Crimes And Misdeminors

They used to just look like kids, these rogue traders, boiler-room con artists and Internet scamsters possessing just enough knowledge about the stock market to fleece anyone who would listen. Now they really are kids.

At 27, Nick Leeson brought down Barings bank with $1.4 billion in fraudulent trades. At 25, Gary Hoke faked a Bloomberg news report linked to a Yahoo bulletin board in a stock scam that cost investors $93,000. At 24, Rafael Shaoulian littered financial bulletin boards with unfounded hype that enabled him to sell a stock and pocket $173,000. At 23, Mark Jakob drove down the stock of Emulex with a phony Internet report. He bought with a vengeance after the decline and made $241,000 when the hoax was discovered and the stock rebounded.

Now comes Jonathan Lebed, 15, a New Jersey neophyte retracting the definition of "kid" from anyone merely young to certifiable school-age dependent. Lebed lives at home. He watches World Wrestling Federation matches. He roots for the Mets. He doesn't drive, at least not a car. But he has been in the fast lane of Wall Street swindlers for the past year, driving stocks with bogus chat-room hype that enabled him to capture $272,826 in illegal profits. Lebed settled his case with regulators last Wednesday, agreeing to disgorge the profits, plus $12,174 in interest, without admitting to any wrongdoing.

Lebed is the first minor the SEC has ever charged with securities fraud, and you may well ask, Isn't it one thing for a set of twentysomethings at work or in college to master the ole pump and dump, Net style, but quite another for a bona fide minor to get it down pat? Do we have a serious problem here?

Yes. A few of them. For starters, his antics have made Lebed something of a hero in his hometown of Cedar Grove. "I'm proud of my son," quickly proclaimed his father Gregory Lebed, a railroad worker for Amtrak who drove up to his house last week in a forest-green Mercedes suv. Proud? Support you can understand. But mass fraud seems a strange accomplishment to crow about.

"He's like a celebrity," says Anthony Callie, a friend and classmate. "I'm sure he's got a lot of new friends." Another classmate, Nicole Basalyga, chimes in, "He outsmarted the government and made a lot of money. That's pretty cool."

Well, not really, Nicole. The government nabbed him. He had to give some of the money back, and he may still face criminal charges. That's pretty uncool. The folks at home, though, aren't thinking about any of that. This is a gilded new age in which everyone has the right to get rich, regardless of the means. Historians document periods of prosperity such as the current one. These periods almost always lead to a high incidence of scamming as the get-rich-quick mindset spreads.

Today, amid an unprecedented bull market broadly enjoyed at the dawn of the Internet, the stock market is the tool of choice--and breaking the rules becomes increasingly acceptable as the players get younger. Call it extreme capitalism. If you win, you're envied as a genius.

Another problem is the settlement. Hours after it was announced, Lebed's attorney, Kevin Marino, reportedly let the world know the disgorgement would be less than what Lebed had made. "I think it's a great idea for everyone to abide by the law," says Marino. As for regulations governing the Internet, "there's still a huge gray area out there. I believe the information industry has surpassed the regulations." To get the deal, the SEC focused on just 11 of 27 trades it had investigated. The SEC could demand restitution only from the trades covered in the settlement. Did Lebed scam the SEC too?

Finally, and this is the big stuff, Internet stock fraud is a growth crime. The seeming anonymity of Web postings and chat sessions has emboldened scamsters and driven down the cost of running a first-rate swindle. No longer do con artists need elaborate "boiler rooms" filled with phone banks and fast-talking stock jocks. "Historically, perpetrators had to be more sophisticated," says John Reed Stark, chief of SEC's Office of Internet Enforcement. "There were a lot more complexities to the schemes. With these manipulations, all you need is a computer and a modem to spread false information."

That's how Lebed did it. He would buy large blocks of thinly traded stocks on the NASDAQ or the over-the-counter bulletin board, moving the price up 20% or more. After the market closed and the next morning dawned, he would flood cyberspace with as many as 600 messages under different names touting the stock as one about to "take off" or, in the case of Man Sang Holdings, "the most undervalued stock in history."

In the Man Sang case, he twice manipulated the price--once buying it at less than $2 and selling near $4, and next buying at less than $3 and selling at more than $5. Gullible chat audiences piled in, pushed up the price and then were left with big losses as the stock inevitably tanked. So cocksure of his schemes was Lebed that in some cases he entered automatic sell orders, to be triggered when the stock rose to a specific price, and then skipped off to school knowing he'd make thousands of dollars before recess. Because he is a minor, he traded through two custodial accounts in his father's name.