1124 lines
49 KiB
Markdown
1124 lines
49 KiB
Markdown
---
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created_at: '2014-03-02T21:30:32.000Z'
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title: 'Jonathan Lebed: Stock Manipulator, S.E.C. Nemesis, and 15 (2001)'
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url: http://www.nytimes.com/2001/02/25/magazine/25STOCK-TRADER.html?pagewanted=all
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author: Sujan
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points: 46
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story_text: ''
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comment_text:
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num_comments: 12
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story_id:
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story_title:
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story_url:
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parent_id:
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created_at_i: 1393795832
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_tags:
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- story
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- author_Sujan
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- story_7330853
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objectID: '7330853'
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year: 2001
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---
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When I arrived one afternoon not long ago, the first person to the door
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was Greg Lebed, Jonathan's 54-year-old father. Black hair sprouted in
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many directions from the top of his head and joined together somewhere
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in the middle of his back. The curl of his lip seemed designed to shout
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abuse from a bleacher seat. He had become famous, briefly, when he
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ordered the world's media off his front lawn and said, ''I'm proud of my
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son.'' Later, elaborating on ''60 Minutes,'' he said, ''It's not like he
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was out stealing the hubcaps off cars or peddling drugs to the
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neighbors.''
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He led me to the family dining room, and without the slightest help from
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me, worked himself into a lather. He got out a photocopy of front-page
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stories from The Daily News. One side had a snapshot of Bill and Hillary
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Clinton beside the headline ''Insufficient Evidence' in Whitewater Case:
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CLINTONS CLEARED''; the other side had a picture of Jonathan Lebed
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beside the headline ''Teen Stock Whiz Nailed.'' Over it all was scrawled
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in Greg's furious hand, ''U.S. Justice at Work.''
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''Look at that\!'' he shouted. ''This is what goes on in this
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country\!''
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Then, just as suddenly as he had erupted, he went dormant. ''Don't
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bother with me,'' he said. ''I get upset.'' He offered me a seat at the
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dining-room table. Connie Lebed, Jonathan's 45-year-old mother, now
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entered. She had a look on her face that as much as said: ''I assume
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Greg has already started yelling about something. Don't mind him; I
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certainly don't.''
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Greg said testily, ''It was that goddamn computer what was the
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problem.''
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''My problem with the S.E.C.,'' said Connie, ignoring her husband, ''was
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that they never called. One day we get this package from Federal Express
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with the whatdyacallit, the subpoenas inside. If only they had called me
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first.'' She will say this six times before the end of the day, with one
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of those marvelous harmonicalike wails that convey a sense of grievance
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maybe better than any noise on the planet. If only they'da caaaawwwwlled
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me.
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''The wife brought that goddamn computer into this house in the first
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place,'' Greg said, hurling a thumb at Connie. ''Ever since that
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computer came into the house, this family was ruined.''
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Connie absorbed the full frontal attack with an uncomprehending blink,
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and then said to me, as if her husband had never spoken: ''My husband
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has a lot of anger. He gets worked up easily. He's already had one heart
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attack.''
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She neither expects nor receives the faintest reply from him. They obey
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the conventions of the stage. When one of them steps forward into the
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spotlight to narrate, the other recedes and freezes like a statue. Ten
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minutes into the conversation, Jonathan slouched in. Even that verb does
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not capture the mixture of sullenness and truculence with which he
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entered the room. He was long and thin and dressed in the prison costume
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of the American suburban teenager: pants too big, sneakers gaping, a
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pirate hoop dangling from one ear. He looked away when he shook my hand
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and said ''Nice to meet you'' in a way that made it clear that he
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couldn't be less pleased. Then he sat down and said nothing while his
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parents returned to their split-screen narration.
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Advertisement
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[Continue reading the main story](#story-continues-4)
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At first glance, it was impossible to link Jonathan in the flesh to
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Jonathan on the Web. I have a file of his Internet postings, and they're
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all pretty bombastic. Two days before the FedEx package arrived bearing
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the S.E.C.'s subpoenas, for instance, he logged onto the Internet and
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posted 200 separate times the following plug for a company called
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Firetector (ticker symbol FTEC):
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''Subj: THE MOST UNDERVALUED STOCK EVER
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''Date: 2/03/00 3:43pm Pacific Standard Time
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''From: LebedTG1
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''FTEC is starting to break out\! Next week, this thing will EXPLODE. .
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. .
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''Currently FTEC is trading for just $2 1/2\! I am expecting to see FTEC
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at $20 VERY SOON.
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''Let me explain why. . . .
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''Revenues for the year should very conservatively be around $20
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million. The average company in the industry trades with a price/sales
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ratio of 3.45. With 1.57 million shares outstanding, this will value
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FTEC at . . . $44.
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''It is very possible that FTEC will see $44, but since I would like to
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remain very conservative . . . my short-term target price on FTEC is
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still $20\!
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''The FTEC offices are extremely busy. . . . I am hearing that a number
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of HUGE deals are being worked on. Once we get some news from FTEC and
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the word gets out about the company . . . it will take-off to MUCH
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HIGHER LEVELS\!
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''I see little risk when purchasing FTEC at these DIRT-CHEAP PRICES.
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FTEC is making TREMENDOUS PROFITS and is trading UNDER BOOK
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VALUE\!\!\!''
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And so on. The author of that and dozens more like it now sat dully at
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the end of the family's dining-room table and watched his parents take
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potshots at each other and their government. There wasn't an exclamation
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point in him.
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not long after his 11th birthday, Jonathan opened an account with
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America Online. He went onto the Internet, at least at first, to meet
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other pro-wrestling fans. He built a Web site dedicated to the greater
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glory of Stone Cold Steve Austin. But about the same time, by watching
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his father, he became interested in the stock market. In his 30-plus
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years working for Amtrak, Greg Lebed had worked his way up to middle
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manager. Along the way, he accumulated maybe $12,000 of blue-chip
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stocks. Like half of America, he came to watch the market's daily upward
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leaps and jerks with keen interest.
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Advertisement
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[Continue reading the main story](#story-continues-5)
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Jonathan saved him the trouble. When he came home from school, he turned
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on CNBC and watched the stock-market ticker stream across the bottom of
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the screen, searching it for the symbols inside his father's portfolio.
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''Jonathan would sit there for hours staring at them,'' Connie said, as
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if Jonathan is miles away.
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''I just liked to watch the numbers go across the screen,'' Jonathan
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said.
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''Why?''
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''I don't know,'' he said. ''I just wondered, like, what they meant.''
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At first, the numbers meant a chance to talk to his father. He would
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call his father at work whenever he saw one of his stocks cross the
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bottom of the television screen. This went on for about six months
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before Jonathan declared his own interest in owning stocks. On Sept. 29,
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1996, Jonathan's 12th birthday, a savings bond his parents gave him at
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birth came due. He took the $8,000 and got his father to invest it for
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him in the stock market. The first stock he bought was America Online,
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at $25 a share -- in spite of a lot of adverse commentary about the
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company on CNBC.
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''He said that it was a stupid company and that it would go to 2
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cents,'' Jonathan chimed in, pointing at his father, who obeyed what now
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appeared to be the family rule and sat frozen at the back of some mental
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stage. AOL rose five points in a couple of weeks, and Jonathan had his
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father sell it. From this he learned that a) you could make money
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quickly in the stock market, b) his dad didn't know what he was talking
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about and c) it paid him to exercise his own judgment on these matters.
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All three lessons were reinforced dramatically by what happened next.
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What happened next was that CNBC -- which Jonathan now rose at 5 every
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morning to watch -- announced a stock-picking contest for students.
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Jonathan had wanted to join the contest on his own but was told that he
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needed to be on a team, and so he went and asked two friends to join
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him. Thousands of students from across the country set out to speculate
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their way to victory. Each afternoon CNBC announced the top five teams
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of the day.
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To get your name read out loud on television, you obviously opted for
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highly volatile stocks that stood a chance of doing well in the short
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term. Jonathan's team, dubbing itself the Triple Threat, had a portfolio
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that rose 51 percent the first day, which put them in first place. They
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remained in the Top 3 for the next three months, until in the last two
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weeks of the contest they collapsed. Even a fourth-place finish was good
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enough to fetch a camera crew from CNBC, which came and filmed the team
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in Cedar Grove. The Triple Threat was featured in The Verona-Cedar Grove
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Times and celebrated on television by the Cedar Grove Township Council.
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''From then, everyone at work started asking me if Jonathan had any
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stock tips for them,'' said Greg.
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''They still ask me,'' said Connie.
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By the Spring of 1998, Jonathan was 13, and his ambitions were growing.
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He had glimpsed the essential truth of the market: that even people who
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called themselves professionals are often incapable of independent
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thought and that most people, though obsessed with money, have little
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ability to make decisions about it. He knew what he was doing, or
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thought he did. He had learned to find everything he wanted to know
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about a company on the Internet; what he couldn't find, he ran down in
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the flesh. It became part of Connie Lebed's life to drive her son to
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various corporate headquarters to make sure they existed. He also
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persuaded her to open an account with Ameritrade. ''He'd done so well
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with the stock contest, I figured, Let's see what he can do,'' Connie
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said.
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Advertisement
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[Continue reading the main story](#story-continues-6)
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What he did was turn his $8,000 savings bond into $28,000 inside of 18
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months. During the same period, he created his own Web site devoted to
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companies with small market capitalization -- penny stocks. The Web site
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came to be known as Stock-dogs.com. (''You know, like racing dogs.'')
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Stock-dogs.com plugged the stocks of companies Jonathan found
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interesting or that people Jonathan met on the Internet found
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interesting. At its peak, Stock-dogs.com had maybe 1,500 visitors a day.
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Even so, the officers of what seemed to Jonathan to be serious companies
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wrote to him to sell him on their companies. Within a couple of months
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of becoming an amateur stock-market analyst, he was in the middle of a
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network of people who spent every waking hour chatting about and trading
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stocks on the Internet. The mere memory of this clearly upset Greg.
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''He was just a little kid,'' he said. ''These people who got in touch
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with him could have been anybody.''
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''How do you know?'' said Jonathan. ''You've never even been on the
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Internet.''
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''Suppose some hacker comes in and steals his money\!'' Greg said.
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''Next day, you type in, and you got nothing left.''
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Jonathan snorted. ''That can't happen.'' He turned to me. ''Whenever he
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sees something on TV about the Internet, he gets mad and disconnects my
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computer phone line.''
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''Oh, yeah,'' Connie said, brightening as if realizing for the first
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time that she lived in the same house as the other two. ''I used to hear
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the garage door opening at 3 in the morning. Then Jonathan's little feet
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running back up the stairs.''
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''I haven't ever even turned a computer on\!'' Greg said. ''And I never
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will\!''
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''He just doesn't understand how a lot of this works,'' explained
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Jonathan patiently. ''And so he overreacts sometimes.''
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Greg and Connie were born in New Jersey, but from the moment the
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Internet struck, they might as well have just arrived from Taiwan. When
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the Internet landed on them, it redistributed the prestige and authority
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that goes with a general understanding of the ways of the world away
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from the grown-ups and to the child. The grown-ups now depended on the
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child to translate for them. Technology had turned them into a family of
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immigrants.
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''I know, I know,'' Greg said, turning to me. ''I'm supposed to know how
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it works. It's the future. But that's his future, not mine\!''
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Advertisement
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[Continue reading the main story](#story-continues-7)
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''Anyway,'' Connie said, drifting back in again. ''That's when the
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S.E.C. called us the first time.''
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The first time?
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Jonathan was 14 when Connie agreed to take him to meet with the S.E.C.
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in its Manhattan offices. When he heard the news, Greg, of course, hit
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the roof and hopped on the high-speed train to triple bypass. ''He'd
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already had one heart attack,'' Connie explained and started to go into
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the heart problems all over again, inspiring Greg to mutter something
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about how he wasn't the person who brought the computer into the house
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and so it wasn't his responsibility to deal with this little nuisance.
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At any rate, Connie asked Harold Burk, her boss at Hoffmann-La Roche,
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the drug company where she worked as a secretary, to go with her and
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Jonathan. Together, they made their way to a long conference table in a
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big room at 7 World Trade Center. On one side of the table, five lawyers
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and an examiner from the S.E.C.; on the other, a 14-year-old boy, his
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mother and a bewildered friend.
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This is how it began:
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S.E.C.: Does Jonathan's father know he's here today?
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Mrs. Lebed: Yes.
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S.E.C.: And he approves of having you here?
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Mrs Lebed: Right, he doesn't want to go.
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S.E.C.: He's aware you're here.
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Mrs. Lebed: With Harold.
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S.E.C.: And that Mr. Burk is here.
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Mrs Lebed: He did not want to -- this whole thing has upset my husband a
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lot. He had a heart attack about a year ago, and he gets very, very
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upset about things. So he really did not want anything to do with it,
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and I just felt like -- Harold said he would help me.
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The S.E.C. seemed to have figured out quickly that they are racing into
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some strange mental cul-de-sac. They turned their attention to Jonathan
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or, more specifically, his brokerage statements.
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S.E.C.: Where did you learn your technique for day trading?
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Jonathan: Just on TV, Internet.
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S.E.C.: What TV shows?
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Advertisement
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[Continue reading the main story](#story-continues-8)
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Jonathan: CNBC mostly -- basically CNBC is what I watch all the time
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S.E.C.: Do you generally make money on your day trading?
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Jonathan: I usually don't day trade; I just try to -- since I was home
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these days and I was very bored, I wanted something to do, so I was just
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trading constantly. I don't think I was making money. . . .
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S.E.C.: Just looking at your April statement, it looks like the majority
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of your trading is day trading.
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Jonathan: I was home a lot that time.
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Mrs. Lebed: They were on spring vacation that week.
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Having established and then ignored the boy's chief motive for trading
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stocks -- a desire to escape the tedium of existence -- the authorities
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then sought to discover his approach to attracting attention on the
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Internet.
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S.E.C.: On the first page \[referring to a hard copy of Jonathan's Web
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site, Stock-dogs.com\] where it says, ''Our 6- to 12-month outlook,
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$8,'' what does that mean? The stock is selling less than 3 but you
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think it's going to go to 8.
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Jonathan: That's our outlook for the price to go based on their earnings
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potential and a good value ratio. . . .
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S.E.C.: Are you aware that there are laws that regulate company
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projections?
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Jonathan: No.
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Eventually, the S.E.C. people crept up on the reason they had noticed
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Jonathan in the first place. They had been hot on the trail of a
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grown-up named Ira Monas, one of Jonathan Lebed's many Internet
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correspondents. Monas, eventually jailed on unrelated charges, had been
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employed in ''investor relations'' by a number of small companies. In
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that role, he had fed Jonathan Lebed information about the companies,
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some of which turned out to be false and some of which Jonathan had
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unwittingly posted on Stock-dogs.com.
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The S.E.C. asked if Monas had paid Jonathan to do this and thus help to
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inflate the price of his company's stocks. Jonathan said no, he had done
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it for free because he thought the information was sound. The S.E.C.
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then expressed its doubt that Jonathan was being forthright about his
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relationship with Monas. One of the small companies Monas had been hired
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to plug was a cigar retail outlet called Havana Republic. As a publicity
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stunt, Monas announced that the company -- in which Jonathan came to own
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100,000 shares -- would hold a ''smoke-out'' in Midtown Manhattan.
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Advertisement
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[Continue reading the main story](#story-continues-9)
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The S.E.C. now knew that Jonathan Lebed had attended the smoke-out. To
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the people across the table from Jonathan, this suggested that his
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relationship with a known criminal was deeper than he admitted.
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S.E.C.: So you decided to go to the smoke-out?
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Jonathan: Yes.
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S.E.C.: How did you go about that?
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Jonathan: We walked down the street and took a bus.
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S.E.C.: Who is ''we.''
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Jonathan: Me and my friend Chuck.
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S.E.C.: O.K.
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Jonathan: We took a bus to New York.
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S.E.C.: You cut school to do this?
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Jonathan: It was after school. Then we got picked up at Port Authority,
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so then my mother and Harold came and picked us up and we went to the
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smoke-out.
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S.E.C.: Why were you picked up at the Port Authority?
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Jonathan: Because people like under 18 across the country, from
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California. . . .
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Mrs. Lebed: They pick up minors there at Port Authority.
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S.E.C.: So the cops were curious about why you were there?
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Jonathan: Yes.
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S.E.C.: And they called your mother?
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Jonathan: Yes.
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S.E.C.: And she came.
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Jonathan: Yes.
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S.E.C.: You went to the smoke-out.
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Jonathan: Yes.
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S.E.C.: Did you see Ira there?
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Jonathan: Yes.
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S.E.C.: Did you introduce yourself to Ira?
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Jonathan: No.
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Advertisement
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[Continue reading the main story](#story-continues-10)
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Here, you can almost here the little sucking sound on the S.E.C.'s side
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of the table as the conviction goes out of this line of questioning.
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S.E.C.: Why not?
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Jonathan: Because I'm not sure if he knew my age, or anything like that,
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so I didn't talk to anyone there at all.
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This mad interrogation began at 10 in the morning and ended at 6 in the
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evening. When it was done, the S.E.C. declined to offer legal advice.
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Instead, it said, ''The Internet is a grown-up medium for grown-up-type
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activities.'' Connie Lebed and Harold Burk, both clearly unnerved,
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apologized profusely on Jonathan's behalf and explained that he was just
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a naïve child who had sought attention in the wrong place. Whatever
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Jonathan thought, he kept to himself.
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When I came home that day, I closed the Ameritrade account,'' Connie
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told me.
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''Then how did Jonathan continue to trade?'' I asked.
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Greg then blurted out, ''The kid never did something wrong,''
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''Don't ask me\!'' Connie said. ''I got nothing to do with it.''
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''All right,'' Greg said, ''here's what happened. When Little Miss
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Nervous over here closes the Ameritrade account, I open an account for
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him in my name with that other place, E\*Trade.''
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I turned to Jonathan, who wore his expression of airy indifference.
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''But weren't you scared to trade again?''
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''No.''
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''This thing with the S.E.C. didn't even make you a little nervous?''
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''No.''
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''No?''
|
|
|
|
''Why should it?''
|
|
|
|
Advertisement
|
|
|
|
[Continue reading the main story](#story-continues-11)
|
|
|
|
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.
|
|
|
|
## Newsletter Sign Up
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[Continue reading the main story](#continues-post-newsletter)
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###
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Invalid email address. Please re-enter.
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You must select a newsletter to subscribe to.
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You agree to receive occasional updates and special offers for The New
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### Thank you for subscribing.
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[View all New York Times newsletters.](/newsletters)
|
|
|
|
It began:
|
|
|
|
''I was going over some old press releases about different companies.
|
|
The best performing stock in 1999 on the Nasdaq was Qualcomm (QCOM).
|
|
QCOM was up around 2000% for the year. On December 29th of last year,
|
|
even after QCOM's run from 25 to 500, Paine Webber analyst Walter Piecky
|
|
came out and issued a buy rating on QCOM with a target price of 1,000.
|
|
QCOM finished the day up 156 to 662. There was nothing fundamentally
|
|
that would make QCOM worth 1,000. There is no way that a company with
|
|
sales under $4 billion, should be worth hundreds of billions. . . . QCOM
|
|
has now fallen from 800 to under 300. It is no longer the hot play with
|
|
all of the attention. Many people were able to successfully time QCOM
|
|
and make a lot of money. The ones who had bad timing on QCOM, lost a lot
|
|
of money.
|
|
|
|
''People who trade stocks, trade based on what they feel will move and
|
|
they can trade for profit. Nobody makes investment decisions based on
|
|
reading financial filings. Whether a company is making millions or
|
|
losing millions, it has no impact on the price of the stock. Whether it
|
|
is analysts, brokers, advisors, Internet traders, or the companies,
|
|
everybody is manipulating the market. If it wasn't for everybody
|
|
manipulating the market, there wouldn't be a stock market at all. . .
|
|
.''
|
|
|
|
As it happens, those last two sentences stand for something like the
|
|
opposite of the founding principle of the United States Securities and
|
|
Exchange Commission. To a very great extent, the world's financial
|
|
markets are premised on a black-and-white mental snapshot of the
|
|
American investor that was taken back in 1929. The S.E.C. was created in
|
|
1934, and the big question in 1934 was, How do you reassure the public
|
|
that the stock market is not rigged? From mid-1929 to mid-1932, the
|
|
value of the stocks listed on the New York Stock Exchange had fallen 83
|
|
percent, from $90 billion to about $16 billion. Capitalism, with reason,
|
|
was not feeling terribly secure.
|
|
|
|
To the greater public in 1934, the numbers on the stock-market ticker no
|
|
longer seemed to represent anything ''real,'' but rather the result of
|
|
manipulation by financial pros. So, how to make the market seem
|
|
''real''? The answer was to make new stringent laws against stock-market
|
|
manipulation -- aimed not at ordinary Americans, who were assumed to be
|
|
the potential victims of any manipulation and the ones who needed to be
|
|
persuaded that it was not some elaborate web of perceptions, but at the
|
|
Wall Street elite. The American financial elite acquired its own police
|
|
force, whose job it was to make sure their machinations did not ever
|
|
again unnerve the great sweaty rabble. That's not how the S.E.C. put it,
|
|
of course. The catch phrase used by the policy-making elites when
|
|
describing the S.E.C.'s mission was ''to restore public confidence in
|
|
the securities markets.'' But it amounted to the same thing. Keep up
|
|
appearances, so that the public did not become too cautious. It occurred
|
|
to no one that the public might one day be as sophisticated in these
|
|
matters as financial professional.s
|
|
|
|
Anyone who paid attention to the money culture could see its foundation
|
|
had long lay exposed, and it was just a matter of time before the
|
|
termites got to it. From the moment the Internet went boom back in 1996,
|
|
Web sites popped up in the middle of nowhere -- Jackson, Mo.; Carmel,
|
|
Calif. -- and began to give away precisely what Wall Street sold for a
|
|
living: earning forecasts, stock recommendations, market color. By the
|
|
summer of 1998, Xerox or AT\&T or some such opaque American corporation
|
|
would announce earnings of 22 cents a share, and even though all of Wall
|
|
Street had predicted a mere 20 cents and the company had exceeded all
|
|
expectations, the stock would collapse. The amateur Web sites had been
|
|
saying 23 cents.
|
|
|
|
Eventually, the Bloomberg News Service commissioned a study to explore
|
|
the phenomenon of what were now being called ''whisper numbers.'' The
|
|
study showed the whisper numbers, the numbers put out by the amateur Web
|
|
sites, were mistaken, on average, by 21 percent. The professional Wall
|
|
Street forecasts were mistaken, on average, by 44 percent. The reason
|
|
the amateurs now held the balance of power in the market was that they
|
|
were, on average, more than twice as accurate as the pros -- this in
|
|
spite of the fact that the entire financial system was rigged in favor
|
|
of the pros. The big companies spoon-fed their scoops directly to the
|
|
pros; the amateurs were flying by radar.
|
|
|
|
Even a 14-year-old boy could see how it all worked, why some guy working
|
|
for free out of his basement in Jackson, Mo., was more reliable than the
|
|
most highly paid analyst on Wall Street. The companies that financial
|
|
pros were paid to analyze were also the financial pros' biggest
|
|
customers. Xerox and AT\&T and the rest needed to put the right spin on
|
|
their quarterly earnings. The goal at the end of every quarter was for
|
|
the newspapers and the cable television shows and the rest to announce
|
|
that they had ''exceeded analysts' expectations.'' The easiest way to
|
|
exceed analysts' expectations was to have the analysts lower them. And
|
|
that's just what they did, and had been doing for years. The guy in
|
|
Carmel, Calif., confessed to Bloomberg that all he had to do to be more
|
|
accurate on the earnings estimates than Wall Street analysts was to
|
|
raise all of them 10 percent.
|
|
|
|
Advertisement
|
|
|
|
[Continue reading the main story](#story-continues-12)
|
|
|
|
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.''
|
|
|
|
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.''
|
|
|
|
Advertisement
|
|
|
|
[Continue reading the main story](#story-continues-13)
|
|
|
|
''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.''
|
|
|
|
Advertisement
|
|
|
|
[Continue reading the main story](#story-continues-14)
|
|
|
|
''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.
|
|
|
|
Advertisement
|
|
|
|
[Continue reading the main story](#story-continues-15)
|
|
|
|
''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.
|
|
|
|
Advertisement
|
|
|
|
[Continue reading the main story](#story-continues-16)
|
|
|
|
''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
|
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same question I asked the first time we met: why hadn't he been scared
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off?
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Straight away he wrote back:
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''It was about 2-3 months from when the S.E.C. called me in for the
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first time until I started trading again. The reason I didn't trade for
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those 2-3 months is because I had all of my money tied up in a stock. I
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sold it at the end of the year to take a tax loss, which allowed me to
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start trading again. I wasn't frightened by them because it was clear
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that they were focused on whether or not I was being paid to profile
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stocks when the fact is I was not. I was never told by them that I was
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doing something wrong and I was never told by them not to do
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something.''
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By September 1999, Jonathan Lebed was playing at the top of his game. He
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had figured out the advantage, after he had bought shares in a small
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company, in publicizing his many interests. ''I came up with it
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myself,'' he said of the idea. ''It was obvious from the newspapers and
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CNBC. Of course stocks respond to publicity\!''
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After he had picked and bought his stock, he would write a single
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message about it and stick it up in as many places on Yahoo Finance as
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he could between 5 and 8 in the morning, when he left home for school.
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There were no explicit rules on Yahoo Finance, but there were
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constraints. The first was that Yahoo limited the number of messages he
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could post using one e-mail address. He would click onto Yahoo and open
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an account with one of his four AOL screen names; a few minutes later,
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Yahoo, mysteriously, would tell him that his messages could no longer be
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delivered. Eventually, he figured out that they must have some limit
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that they weren't telling people about. He got around it by grabbing
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another of his four AOL screen names and creating another Yahoo account.
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By rotating his four AOL screen names, he found he could get his message
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onto maybe 200 Yahoo message boards before school.
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He also found that when he went to do it the next time, with a different
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stock, Yahoo would no longer accept messages from his AOL screen names.
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So he was forced to create four more screen names and start over again.
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Yahoo never told him he shouldn't do this. ''The account would be just,
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like, deleted,'' he said. ''Yahoo never had a policy; it's just what I
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figured out.'' The S.E.C. accused Jonathan of trying to seem like more
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than one person when he promoted his stocks, but when you see how and
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|
why he did what he did, that is clearly false. (For instance, he ignored
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the feature on Yahoo that enables users to employ up to seven different
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''fictitious names'' for each e-mail address.) It's more true to say
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that he was trying to simulate an appearance on CNBC.
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Over time, he learned that some messages had more effect on the stock
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market than others. ''I definitely refined it,'' he said of his Internet
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persona. ''In the beginning, I would write, like, very professionally.
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But then I started putting stuff in caps and using exclamation points
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and making it sound more exciting. That worked better. When it's more
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exciting, it draws people's attention to it compared to when you write
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like, dull or something.'' The trick was to find a stock that he could
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get excited about. He sifted the Internet chat rooms and the shopping
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mall with three things in mind: 1) ''It had to be in the area of the
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stock market that is likely to become a popular play''; 2) ''it had to
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be undervalued compared to similar companies''; and 3) ''it had to be
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undiscovered -- not that many people talking about it on the message
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boards.''
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Advertisement
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[Continue reading the main story](#story-continues-17)
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Over a couple of months, I drifted in and out of Jonathan Lebed's life
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and became used to its staccato rhythms. His defining trait was that the
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strangest things happened to him, and he just thought of them as
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perfectly normal -- and there was no one around to clarify matters. The
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threat of being prosecuted by the U.S. Attorney in Newark and sent away
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to a juvenile detention center still hung over him, but he didn't give
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any of it a second thought. He had his parents, his 12-year-old sister
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Dana and a crowd of friends at Cedar Grove High School, most of whom
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owned pieces of Internet businesses and all of whom speculated in the
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stock market. ''There are three groups of kids in our school,'' one of
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them explained to me. ''There's the jocks, there's the druggies and
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there's us -- the more business oriented. The jocks and the druggies
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respect what we do. At first, a lot of the kids are, like, What are you
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doing? But once kids see money, they get excited.''
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The first time I heard this version of the social structure of Cedar
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Grove High, I hadn't taken it seriously. But then one day I went out
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with Jonathan and one of his friends, Keith Graham, into a neighboring
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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.
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''Remember West Coast Video?'' Keith said drolly.
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I looked up. We were walking past a derelict building with ''West Coast
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Video'' stenciled on its plate glass.
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Jonathan chuckled knowingly. ''We owned, like, half the company.''
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I looked at him. He seemed perfectly serious. He began to tick off the
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reasons for his investment. ''First, they were about to open an Internet
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subsidiary; second, they were going to sell DVD's when no other video
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chain. . . . ''
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I stopped him before he really got going. ''Who owned half the
|
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company?''
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''Me and a few others. Keith, Michael, Tom, Dan.''
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''Some teachers, too,'' Keith said.
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''Yeah, the teachers heard about it,'' Jonathan said. He must have seen
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me looking strangely at him because he added: ''It wasn't that big a
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|
deal. We probably didn't have a controlling interest in the company, but
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we had a fairly good percentage of the stock.''
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''Teachers?'' I said. ''The teachers followed you into this sort of
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thing.''
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''Sometimes,'' Jonathan said.
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''All the time,'' Keith said. Keith is a year older than Jonathan and
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|
tends to be a more straightforward narrator of events. Jonathan will
|
|
habitually dramatize or understate some case and emit a strange
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|
frequency, like a boy not quite sure how hard to blow into his new tuba,
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|
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
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was, like, if Jonathan's in on it, it must be good.'' And then the two
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boys moved on to some other subject, bored with the memory of having led
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some teachers in the acquisition of shares of West Coast Video. We
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|
entered the pool hall and took a table, where we were joined by another
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|
friend, John. Keith had paged him.
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My role in Jonathan Lebed's life suddenly became clear: to express
|
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sufficient wonder at whatever he has been up to that he is compelled to
|
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elaborate.
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''I don't understand,'' I said. ''How would other kids find out what
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Jonathan was in?''
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''It's high school,'' said Keith, in a tone reserved for people over 35.
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''Four hundred kids. People talk.''
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''How would the teachers find out?''
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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.
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''But why?''
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''They saw we were making money,'' Keith said.
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|
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''Yeah,'' said Jonathan, who, odd as it sounds, exhibits none of his
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|
friend's knowingness. He just knows. ''I feel, like, that most of my
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|
classes, my grades would depend not on my performance but on how the
|
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stocks were doing.''
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|
''Not really,'' Keith said.
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''O.K.,'' Jonathan said. ''Maybe not that. But, like, I didn't think it
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|
mattered if I was late for class.''
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|
Keith considered that. ''That's true,'' he said.
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|
''I mean,'' Jonathan said, ''they were making like thousands of dollars
|
|
off the trades, more than their salaries even. . . . ''
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|
|
''Look,'' I said, ''I know this is a stupid question. But was there any
|
|
teacher who, say, disapproved of what you were doing?''
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|
|
The three boys considered this, plainly for the first time in their
|
|
lives.
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|
|
''The librarian,'' Jonathan finally said.
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|
|
''Yeah,'' John said. ''But that's only because the computers were in the
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|
library, and she didn't like us using them.''
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|
|
''You traded stocks from the library?''
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|
|
''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.''
|
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|
|
''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.''
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|
[Continue reading the main story](#whats-next)
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