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& Finance . Net Fraud? The SEC vs. Jonathan Lebed NOTE: We're taking yet another break from our series on The Visual Market, mostly because, quite frankly, we didn't expect the Bear Market to be hibernating this long. Even though this pre-Easter short week week saw some substantial gains on the Dow & the NASDAQ, both still linger at levels substantially below what they'd reached last year, before the April Fools bust. ... And, if you've been following our series, then you know that that amounts to the longest and largest decline of any of the crashes and recessions we've looked at, including the Crash of '87. No matter what comes, though, we promise a close-up look at this latest Bear by our June issue, possibly before if market changes warrant. But in the meanwhile, we thought we'd take a look at a particularly interesting case the SEC settled last year ... against a 15-year old named Jonathan Lebed. Every day, it seems, when I check my e-mail, among the many newsletters and other info I've asked for, comes a clutter of unsolicited stuff. Since we run a web site, lots of it has to do with come-on's for web site hosting, accepting credit card payments, advertising, search engine submission services, etc., etc., etc. ... But there's more. This one offers to treat my male pattern baldness, which I don't happen to have. Another offers special mega-vitamins to improve my health, though I buy generic at Brooks. But there among them are the e-mails that can't wait to let me in on the latest & greatest undervalued stock. You'd think the market of the past year might have cured what had become, it seemed, a national epidemic, viz., the quest for the quick buck. But some obsessions die hard and, in fact, in recent months, particularly through our SoverNet account, the number of these e-mails has been increasing. ... Rewind
... At the time of the SEC settlement, Jonathan was 15. ... That's right: 15. But in his few short teenage years, he had managed, it seems, to turn a bond his parents had taken out for him when he was born, and which matured at $8,000 when he turned 12, into a little nest egg worth about 100 times the amount. How did he do it? ... By trading stocks on the internet. ... ... Of course, if you're like me, you'll want to repeat the question:
Well, according to the SEC, Jonathan managed to pull it off only by engaging in that practice much-maligned by the SEC -- stock manipulation, i.e., engaging in activities designed to do nothing more than artificially alter the price of a stock. Actually, according to Richard Walker, the Director of Enforcement for the SEC, "It's when you promote a stock for the purpose of artificially raising its price." That's how he was quoted in a recent NY Times Magazine article which detailed much of the SEC case against Lebed. But we have to assume, don't we, that buying short and artificially lowering the price can achieve the same ends. ... In any case ... Jonathan, it seems, would rise at 5 a.m. to rivet himself to the morning news and, before he left for school, taking what he'd heard, he would post stock recommendations through e-mail and on message boards at Yahoo Finance. And in general, he'd come home from school each day considerably more well-off, at least financially, than when he'd left.
Within those first 18 months -- when he'd grown his $8,000 into $28,000 -- Jonathan also started his own web site: Stock-Dogs.com. Here, with some 1500 visitors a day at its peak, Jonathan would post the same kind of info he'd been sending out to message boards and e-mails. And steadily, if not slowly, Jonathan had managed to increase his portfolio value. In six months or trading at one point, he'd managed to amass that $800,000 we pointed to earlier. The SEC case against Lebed focused on his use of fictitious names, which, as The Times article makes clear, was not an attempt at deception so much as it was a requirement of his use of Yahoo. He could only post so many messages before his account was deleted, so he simply opened other accounts. But, among the more interesting facts of the case is this:
That means the kid walked away with more than a half-million. ... Why did the SEC allow him to keep all that money if he was engaging in stock manipulation? The answer it seems, it simple or complex, depending on your perspective. ... According to The Times, the SEC did not want to risk going to court on this one, for fear they might lose the case big time, so they settled with the Lebed family lawyer on only returning the proceeds, with interest, supposedly on the trades he'd made in connection with some eleven occasions when Jonathan had to use those additional Yahoo accounts to get his message out. The rest was his to keep. According to Times article author, Michael Lewis, however, who even interviewed former SEC chairman, Arthur Leavitt, for the piece, the exact figure was not the result of calculation so much as negotiation with the Lebed's lawyer. The real reason, he speculates, may lie in the simple fact that "market manipulation" is nothing more than a tautology, a little bit of circular logic. When Lewis pressed Enforcement Director Walker further, the latter added, "The price of a stock is artificially raised when subjected to something other than ordinary market forces." But Walker was unable to zero in on the key words and phrases here -- "artifically" and "ordinary market forces." What was artificial or extraordinary about Jonathan Lebed's promotions of stocks that made it any different than the promotions & speculations of hundreds of Wall Street analysts? The answer may seem obvious. But, before you jump to any conclusions, consider this. According to a Bloomberg News Service study , also cited in The Times article, on earnings forecasts from Wall Street pros vs. the "whisper numbers" of amateur web sites ...
The SEC case against Jonathan Lebed, then, is a curious phenomenon at best. It begs more questions than it answers ... about investing, about Jonathan, about the SEC, and more. For more details, we urge you to take a look at the Times article. It provides an intriguing glimpse into the factual details and the psychology, not only of Jonathan, but of his parents, friends, teachers, and others who profited from Jonathan's enterprises. But it also provides an interesting glimpse of the SEC itself. Here, however, we thought we'd provide just a few highlights of the case, as well as a little follow-up of our own. . ******* ******* If you would like to submit an article for our Investing section, don't hesitate to let us know. Simply e-mail us at business@downstreetmagazine.com. The e-mail should contain your name, address, and a phone number where we can reach you. You may also send a copy of your proposed article. The text can either be included in the body of the e-mail, or you can send it as an attachment in just about any word processing format. If your piece is accepted, we will pay a small honorarium for your interest & your time. [See Freelancers Wanted for more details.] If you would like to advertise in this section, or throughout the magazine, please visit our Advertising Info Pages ... or call, write, or e-mail ads@downstreetmagazine.com. ******* ******* . |
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