Stock Manipulation Part 1
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.
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? |
