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At the age of 14, Jonathan G. Lebed was making thousands of dollars trading stocks online. By 15, Lebed, of Cedar Grove, N.J., had become the first minor ever charged by the Securities and Exchange Commission after he allegedly netted $272,826 by using Internet message boards to manipulate stock prices. The SEC announced Wednesday that it brought charges and settled with Lebed, who allegedly sold thinly traded microcap stocks (low-priced stocks issued by the smallest of companies) after touting them in hundreds of notes posted primarily on Yahoo Finance message boards. He claimed, among other things, that a certain stock was about to “take off” and was “the most undervalued stock ever.” In some cases, he placed a sell limit order to ensure that he would not miss a price jump while he was in school. Without admitting or denying the SEC’s findings, Lebed agreed to repay the U.S. Treasury the profits he made, plus $12,174 in interest, rounding the sum to $285,000. “He’s very intelligent and does well in school and has an obvious aptitude in investing,” says Kevin Marino, the Newark, N.J.-based attorney representing Lebed. “He’s self-taught and was interested in it.” The case illustrates not only the ease of trading online, but also the na�vet� of the growing number of investors in the stock market. “I implore investors to be highly skeptical of any advice they receive from the Internet,” Ronald Long, administrator of the SEC’s Philadelphia District Office, cautioned in a press release. “People should do thorough research before making investment decisions and verify all information before acting on it.” Lebed was charged with manipulating stock prices on 11 different occasions between Aug. 23, 1999 (when he was still 14) and Feb. 4, 2000. Trading with custodial accounts at two broker-dealers, Lebed netted between $11,000 and $74,000 on each occasion. Using his father’s name, which was on an account opened for Lebed with $8,000 from savings bonds and birthday gifts when he was 12 years old, Lebed bought and sold stocks valued at between 5 cents and $1, according to the SEC. To boost the value of those stocks, Lebed typically posted between 200 and 300 identical messages on Yahoo Finance message boards after markets closed on the day of his purchase, as well as another 200 to 300 messages the next morning — all using different fictional aliases. Lebed helped give his postings an air of credibility by acquiring between 17 and 46 percent of a given stock’s trading volume on a single day — enough to cause the stock price to rise just before his messages appeared. For instance, on Jan. 5 he bought 18,000 shares of Man Sang Holdings at prices ranging from $1.38 to $2 per share — nearly 30 percent of the 60,700 shares traded that day. Just before midnight the same day, he posted a note on Yahoo Finance message boards claiming that the stock would be trading at $20 per share “very soon.” The next day, the trading volume soared to more than 1 million shares at a high of $4.69 per share. Lebed sold his stock for as much as $4 per share, netting a cool $34,959. There was no news on the company during the time period to account for the price and volume increases, according to the SEC. “Jonathan, at an early age because of his interest in the Internet, was online a lot,” says Mauro Wolfe, the enforcement staff attorney who handled the case. “I think he learned these concepts from other sources,” Wolfe adds, noting the SEC believes that Lebed carried out his deceptions alone. Lebed’s parents, who were not charged, knew of his profits, but the SEC believes that they were unaware of the manipulation schemes. In addition to returning his profits to the U.S. Treasury, Lebed agreed to a cease-and-desist order, which, if breached, could lead to more serious punishment. Wolfe says the case brings to light the ease of manipulating stocks online. In addition to prosecuting more cases, the SEC also is working on educating the public about such fraud, he said. Brett Trueman, a professor of accounting at the University of California at Berkeley’s Haas School of Business, notes that such fraud would not be possible if it were not for naive investors willing to take any online stock advice at face value. “They don’t know what they’re doing,” he says. “They see other people getting rich and want their share. So they go to chat rooms. They don’t do their own research.” Trueman says sites such as Yahoo could stem such fraud in the future by requiring individuals entering chat rooms to use real names. But for the time being, Yahoo Finance, which has 7,000 message boards, has no plans to revisit its policy, allowing users to choose more than one name, a spokeswoman said. She declined to comment on the Lebed case.

Related articles from The Industry Standard: What the Kids Really Need SEC Alleges 15 Pump-and-Dump Scams Feds Crack Down on Massive Securities Fraud Copyright (c)2000 The Industry Standard

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