n
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."
edar
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.
y
the Spring of 1998, Jonathan was 13, and his ambitions
were growing. He had glimpsed the essential truth of the
market: that even people who called themselves
professionals are often incapable of independent thought
and that most people, though obsessed with money, have
little ability to make decisions about it. He knew what
he was doing, or thought he did. He had learned to find
everything he wanted to know about a company on the
Internet; what he couldn't find, he ran down in the
flesh. It became part of Connie Lebed's life to drive
her son to various corporate headquarters to make sure
they existed. He also persuaded her to open an account
with Ameritrade. "He'd done so well with the stock
contest, I figured, Let's see what he can do,"
Connie said.
What he did was turn his $8,000 savings bond into
$28,000 inside of 18 months. During the same period, he
created his own Web site devoted to companies with small
market capitalization -- penny stocks. The Web site came
to be known as Stock-dogs.com. ("You know, like
racing dogs.") Stock-dogs.com plugged the stocks of
companies Jonathan found interesting or that people
Jonathan met on the Internet found interesting. At its
peak, Stock-dogs.com had maybe 1,500 visitors a day.
Even so, the officers of what seemed to Jonathan to be
serious companies wrote to him to sell him on their
companies. Within a couple of months of becoming an
amateur stock-market analyst, he was in the middle of a
network of people who spent every waking hour chatting
about and trading stocks on the Internet. The mere
memory of this clearly upset Greg.
"He was just a little kid," he said.
"These people who got in touch with him could have
been anybody."
"How do you know?" said Jonathan.
"You've never even been on the Internet."
"Suppose some hacker comes in and steals his
money!" Greg said. "Next day, you type in, and
you got nothing left."
Jonathan snorted. "That can't happen." He
turned to me. "Whenever he sees something on TV
about the Internet, he gets mad and disconnects my
computer phone line."
"Oh, yeah," Connie said, brightening as if
realizing for the first time that she lived in the same
house as the other two. "I used to hear the garage
door opening at 3 in the morning. Then Jonathan's little
feet running back up the stairs."
"I haven't ever even turned a computer on!"
Greg said. "And I never will!"
"He just doesn't understand how a lot of this
works," explained Jonathan patiently. "And so
he overreacts sometimes."
Greg and Connie were born in New Jersey, but from the
moment the Internet struck, they might as well have just
arrived from Taiwan. When the Internet landed on them,
it redistributed the prestige and authority that goes
with a general understanding of the ways of the world
away from the grown-ups and to the child. The grown-ups
now depended on the child to translate for them.
Technology had turned them into a family of immigrants.
"I know, I know," Greg said, turning to me.
"I'm supposed to know how it works. It's the
future. But that's his future, not mine!"
"Anyway," Connie said, drifting back in
again. "That's when the S.E.C. called us the first
time."
The first time?
Jonathan was 14 when Connie agreed to take him to
meet with the S.E.C. in its Manhattan offices. When he
heard the news, Greg, of course, hit the roof and hopped
on the high-speed train to triple bypass. "He'd
already had one heart attack," Connie explained and
started to go into the heart problems all over again,
inspiring Greg to mutter something about how he wasn't
the person who brought the computer into the house and
so it wasn't his responsibility to deal with this little
nuisance.
At any rate, Connie asked Harold Burk, her boss at
Hoffmann-La Roche, the drug company where she worked as
a secretary, to go with her and Jonathan. Together, they
made their way to a long conference table in a big room
at 7 World Trade Center. On one side of the table, five
lawyers and an examiner from the S.E.C.; on the other, a
14-year-old boy, his mother and a bewildered friend.
This is how it began:
S.E.C.: Does Jonathan's father know he's here
today?
Mrs. Lebed: Yes.
S.E.C.: And he approves of having you here?
Mrs Lebed: Right, he doesn't want to go.
S.E.C.: He's aware you're here.
Mrs. Lebed: With Harold.
S.E.C.: And that Mr. Burk is here.
Mrs Lebed: He did not want to -- this whole thing
has upset my husband a lot. He had a heart attack about
a year ago, and he gets very, very upset about things.
So he really did not want anything to do with it, and I
just felt like -- Harold said he would help me.
The S.E.C. seemed to have figured out quickly that
they are racing into some strange mental cul-de-sac.
They turned their attention to Jonathan or, more
specifically, his brokerage statements.
S.E.C.: Where did you learn your technique for day
trading?
Jonathan: Just on TV, Internet.
S.E.C.: What TV shows?
Jonathan: CNBC mostly -- basically CNBC is what I
watch all the time.
S.E.C.: Do you generally make money on your day
trading?
Jonathan: I usually don't day trade; I just try to --
since I was home these days and I was very bored, I
wanted something to do, so I was just trading
constantly. I don't think I was making money. . . .
S.E.C.: Just looking at your April statement, it
looks like the majority of your trading is day trading.
Jonathan: I was home a lot that time.
Mrs. Lebed: They were on spring vacation that week.
Having established and then ignored the boy's chief
motive for trading stocks -- a desire to escape the
tedium of existence -- the authorities then sought to
discover his approach to attracting attention on the
Internet.
S.E.C.: On the first page [referring to a hard
copy of Jonathan's Web site, Stock-dogs.com] where it
says, "Our 6- to 12-month outlook, $8," what
does that mean? The stock is selling less than 3 but you
think it's going to go to 8.
Jonathan: That's our outlook for the price to go
based on their earnings potential and a good value
ratio. . . .
S.E.C.: Are you aware that there are laws that
regulate company projections?
Jonathan: No.
Eventually, the S.E.C. people crept up on the reason
they had noticed Jonathan in the first place. They had
been hot on the trail of a grown-up named Ira Monas, one
of Jonathan Lebed's many Internet correspondents. Monas,
eventually jailed on unrelated charges, had been
employed in "investor relations" by a number
of small companies. In that role, he had fed Jonathan
Lebed information about the companies, some of which
turned out to be false and some of which Jonathan had
unwittingly posted on Stock-dogs.com.
The S.E.C. asked if Monas had paid Jonathan to do
this and thus help to inflate the price of his company's
stocks. Jonathan said no, he had done it for free
because he thought the information was sound. The S.E.C.
then expressed its doubt that Jonathan was being
forthright about his relationship with Monas. One of the
small companies Monas had been hired to plug was a cigar
retail outlet called Havana Republic. As a publicity
stunt, Monas announced that the company -- in which
Jonathan came to own 100,000 shares -- would hold a
"smoke-out" in Midtown Manhattan.
The S.E.C. now knew that Jonathan Lebed had attended
the smoke-out. To the people across the table from
Jonathan, this suggested that his relationship with a
known criminal was deeper than he admitted.
S.E.C.: So you decided to go to the smoke-out?
Jonathan: Yes.
S.E.C.: How did you go about that?
Jonathan: We walked down the street and took a bus.
S.E.C.: Who is "we."
Jonathan: Me and my friend Chuck.
S.E.C.: O.K.
Jonathan: We took a bus to New York.
S.E.C.: You cut school to do this?
Jonathan: It was after school. Then we got picked up
at Port Authority, so then my mother and Harold came and
picked us up and we went to the smoke-out.
S.E.C.: Why were you picked up at the Port Authority?
Jonathan: Because people like under 18 across the
country, from California. . . .
Mrs. Lebed: They pick up minors there at Port
Authority.
S.E.C.: So the cops were curious about why you were
there?
Jonathan: Yes.
S.E.C.: And they called your mother?
Jonathan: Yes.
S.E.C.: And she came.
Jonathan: Yes.
S.E.C.: You went to the smoke-out.
Jonathan: Yes.
S.E.C.: Did you see Ira there?
Jonathan: Yes.
S.E.C.: Did you introduce yourself to Ira?
Jonathan: No.
Here, you can almost here the little sucking sound on
the S.E.C.'s side of the table as the conviction goes
out of this line of questioning.
S.E.C.: Why not?
Jonathan: Because I'm not sure if he knew my age, or
anything like that, so I didn't talk to anyone there at
all.
This mad interrogation began at 10 in the morning and
ended at 6 in the evening. When it was done, the S.E.C.
declined to offer legal advice. Instead, it said,
"The Internet is a grown-up medium for
grown-up-type activities." Connie Lebed and Harold
Burk, both clearly unnerved, apologized profusely on
Jonathan's behalf and explained that he was just a naive
child who had sought attention in the wrong place.
Whatever Jonathan thought, he kept to himself.
hen
I came home that day, I closed the Ameritrade
account," Connie told me.
"Then how did Jonathan continue to trade?"
I asked.
Greg then blurted out, "The kid never did
something wrong,"
"Don't ask me!" Connie said. "I got
nothing to do with it."
"All right," Greg said, "here's what
happened. When Little Miss Nervous over here closes the
Ameritrade account, I open an account for him in my name
with that other place, E*Trade."
I turned to Jonathan, who wore his expression of airy
indifference.
"But weren't you scared to trade again?"
"No."
"This thing with the S.E.C. didn't even make you
a little nervous?"
"No."
"No?"
"Why should it?"
oon
after he agreed to defend Jonathan Lebed, Kevin Marino,
his lawyer, discovered he had a problem. No matter how
he tried, he was unable to get Jonathan Lebed to say
what he really thought. "In a conversation with
Jonathan, I was supplying way too many of the
ideas," Marino says. "You can't get them out
of him." Finally, he asked Jonathan and his parents
each to write a few paragraphs describing their feelings
about how the S.E.C. was treating Jonathan. Connie
Lebed's statement took the form of a wailing lament of
the pain inflicted by the callous government regulators
on the family. ("I am also upset as you know that I
was not called.") Greg Lebed's statement was an
angry screed directed at both the government and the
media.
Jonathan's statement -- a four-page e-mail message
dashed off the night that Marino asked for it -- was so
different in both tone and substance from his parents'
that it inspired wonder that it could have been written
by even the most casual acquaintance of the other two.
It began:
"I was going over some old press releases about
different companies. The best performing stock in 1999
on the Nasdaq was Qualcomm (QCOM). QCOM was up around
2000% for the year. On December 29th of last year, even
after QCOM's run from 25 to 500, Paine Webber analyst
Walter Piecky came out and issued a buy rating on QCOM
with a target price of 1,000. QCOM finished the day up
156 to 662. There was nothing fundamentally that would
make QCOM worth 1,000. There is no way that a company
with sales under $4 billion, should be worth hundreds of
billions. . . . QCOM has now fallen from 800 to under
300. It is no longer the hot play with all of the
attention. Many people were able to successfully time
QCOM and make a lot of money. The ones who had bad
timing on QCOM, lost a lot of money.
"People who trade stocks, trade based on what
they feel will move and they can trade for profit.
Nobody makes investment decisions based on reading
financial filings. Whether a company is making millions
or losing millions, it has no impact on the price of the
stock. Whether it is analysts, brokers, advisors,
Internet traders, or the companies, everybody is
manipulating the market. If it wasn't for everybody
manipulating the market, there wouldn't be a stock
market at all. . . ."
As it happens, those last two sentences stand for
something like the opposite of the founding principle of
the United States Securities and Exchange Commission. To
a very great extent, the world's financial markets are
premised on a black-and-white mental snapshot of the
American investor that was taken back in 1929. The S.E.C.
was created in 1934, and the big question in 1934 was,
How do you reassure the public that the stock market is
not rigged? From mid-1929 to mid-1932, the value of the
stocks listed on the New York Stock Exchange had fallen
83 percent, from $90 billion to about $16 billion.
Capitalism, with reason, was not feeling terribly
secure.
To the greater public in 1934, the numbers on the
stock-market ticker no longer seemed to represent
anything "real," but rather the result of
manipulation by financial pros. So, how to make the
market seem "real"? The answer was to make new
stringent laws against stock-market manipulation --
aimed not at ordinary Americans, who were assumed to be
the potential victims of any manipulation and the ones
who needed to be persuaded that it was not some
elaborate web of perceptions, but at the Wall Street
elite. The American financial elite acquired its own
police force, whose job it was to make sure their
machinations did not ever again unnerve the great sweaty
rabble. That's not how the S.E.C. put it, of course. The
catch phrase used by the policy-making elites when
describing the S.E.C.'s mission was "to restore
public confidence in the securities markets." But
it amounted to the same thing. Keep up appearances, so
that the public did not become too cautious. It occurred
to no one that the public might one day be as
sophisticated in these matters as financial
professional.s
nyone
who paid attention to the money culture could see its
foundation had long lay exposed, and it was just a
matter of time before the termites got to it. From the
moment the Internet went boom back in 1996, Web sites
popped up in the middle of nowhere -- Jackson, Mo.;
Carmel, Calif. -- and began to give away precisely what
Wall Street sold for a living: earning forecasts, stock
recommendations, market color. By the summer of 1998,
Xerox or AT&T or some such opaque American
corporation would announce earnings of 22 cents a share,
and even though all of Wall Street had predicted a mere
20 cents and the company had exceeded all expectations,
the stock would collapse. The amateur Web sites had been
saying 23 cents.
Eventually, the Bloomberg News Service commissioned a
study to explore the phenomenon of what were now being
called "whisper numbers." The study showed the
whisper numbers, the numbers put out by the amateur Web
sites, were mistaken, on average, by 21 percent. The
professional Wall Street forecasts were mistaken, on
average, by 44 percent. The reason the amateurs now held
the balance of power in the market was that they were,
on average, more than twice as accurate as the pros --
this in spite of the fact that the entire financial
system was rigged in favor of the pros. The big
companies spoon-fed their scoops directly to the pros;
the amateurs were flying by radar.
Even a 14-year-old boy could see how it all worked,
why some guy working for free out of his basement in
Jackson, Mo., was more reliable than the most highly
paid analyst on Wall Street. The companies that
financial pros were paid to analyze were also the
financial pros' biggest customers. Xerox and AT&T
and the rest needed to put the right spin on their
quarterly earnings. The goal at the end of every quarter
was for the newspapers and the cable television shows
and the rest to announce that they had "exceeded
analysts' expectations." The easiest way to exceed
analysts' expectations was to have the analysts lower
them. And that's just what they did, and had been doing
for years. The guy in Carmel, Calif., confessed to
Bloomberg that all he had to do to be more accurate on
the earnings estimates than Wall Street analysts was to
raise all of them 10 percent.
A year later, when the Internet bubble burst, the
hollowness of the pros only became clearer. The most
famous analysts on Wall Street, who just a few weeks
before had done whatever they could to cadge an
appearance on CNBC or a quote in The Wall Street Journal
to promote their favorite dot-com, went into hiding.
Morgan Stanley's Mary Meeker, who made $15 million in
1999 while telling people to buy Priceline when it was
at $165 a share and Healtheon/WebMD when it reached $105
a share, went silent as they collapsed toward zero.
Financial professionals had entered some weird new
head space. They simply took it for granted that a
"financial market" was a collection of people
doing their best to get onto CNBC and CNNfn and into the
Heard on the Street column of The Wall Street Journal
and the Lex column of The Financial Times, where they
could advance their narrow self-interests.
To anyone who wandered into the money culture after,
say, January 1996, it would have seemed absurd to take
anything said by putative financial experts at face
value. There was no reason to get worked up about it.
The stock market was not an abstraction whose integrity
needed to be preserved for the sake of democracy. It was
a game people played to make money. Who cared if
anything anyone said or believed was "real"?
Capitalism could now afford for money to be viewed as no
different from anything else you might buy or sell.
Or, as Jonathan Lebed wrote to his lawyer:
"Every morning I watch Shop at Home, a show on
cable television that sells such products as baseball
cards, coins and electronics. Don West, the host of the
show, always says things like, 'This is one of the best
deals in the history of Shop at Home! This is a
no-brainer folks! This is absolutely unbelievable,
congratulations to everybody who got in on this! Folks,
you got to get in on the line, this is a gift, I just
can't believe this!' There is absolutely nothing wrong
with him making quotes such as those. As long as he
isn't lying about the condition of a baseball card or
lying about how large a television is, he isn't
committing any kind of a crime. The same thing applies
to people who discuss stocks."
ight
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."
"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.
"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 legal ones?"
"I'm not going to go through the case point by
point."
"Why not?"
"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 Wall Street."
Well. What do you say to that? He had indeed worked
on Wall Street -- in 1968.
"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 do something."
y
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 school.
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."
ver
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 excited."
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 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.
