E.C.: You cut school to do this? Jonathan: It was after school. Then we got picked up at Port Authority, so then my mother and Harold came and picked us up and we went to the smoke-out. S.E.C.: Why were you picked up at the Port Authority? Jonathan: Because people like under 18 across the country, from California. . . . Mrs. Lebed: They pick up minors there at Port Authority. S.E.C.: So the cops were curious about why you were there? Jonathan: Yes. S.E.C.: And they called your mother? Jonathan: Yes. S.E.C.: And she came. Jonathan: Yes. S.E.C.: You went to the smoke-out. Jonathan: Yes. S.E.C.: Did you see Ira there? Jonathan: Yes. S.E.C.: Did you introduce yourself to Ira? Jonathan: No. Here, you can almost here the little sucking sound on the S.E.C.'s side of the table as the conviction goes out of this line of questioning. S.E.C.: Why not? Jonathan: Because I'm not sure if he knew my age, or anything like that, so I didn't talk to anyone there at all. This mad interrogation began at 10 in the morning and ended at 6 in the evening. When it was done, the S.E.C. declined to offer legal advice. Instead, it said, "The Internet is a grown-up medium for grown-up-type activities." Connie Lebed and Harold Burk, both clearly unnerved, apologized profusely on Jonathan's behalf and explained that he was just a naive child who had sought attention in the wrong place. Whatever Jonathan thought, he kept to himself. When I came home that day, I closed the Ameritrade account," Connie told me. "Then how did Jonathan continue to trade?" I asked. Greg then blurted out, "The kid never did something wrong," "Don't ask me!" Connie said. "I got nothing to do with it." "All right," Greg said, "here's what happened. When Little Miss Nervous over here closes the Ameritrade account, I open an account for him in my name with that other place, ETrade." I turned to Jonathan, who wore his expression of airy indifference. "But weren't you scared to trade again?" "No." "This thing with the S.E.C. didn't even make you a little nervous?" "No." "No?" "Why should it?" Soon after he agreed to defend Jonathan Lebed, Kevin Marino, his lawyer, discovered he had a problem. No matter how he tried, he was unable to get Jonathan Lebed to say what he really thought. "In a conversation with Jonathan, I was supplying way too many of the ideas," Marino says. "You can't get them out of him." Finally, he asked Jonathan and his parents each to write a few paragraphs describing their feelings about how the S.E.C. was treating Jonathan. Connie Lebed's statement took the form of a wailing lament of the pain inflicted by the callous government regulators on the family. ("I am also upset as you know that I was not called.") Greg Lebed's statement was an angry screed directed at both the government and the media. Jonathan's statement -- a four-page e-mail message dashed off the night that Marino asked for it -- was so different in both tone and substance from his parents' that it inspired wonder that it could have been written by even the most casual acquaintance of the other two. It began: "I was going over some old press releases about different companies. The best performing stock in 1999 on the Nasdaq was Qualcomm (QCOM). QCOM was up around 2000% for the year. On December 29th of last year, even after QCOM's run from 25 to 500, Paine Webber analyst Walter Piecky came out and issued a buy rating on QCOM with a target price of 1,000. QCOM finished the day up 156 to 662. There was nothing fundamentally that would make QCOM worth 1,000. There is no way that a company with sales under $4 billion, should be worth hundreds of billions. . . . QCOM has now fallen from 800 to under 300. It is no longer the hot play with all of the attention. Many people were able to successfully time QCOM and make a lot of money. The ones who had bad timing on QCOM, lost a lot of money. "People who trade stocks, trade based on what they feel will move and they can trade for profit. Nobody makes investment decisions based on reading financial filings. Whether a company is making millions or losing millions, it has no impact on the price of the stock. Whether it is analysts, brokers, advisors, Internet traders, or the companies, everybody is manipulating the market. If it wasn't for everybody manipulating the market, there wouldn't be a stock market at all. . . ." As it happens, those last two sentences stand for something like the opposite of the founding principle of the United States Securities and Exchange Commission. To a very great extent, the world's financial markets are premised on a black-and-white mental snapshot of the American investor that was taken back in 1929. The S.E.C. was created in 1934, and the big question in 1934 was, How do you reassure the public that the stock market is not rigged? From mid-1929 to mid-1932, the value of the stocks listed on the New York Stock Exchange had fallen 83 percent, from $90 billion to about $16 billion. Capitalism, with reason, was not feeling terribly secure. To the greater public in 1934, the numbers on the stock-market ticker no longer seemed to represent anything "real," but rather the result of manipulation by financial pros. So, how to make the market seem "real"? The answer was to make new stringent laws against stock-market manipulation -- aimed not at ordinary Americans, who were assumed to be the potential victims of any manipulation and the ones who needed to be persuaded that it was not some elaborate web of perceptions, but at the Wall Street elite. The American financial elite acquired its own police force, whose job it was to make sure their machinations did not ever again unnerve the great sweaty rabble. That's not how the S.E.C. put it, of course. The catch phrase used by the policy-making elites when describing the S.E.C.'s mission was "to restore public confidence in the securities markets." But it amounted to the same thing. Keep up appearances, so that the public did not become too cautious. It occurred to no one that the public might one day be as sophisticated in these matters as financial professional.s nyone who paid attention to the money culture could see its foundation had long lay exposed, and it was just a matter of time before the termites got to it. From the moment the Internet went boom back in 1996, Web sites popped up in the middle of nowhere -- Jackson, Mo.; Carmel, Calif. -- and began to give away precisely what Wall Street sold for a living: earning forecasts, stock recommendations, market color. By the summer of 1998, Xerox or AT&T or some such opaque American corporation would announce earnings of 22 cents a share, and even though all of Wall Street had predicted a mere 20 cents and the company had exceeded all expectations, the stock would collapse. The amateur Web sites had been saying 23 cents. Eventually, the Bloomberg News Service commissioned a study to explore the phenomenon of what were now being called "whisper numbers." The study showed the whisper numbers, the numbers put out by the amateur Web sites, were mistaken, on average, by 21 percent. The professional Wall Street forecasts were mistaken, on average, by 44 percent. The reason the amateurs now held the balance of power in the market was that they were, on average, more than twice as accurate as the pros -- this in spite of the fact that the entire financial system was rigged in favor of the pros. The big companies spoon-fed their scoops directly to the pros; the amateurs were flying by radar. Even a 14-year-old boy could see how it all worked, why some guy working for free out of his basement in Jackson, Mo., was more reliable than the most highly paid analyst on Wall Street. The companies that financial pros were paid to analyze were also the financial pros' biggest customers. Xerox and AT&T and the rest needed to put the right spin on their quarterly earnings. The goal at the end of every quarter was for the newspapers and the cable television shows and the rest to announce that they had "exceeded analysts' expectations." The easiest way to exceed analysts' expectations was to have the analysts lower them. And that's just what they did, and had been doing for years. The guy in Carmel, Calif., confessed to Bloomberg that all he had to do to be more accurate on the earnings estimates than Wall Street analysts was to raise all of them 10 percent. A year later, when the Internet bubble burst, the hollowness of the pros only became clearer. The most famous analysts on Wall Street, who just a few weeks before had done whatever they could to cadge an appearance on CNBC or a quote in The Wall Street Journal to promote their favorite dot-com, went into hiding. Morgan Stanley's Mary Meeker, who made $15 million in 1999 while telling people to buy Priceline when it was at $165 a share and Healtheon/WebMD when it reached $105 a share, went silent as they collapsed toward zero. Financial professionals had entered some weird new head space. They simply took it for granted that a "financial market" was a collection of people doing their best to get onto CNBC and CNNfn and into the Heard on the Street column of The Wall Street Journal and the Lex column of The Financial Times, where they could advance their narrow self-interests. To anyone who wandered into the money culture after, say, January 1996, it would have seemed absurd to take anything said by putative financial experts at face value. There was no reason to get worked up about it. The stock market was not an abstraction whose integrity needed to be preserved for the sake of democracy. It was a game people played to make money. Who cared if anything anyone said or believed was "real"? Capitalism could now afford for money to be viewed as no different from anything else you might buy or sell. Or, as Jonathan Lebed wrote to his lawyer: "Every morning I watch Shop at Home, a show on cable television that sells such products as baseball cards, coins and electronics. Don West, the host of the show, always says things like, 'This is one of the best deals in the history of Shop at Home! This is a no-brainer folks! This is absolutely unbelievable, congratulations to everybody who got in on this! Folks, you got to get in on the line, this is a gift, I just can't believe this!' There is absolutely nothing wrong with him making quotes such as those. As long as he isn't lying about the condition of a baseball card or lying about how large a television is, he isn't committing any kind of a crime. The same thing applies to people who discuss stocks." (continued...)