Crimes And Misdeminors

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There's absolutely nothing new about Lebed's con. What makes it noteworthy is his age, plus the epidemic that has developed of this kind of fraud. The SEC gets 300 e-mails a day complaining about rip-offs. A quarter of its enforcement staff is dedicated to cyberspace, surfing the Net for hard sells and unrealistic investment promises.

The good news is that this stuff is easy to track down. The SEC has cracked 180 Net-fraud cases in the past five years, most of them in the past two. The charges against Lebed coincided with a nationwide fraud sweep involving 15 cases and 33 defendants. Some 70 micro-cap stocks--low volume and thinly traded--worth $1.7 billion were involved, and the total illegal profits came to $10 million. The SEC likes to bundle its cases for maximum effect. This was its fourth such sweep since the Net became a popular stomping ground for stock fraud a few years ago.

Conventional fraud investigations usually take six months to a year. But Internet fraud often wraps up in less than a week. The electronic trail is that clear--far easier to trace than the paper trail of the old economy. Last year Silicon Investor, based in Seattle and owned by Go2net, reprimanded Lebed for "violating the terms of his membership" (which can mean anything from spamming to being abusive to going "off topic" on message boards). The last time he posted a message to the site was July 17, 1999. He then apparently gave up and moved to the less regulated environment of Yahoo. What may have helped the SEC is that Silicon Investor has archived all 15 million of the messages placed on its 20,000 message boards since inception. A trail was easy to generate.

"You've got great evidence, and it's easy to find people," says the SEC's Stark. "Internet con artists may try to hide behind multiple screen aliases, but most computers leave their own electronic footprints that are relatively easy for experts to track."

For the con to work, it must be done out in the open where investors will see it and throw money at it. "You want people to find you," Stark says. "You want them to read your information." That's what makes the stock go up, but it also makes you easier to find. Lebed may have got away with his schemes for a year, but others have been identified within days. In the Emulex case in August, Jakob was targeted within hours of his phony press release. Hoke, an employee at PairGain Technologies, was nabbed just a week after his bogus release declared that PairGain was about to be bought out.

One of the amazing aspects of Lebed's story, or that of any Net fraudster, is that people act on the hype they see online. Large banks like Chase Manhattan pay millions of dollars a year in premiums to insure against a rogue trader like Leeson. Your best protection against a rogue Internet hypster is just not to listen. Most pump-and-dump schemes involve micro-cap stocks. That's your first tip-off. Often they hype them as likely to double or better in weeks. If you have questions, the SEC has a brochure, "Pump&Dump.con;," with tips for avoiding scams. It's available at www.sec.gov .

The rash of Net fraud cases has done little to deter online investors from their passion, nor should it if they stick to investing in what they know. "Sure, there's a lot of garbage out there," says Bob Smith, a Houston oil executive. He upgraded his computer five years ago specifically to dump his broker and trade online. He checks the financial Web postings and tunes in to chat sessions on the market. But he also does his own research and notes that the hype-and-con element of Wall Street isn't just online. "Highly paid analysts hype Internet stocks with outrageous price targets, then drop their estimates," he says. "I am sure they get their firms out of a position before they drop the bomb on the rest of the investing public."

Jordan Feiger, a Chicago businessman, is another who hasn't been turned off by the scams. "When you go into a chat room, it's like picking up a copy of the Star," he says, referring to the gossipy supermarket tabloid. "Some of the stories might be true and valid, but they certainly should not be your main source of information."

By all accounts, Lebed is intelligent and likable, considered a tad geeky because of the black leather briefcase he totes to school. "He's not very active in school and stuff," notes Kristel Rice, a senior at Cedar Grove High School, where Lebed is a junior. While students knew of his interest in stock trading, he kept to himself, asking only a few to join him. "He kept quiet about it," says classmate Tom McCarthy. "He kept it personal."

Before he discovered the dark side of Net investing, he seemed on a fast track for a dream career on Wall Street. With help from his father, he began investing at the age of 12 and a year later formed an alliance, dubbed the Triple Threat, with two friends. As a team, they placed fourth among 3,500 in a national investment derby sponsored by CNBC and MCI. Lebed and his pals rolled out of bed regularly at 5 a.m. to troll for stocks on the Internet and TV.