My favorite quote from a 15 year old kid that knows what most of the J6Ps haven't figured out yet...
"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. . . ."
This is too big for SI to let me post the whole thing so I will cut some out.........
February 25, 2001
Jonathan Lebed: Stock Manipulator, S.E.C. Nemesis -- and 15
By MICHAEL LEWIS
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 E*Trade, 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. ....Jonathan Lebed was still sitting on half a million dollars....
...His father 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." ...
...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. ......
...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. ...
...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
Anyone 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." ......
......"Do you think he is a sign of a bigger problem?"
"Yes, I do. And I find his case very disturbing . . . more serious than the guy who holds up the candy store. . . . I think there's a considerable risk of an anti-business backlash in this country. The era of the 25-year-old billionaire represents a kind of symbol which is different from the Horatio Alger symbol. The 25-year-old billionaire looks lucky, feels lucky. And investors who lose money buying stock in the company of the 25-year-old billionaire. . . . "
He trailed off, leaving me to finish the thought.
"You think it's a moral issue."
"I do."
"You think Jonathan Lebed is a bad kid?"
"Yes, I do."
"Can you explain to me what he did?"
He looked at me long and hard. I could see that this must be his meaningful stare. His eyes were light blue bottomless pits. "He'd go into these chat rooms and use 20 fictitious names and post messages. . . . "
"By fictitious names, do you mean e-mail addresses?"
"I don't know the details."
Don't know the details? He'd been all over the airwaves decrying the behavior of Jonathan Lebed.
"Put it this way," he said. "He'd buy, lie and sell high." The chairman's voice had deepened unnaturally. He hadn't spoken the line; he had acted it. It was exactly the same line he had spoken on "60 Minutes" when his interviewer, Steve Kroft, asked him to explain Jonathan Lebed's crime. He must have caught me gaping in wonder because, once again, he looked at me long and hard. I glanced away.
"What do you think?" he asked.
Well, I had my opinions. In the first place, I had been surprised to learn that it was legal for, say, an author to write phony glowing reviews of his book on Amazon but illegal for him to plug a stock on Yahoo just because he happened to own it. I thought it was -- to put it kindly -- misleading to tell reporters that Jonathan Lebed had used "20 fictitious names" when he had used four AOL e-mail addresses and posted exactly the same message under each of them so that no one who read them could possibly mistake him for more than one person. I further thought that without quite realizing what had happened to them, the people at the S.E.C. were now lighting out after the very people -- the average American with a bit of money to play with -- whom they were meant to protect.
Finally, I thought that by talking to me or any other journalist about Jonathan Lebed when he didn't really understand himself what Jonathan Lebed had done, the chairman of the S.E.C. displayed a disturbing faith in the media to buy whatever he was selling.
But when he asked me what I thought, all I said was, "I think it's more complicated than you think."
"Richard -- call Richard!" Levitt was shouting out the door of his vast office. "Tell Richard to come in here!"
Richard was Richard Walker, the S.E.C.'s director of enforcement. He entered with a smile, but mislaid it before he even sat down. His mind went from a standing start to deeply distressed inside of 10 seconds. "This kid was making predictions about the prices of stocks," he said testily. "He had no basis for making these predictions." Before I could tell him that sounds a lot like what happens every day on Wall Street, he said, "And don't tell me that's standard practice on Wall Street," so I didn't. But it is. It is still O.K. for the analysts to lowball their estimates of corporate earnings and plug the stocks of the companies they take public so that they remain in the good graces of those companies. The S.E.C. would protest that the analysts don't actually own the stocks they plug, but that is a distinction without a difference: they profit mightily and directly from its rise.
"Jonathan Lebed was seeking to manipulate the market," said Walker.
But that only begs the question. If Wall Street analysts and fund managers and corporate C.E.O.'s who appear on CNBC and CNNfn to plug stocks are not guilty of seeking to manipulate the market, what on earth does it mean to manipulate the market?
"It's when you promote a stock for the purpose of artificially raising its price."
But when a Wall Street analyst can send the price of a stock of a company that is losing billions of dollars up 50 points in a day, what does it mean to "artificially raise" the price of a stock? The law sounded perfectly circular. Actually, this point had been well made in a recent article in Business Crimes Bulletin by a pair of securities law experts, Lawrence S. Bader and Daniel B. Kosove. "The casebooks are filled with opinions that describe manipulation as causing an 'artificial' price," the experts wrote. "Unfortunately, the casebooks are short on opinions defining the word 'artificial' in this context. . . . By using the word 'artificial,' the courts have avoided coming to grips with the problem of defining 'manipulation'; they have simply substituted one undefined term for another."
Walker recited, "The price of a stock is artificially raised when subjected to something other than ordinary market forces."
But what are "ordinary market forces"?
An ordinary market force, it turned out, is one that does not cause the stock to rise artificially. In short, an ordinary market force is whatever the S.E.C. says it is, or what it can persuade the courts it is. And the S.E.C. does not view teenagers' broadcasting their opinions as "an ordinary market force." It can't. If it did, it would be compelled to face the deep complexity of the modern market -- and all of the strange new creatures who have become, with the help of the Internet, ordinary market forces. When the Internet collided with the stock market, Jonathan Lebed became a market force. Adolescence became a market force.
I finally came clean with a thought: the S.E.C. let Jonathan Lebed walk away with 500 grand in his pocket because it feared that if it didn't, it would wind up in court and it would lose. And if the law ever declared formally that Jonathan Lebed didn't break it, the S.E.C. would be faced with an impossible situation: millions of small investors plugging their portfolios with abandon, becoming in essence professional financial analysts, generating embarrassing little explosions of unreality in every corner of the capital markets. No central authority could sustain the illusion that stock prices were somehow "real" or that the market wasn't, for most people, a site of not terribly productive leisure activity. The red dog would be off his leash.
I might as well have strolled into the office of the drug czar and lit up a joint.
"The kid himself said he set out to manipulate the market," Walker virtually shrieked. But, of course, that is not all the kid said. The kid said everybody in the market was out to manipulate the market. ......
..........
......"Remember West Coast Video?" Keith said drolly.
I looked up. We were walking past a derelict building with "West Coast Video" stenciled on its plate glass.
Jonathan chuckled knowingly. "We owned, like, half the company."
I looked at him. He seemed perfectly serious. He began to tick off the reasons for his investment. "First, they were about to open an Internet subsidiary; second, they were going to sell DVD's when no other video chain. . . . "
I stopped him before he really got going. "Who owned half the company?"
"Me and a few others. Keith, Michael, Tom, Dan."
"Some teachers, too," Keith said.
"Yeah, the teachers heard about it," Jonathan said. He must have seen me looking strangely at him because he added: "It wasn't that big a deal. We probably didn't have a controlling interest in the company, but we had a fairly good percentage of the stock."
"Teachers?" I said. "The teachers followed you into this sort of thing."
"Sometimes," Jonathan said.
"All the time," Keith said. Keith is a year older than Jonathan and tends to be a more straightforward narrator of events. Jonathan will habitually dramatize or understate some case and emit a strange frequency, like a boy not quite sure how hard to blow into his new tuba, and Keith will invariably correct him. "As soon as people at school found out what Jonathan was in, everybody got in. Like right way. It was, like, if Jonathan's in on it, it must be good." And then the two boys moved on to some other subject, bored with the memory of having led some teachers in the acquisition of shares of West Coast Video. We entered the pool hall and took a table, where we were joined by another friend, John. Keith had paged him.
My role in Jonathan Lebed's life suddenly became clear: to express sufficient wonder at whatever he has been up to that he is compelled to elaborate.
"I don't understand," I said. "How would other kids find out what Jonathan was in?"
"It's high school," said Keith, in a tone reserved for people over 35. "Four hundred kids. People talk."
"How would the teachers find out?"
Now Keith gave me a look that told me that I'm the most prominent citizen of a new nation called Stupid. "They would ask us!" he said.
"But why?"
"They saw we were making money," Keith said.
"Yeah," said Jonathan, who, odd as it sounds, exhibits none of his friend's knowingness. He just knows. "I feel, like, that most of my classes, my grades would depend not on my performance but on how the stocks were doing."
"Not really," Keith said.
"O.K.," Jonathan said. "Maybe not that. But, like, I didn't think it mattered if I was late for class."
Keith considered that. "That's true," he said.
"I mean," Jonathan said, "they were making like thousands of dollars off the trades, more than their salaries even. . . . "
"Look," I said, "I know this is a stupid question. But was there any teacher who, say, disapproved of what you were doing?"
The three boys considered this, plainly for the first time in their lives.
"The librarian," Jonathan finally said.
"Yeah," John said. "But that's only because the computers were in the library, and she didn't like us using them."
"You traded stocks from the library?"
"Fifth-period study hall was in the library," Keith said. "Fifth-period study hall was like a little Wall Street. But sometimes the librarian would say the computers were for study purposes only. None of the other teachers cared."
"They were trading," Jonathan said.
The mood had shifted. We shot pool and pretended that there was no more boring place to be than this world we live in. "Even though we owned like a million shares," Jonathan said, picking up the new mood. "It wasn't that big a deal. West Coast Video was trading at like 30 cents a share when we got in."
Keith looked up from the cue ball. "When you got in," he said. "Everyone else got in at 65 cents; then it collapsed. Most of the people lost money on that one."
"Hmmm," Jonathan said, with real satisfaction. "That's when I got out."
Suddenly I realized that the S.E.C. was right: there were victims to be found from Jonathan Lebed's life on the Internet. They were right here in New Jersey. I turned to Keith. "You're Jonathan's victim."
"Yeah, Keith," Jonathan said, laughing. "You're my victim."
"Nah," Keith said. "In the stock market, you go in knowing you can lose. We were just doing what Jon was doing, but not doing as good a job at it."
Michael Lewis, a contributing writer for the magazine, is making a television series about the Internet for the BBC.
nytimes.com |
