-------- Original Message --------
Subject: FWD: Stock Manipulator, S.E.C. Nemesis -- and 15 [VERY LONG]
Date: Thu, 26 Apr 2001 08:44:44 -0400
From: "Donald E. Eastlake 3rd" <email@example.com>
(It's long but this really has some great points about the stock
market "stock manipulation" laws today.)
Date: Sat, 24 Feb 2001 10:33:09 -0700
From: Jim Beveridge <firstname.lastname@example.org>
Subject: Jonathan Lebed Stock Manipulator, S.E.C. Nemesis -- and 15 years old
Good (but extremely long) article on the kid that beat the SEC, the
stock market, and his parents (who know nothing of computers).
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."
"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
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
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
"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
"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
"I see little risk when purchasing FTEC at these DIRT-CHEAP
PRICES. FTEC is making TREMENDOUS PROFITS and is trading UNDER BOOK
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
"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
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,"
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
"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
"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
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?
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.
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?
S.E.C.: And they called your mother?
S.E.C.: And she came.
S.E.C.: You went to the smoke-out.
S.E.C.: Did you see Ira there?
S.E.C.: Did you introduce yourself to Ira?
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
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
"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, E*Trade."
I turned to Jonathan, who wore his expression of airy indifference.
"But weren't you scared to trade again?"
"This thing with the S.E.C. didn't even make you a little nervous?"
"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.
"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 professionals.
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
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
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."
Right from the start, the S.E.C. treated the publicity surrounding the
case of Jonathan Lebed at least as seriously as the case itself. Maybe
even more seriously. The Philadelphia office had brought the case, and
so when the producer from "60 Minutes" called to say he wanted to do a
big segment about the world's first teenage stock market manipulator,
he called the Philadelphia office. "Normally we call the top and get
bumped down to some flack," says Trevor Nelson, the "60 Minutes"
producer in question. "This time I left a message at the S.E.C's
Philadelphia office, and Arthur Levitt's office called me right back."
Levitt, being the S.E.C. chairman, flew right up from Washington to be
on the show.
To the S.E.C., it wasn't enough that Jonathan Lebed hand over his
winnings: he had to be vilified; people had to be made to understand
that what he had done was a crime, with real victims. "The S.E.C. kept
saying that they were going to give us the name of one of the kid's
victims so we could interview him," Nelson says. "But they never did."
I waited a couple of months for things to cool off before heading down
to Washington to see Arthur Levitt. He was just then finishing up
being the longest-serving chairman of the S.E.C. and was taking a
victory lap in the media for a job well done. He was now 69, but as a
youth, back in the 1950's and 1960's, he had made a lot of money on
Wall Street. At the age of 62, he landed his job at the S.E.C. -- in
part, because he had raised a lot of money on the street for Bill
Clinton -- where he set himself up to defend the interests of the
ordinary investor. He had declared war on the financial elite and
pushed through rules that stripped it of its natural market
advantages. His single bravest act was Regulation FD, which required
corporations to release significant information about themselves to
everyone at once rather than through the Wall Street analysts.
Having first determined I was the sort of journalist likely to see the
world exactly as he did, he set out to explain to me the new forces
corrupting the financial markets. "The Internet has speeded up
everything," he said, "and we're seeing more people in the markets who
shouldn't be there. A lot of these new investors don't have the
experience or the resources or a professional trader. These are the
ones who bought that [expletive] that Lebed was pushing."
"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."
"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
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
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.
"Then why did you let him keep 500 grand of his profits?" I asked.
"We determined that those profits were different from the profits he
made on the 11 trades we defined as illegal," he said.
This, I already knew, was a pleasant fiction. The amount Jonathan
Lebed handed over to the government was determined by haggling between
Kevin Marino and the S.E.C.'s Philadelphia office. The
S.E.C. initially demanded the $800,000 Jonathan had made, plus
interest. Marino had countered with 125 grand. They haggled a bit and
then settled at 285.
"Can you explain how you distinguished the illegal trades from the
"I'm not going to go through the case point by point."
"It wouldn't be appropriate."
At which point, Arthur Levitt, who had been trying to stare into my
eyes as intently as a man can stare, said in his deep voice, "This kid
has no basis for making these predictions."
"But how do you know that?"
And the chairman of the S.E.C., the embodiment of investor confidence,
the keeper of the notion that the numbers gyrating at the bottom of
the CNBC screen are "real," drew himself up and said, "I worked on
Well. What do you say to that? He had indeed worked on Wall Street --
"So did I," I said.
"I worked there longer than you."
Walker leapt back in. "This kid's father said he was going to rip the
[expletive] computer out of the wall."
I realized that it was my turn to stare. I stared at Richard
Walker. "Have you met Jonathan Lebed's father?" I said.
"No I haven't," he said curtly. "But look, we talked to this kid two
years ago, when he was 14 years old. If I'm a kid and I'm pulled in by
some scary government agency, I'd back off."
That's the trouble with 14-year-old boys -- from the point of view of
the social order. They haven't yet learned the more sophisticated
forms of dishonesty. It can take years of slogging to learn how to
feign respect for hollow authority.
Still! That a 14-year-old boy, operating essentially in a vacuum,
would walk away from a severe grilling by six hostile bureaucrats and
jump right back into the market -- how did that happen? It occurred to
me, as it had occurred to Jonathan's lawyer, that I had taken entirely
the wrong approach to getting the answer. The whole point of Jonathan
Lebed was that he had invented himself on the Internet. The Internet
had taught him how hazy the line was between perception and
reality. When people could see him, they treated him as they would
treat a 14-year-old boy. When all they saw were his thoughts on
financial matters, they treated him as if he were a serious trader. On
the Internet, where no one could see who he was, he became who he
was. I left the S.E.C. and went back to my hotel and sent him an
e-mail message, asking him the same question I asked the first time we
met: why hadn't he been scared off?
Straight away he wrote back:
"It was about 2-3 months from when the S.E.C. called me in for the
first time until I started trading again. The reason I didn't trade
for those 2-3 months is because I had all of my money tied up in a
stock. I sold it at the end of the year to take a tax loss, which
allowed me to start trading again. I wasn't frightened by them because
it was clear that they were focused on whether or not I was being paid
to profile stocks when the fact is I was not. I was never told by them
that I was doing something wrong and I was never told by them not to
By September 1999, Jonathan Lebed was playing at the top of his
game. He had figured out the advantage, after he had bought shares in
a small company, in publicizing his many interests. "I came up with it
myself," he said of the idea. "It was obvious from the newspapers and
CNBC. Of course stocks respond to publicity!"
After he had picked and bought his stock, he would write a single
message about it and stick it up in as many places on Yahoo Finance as
he could between 5 and 8 in the morning, when he left home for
school. There were no explicit rules on Yahoo Finance, but there were
constraints. The first was that Yahoo limited the number of messages
he could post using one e-mail address. He would click onto Yahoo and
open an account with one of his four AOL screen names; a few minutes
later, Yahoo, mysteriously, would tell him that his messages could no
longer be delivered. Eventually, he figured out that they must have
some limit that they weren't telling people about. He got around it by
grabbing another of his four AOL screen names and creating another
Yahoo account. By rotating his four AOL screen names, he found he
could get his message onto maybe 200 Yahoo message boards before
He also found that when he went to do it the next time, with a
different stock, Yahoo would no longer accept messages from his AOL
screen names. So he was forced to create four more screen names and
start over again. Yahoo never told him he shouldn't do this. "The
account would be just, like, deleted," he said. "Yahoo never had a
policy; it's just what I figured out." The S.E.C. accused Jonathan of
trying to seem like more than one person when he promoted his stocks,
but when you see how and why he did what he did, that is clearly
false. (For instance, he ignored the feature on Yahoo that enables
users to employ up to seven different "fictitious names" for each
e-mail address.) It's more true to say that he was trying to simulate
an appearance on CNBC.
Over time, he learned that some messages had more effect on the stock
market than others. "I definitely refined it," he said of his Internet
persona. "In the beginning, I would write, like, very
professionally. But then I started putting stuff in caps and using
exclamation points and making it sound more exciting. That worked
better. When it's more exciting, it draws people's attention to it
compared to when you write like, dull or something." The trick was to
find a stock that he could get excited about. He sifted the Internet
chat rooms and the shopping mall with three things in mind: 1) "It had
to be in the area of the stock market that is likely to become a
popular play"; 2) "it had to be undervalued compared to similar
companies"; and 3) "it had to be undiscovered -- not that many people
talking about it on the message boards."
Over a couple of months, I drifted in and out of Jonathan Lebed's life
and became used to its staccato rhythms. His defining trait was that
the strangest things happened to him, and he just thought of them as
perfectly normal -- and there was no one around to clarify
matters. The threat of being prosecuted by the U.S. Attorney in Newark
and sent away to a juvenile detention center still hung over him, but
he didn't give any of it a second thought. He had his parents, his
12-year-old sister Dana and a crowd of friends at Cedar Grove High
School, most of whom owned pieces of Internet businesses and all of
whom speculated in the stock market. "There are three groups of kids
in our school," one of them explained to me. "There's the jocks,
there's the druggies and there's us -- the more business oriented. The
jocks and the druggies respect what we do. At first, a lot of the kids
are, like, What are you doing? But once kids see money, they get
The first time I heard this version of the social structure of Cedar
Grove High, I hadn't taken it seriously. But then one day I went out
with Jonathan and one of his friends, Keith Graham, into a neighboring
suburb to do what they liked to do most when they weren't doing
business, shoot pool. We parked the car and set out down an
unprosperous street in search of the pool hall.
"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
"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
"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
"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.
"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
"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
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."
# # # end # # #
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