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What constitutes illegal manipulation of the market?

By jrh in MLP
Sun Feb 25, 2001 at 07:27:44 PM EST
Tags: Internet (all tags)

From today's New York Times Magazine comes the tale of 15-year-old Jonathan Lebed. Lebed's sin? He hyped his stock picks on the internet, making hundreds of thousands of dollars in the process. In the words of the Securities and Exchange Commission chairman, "He'd buy, lie and sell high." But were Lebed's actions any worse than those of the average Wall Street analyst?

Lebed hyped the stocks of obscure companies ("FTEC is making TREMENDOUS PROFITS and is trading UNDER BOOK VALUE!!!"), spamming stock message boards hundreds of times before school each day.

In September 2000, Lebed was fined $285,000 of his earnings by the Securities and Exchange Commission, which regulates the stock market in the US. That still leaves him with half a million dollars in profits.

SEC officials are portrayed as harboring violent hostility to Lebed:

"Tell me about the kid."

"He's a little jerk."

"How so?"

"He is exactly what you or I hope our kids never turn out to be."

"Have you met him?"

"No. I don't need to."

Asks journalist and former Wall Street grunt Michael Lewis:

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?


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What constitutes illegal manipulation of the market? | 28 comments (28 topical, editorial, 0 hidden)
he broke the law (3.50 / 12) (#1)
by jeanlucpikachu on Sun Feb 25, 2001 at 02:25:50 PM EST

The SEC comes down on ANYONE who violates trading rules. The rules about illegal market manipulation are fairly clear. If you don't understand them, ask a lawyer. What's REALLY amazing is how lightly the kid got off. He's clearly got an adult level intelligence, why not prosecute him as an adult? It'd make more sense than prosecuting people with single digit ages for adult crimes...

Capt. Jean-Luc Pikachu AIM: jeanlucpikachu
No outrage (3.20 / 5) (#2)
by delmoi on Sun Feb 25, 2001 at 02:29:49 PM EST

Usually people who get tried as adults when they aren't are murders and the like, when people are outraged.

So, this kid broke some obscure stock-manipulation laws, and made a shitload of money. To be honest, I doubt that requires 'adult-level' intelligence, and I doubt he even knew about the laws.

I think he should be let off as well, he is just a kid, and his mistakes are largely correctable.
"'argumentation' is not a word, idiot." -- thelizman
[ Parent ]
Ignorance of the law (3.00 / 1) (#14)
by Miniluv on Sun Feb 25, 2001 at 07:11:14 PM EST

To be honest, I doubt that requires 'adult-level' intelligence, and I doubt he even knew about the laws.
To sucessfully deceive enough people to artificially inflate a stock value requires a reasonably mature level of intelligence. Second, it is a well established point of law in the US that ignorance of the law is no defense.

"Its like someone opened my mouth and stuck a fistful of herbs in it." - Tamio Kageyama, Iron Chef 'Battle Eggplant'
[ Parent ]
yep (2.00 / 3) (#3)
by xriso on Sun Feb 25, 2001 at 02:36:48 PM EST

He's clearly got an adult level intelligence

Yep, he's so smart that he knew he would get off lightly if he did this.
*** Quits: xriso:#kuro5hin (Forever)
[ Parent ]

Manipulation? (4.70 / 20) (#4)
by Signal 11 on Sun Feb 25, 2001 at 02:39:12 PM EST

This isn't manipulation - this is people avoiding using their brains, and then asking a federal institution to come save them. He's a con artist and a spammer, what more needs to be said?

Stupid people who responded to his spam posts and did not look into the financial information on these companies and subsequently lost their money are not a problem for me, for the government, or for you. It's the problem of whomever made those bad investments, solely. Capitalism does not prevent people from making stupid decisions, it only prevents them from doing so systematically. That is to say, if you make a bad investment and lose money, you can certainly keep doing that, but eventually you'll run out of money and will no longer be allowed to make those same bad decisions.

The SEC, IMO, has over-extended itself. Certainly companies should be forced to reveal accurate information, but other than that, the SEC should stay out of peoples' finances. The market will resolve these problems on its own - and stupid people get what they deserve.

By the way, this is no defense of this spammer scumbag - but that is a seperate charge. People not using common sense and then subsequently being "manipulated" by it is not, to me, a crime.

Society needs therapy. It's having
trouble accepting itself.

Spamming (4.28 / 7) (#6)
by baberg on Sun Feb 25, 2001 at 02:53:12 PM EST

Not only is he a spammer, but his spam just REEKED of stupidity. I mean, come on. Did you read the stuff he wrote in his spam? It's freaking pathetic. I refust to believe that anybody would believe something like
The FTEC offices are extremely busy. . . . I am hearing that a number of HUGE deals are being worked on. Once we get some news from FTEC and the word gets out about the company . . . it will take-off to MUCH HIGHER LEVELS! I see little risk when purchasing FTEC at these DIRT-CHEAP PRICES. FTEC is making TREMENDOUS PROFITS and is trading UNDER BOOK VALUE!!!
If I received something through snail mail that said something like this (with the capital letters and everything) I would know it was a scam of some type. I agree with ya, Siggy. People who fell for this line of bull and lost their money deserved to lose it. The S.E.C. overstepped its bounds and got mad because a kid knew how to work the system to his advantage. Yes, insider trading and artificially inflated prices are bad. No, this guy didn't do anything more than spam a few message boards and get rich off of it. Spamming is bad; making money is good (at least in America, it is)

[ Parent ]
Not quite the way it works (4.00 / 1) (#19)
by pig bodine on Mon Feb 26, 2001 at 04:33:20 AM EST

Remember, we're talking about money made during the dot com bubble. Not everyone who bought were people who were taken in by Lebed's posts. It only takes a handful of buyers initially who gamble on the truth of Lebed's statements, or on the possibility that others will (essentially playing the same game Lebed does). Once the price starts rising because of this initial interest, a few more people will jump in who, having read the message, take the rise to be an indication that the advice is sound. Soon enough people will be buying just because the stock is going up. People who never even saw Lebed's message are now in the game. All Lebed has to do is sell before the price starts dropping. It's a question of how daring he's willing to be.

The character of the messages looks ridiculous here, but they fit in very well with the sort of thing you would find on yahoo daytrading message boards.

[ Parent ]

Suckers (none / 0) (#22)
by baberg on Mon Feb 26, 2001 at 11:17:06 AM EST

I understand that it's not directly Lebed who caused the price to inflate. He bought some stock and posted that message. What I want to know is why in the hell would anybody follow the advice of an anonymous posting to an Internet message board, especially when that refers to something that costs real money?

I can understand following people's suggestions when it comes to problems with computer hardware; you lose nothing by trying one of their suggested fixes (i.e., changing an IRQ). But when somebody tells me to buy a stock because they have a "hot tip", even if it were real life and that person was a trusted analyst, I would still be skeptical. Nothing in the world would make me take the economic advice from somebody who inserts key phrases in a message using ALL CAPS. It's just spam, and people fell for it.

So, what I'm saying is that I have no sympathy for the people who were suckered in by this. Even if they were second-generation sucker (i.e., the people who see the stock rising and decide that Lebed knows what he's talking about) because they should know that any price inflation can be artificial. People who do not read the message boards and who get screwed by this close-to-insider trading have my sympathy.

I guess I just am astonished that anybody would follow the advice posted on the Internet when it comes to the stock market. YMMV.

[ Parent ]

Goes without saying (none / 0) (#24)
by pig bodine on Mon Feb 26, 2001 at 06:15:10 PM EST

"Greedy suckers" are words that should be mentioned in any sensible definition of day traders. Since there are generally no dividends paid on dot com stocks, the only way to make money from them is from gains made in buying low and selling high. The only way to consistently make money in a market like that is to either get really lucky, or find a way to exploit people who are stupider than yourself. It was the suckers who made the dot com market...wouldn't have worked without them. Being shocked by the depth of their gullibilty was a good way to avoid making money from them.

People have been falling for ridiculous stock market scams since the 1700s, when one stock was advertised for "a company for carrying on an undertaking of Great Advantage, but no one to know what it is."

[ Parent ]

No, the SEC is right (2.50 / 2) (#16)
by Nyarlathotep on Sun Feb 25, 2001 at 10:40:09 PM EST

No, he is manipulating the market and he should loose the profits he gained by unethical practices. Now, I do not think that the people he took these profits from should get their money back, i.e. I agree with you that it's good capitalism for the stupid to loose their money. Finally, notice the the SEC has fined him, i.e. I don't think they are goingin people their money back, so they have made exactly the correct decission: punish the cheaters and let the cheated lose their money.

Actually, the only thing I don't like about the SECs decission is that they did not take all the money he made illegally.

Campus Crusade for Cthulhu -- it found me!
[ Parent ]
demographics (3.00 / 1) (#17)
by radar bunny on Mon Feb 26, 2001 at 12:52:44 AM EST

Stupid people who responded to his spam posts and did not look into the financial information on these companies and subsequently lost their money are not a problem for me, for the government, or for you.

Agreed. But out of some kind of curriosity, I would love to see some demographics on exactly WHAT kind of people fell for this. You know, education, income, occupation, location. I mean, i wonder how many people who fell for this are actually pretty smart in other areas of human knoweldge. Well at any rate, it proves the saying "there's a sucker born every minute."

[ Parent ]
The SEC is unfair, and the kid is normal (4.60 / 20) (#5)
by fuzzrock on Sun Feb 25, 2001 at 02:49:17 PM EST

First of all, anybody who's reading this and hasn't read the NYtimes article, go read it - it's well-written, and very interesting. The author makes a couple of points that are not in jrh's above summary. That's okay, this is MLP. But go read it.


I think the most insightful aspect of the article is how much it points out how totally artificial the market is, even without people like Lebed. The SEC didn't go after him because he was 'artifically' manipulating the market, they went after him because his mere existence makes it obvious that the market as a whole rests on nothingness.

It seems clear to me that Lebed didn't really do anything that I could view as morally wrong. All he did was post messages on Yahoo! discussion forums. He didn't use priveleged information, in fact he apparently used the same information that professional analysts use to make predictions - he just used it for stocks that he happened to own. The people who were foolish enough to buy stock on the word of a random stranger were the only people who suffered at all. And as one of them, one of Lebed's friends, said, "In the stock market, you go in knowing you can lose." The internet is just like any other gambling - you shouldn't risk any money you can't afford to lose.

yep (4.20 / 5) (#7)
by xriso on Sun Feb 25, 2001 at 03:36:51 PM EST

As my dad (who works in a bank) says, the stock market goes wherever people think it will go. If you have mass superstition about certain situations in a stock, the same thing will happen every time with every stock that encounters that situation. The effect is that the superstition is reinforced.

One of the more interesting things I've seen is Superforce, which predicts Ion ratios in the air in order to predict stock markets. Basically, it uses the science behind the "full-moon effect". In the testimonials section, I think, somebody was saying that they could use the predictions to see when their migraines would get bad. Right now, we're on a slow decrease from yesterday, meaning that people will get calmer, until Wednesday, at least.
*** Quits: xriso:#kuro5hin (Forever)
[ Parent ]

Don't follow you (2.80 / 5) (#12)
by bjrubble on Sun Feb 25, 2001 at 05:20:02 PM EST

Yes, the stock market is entirely artificial. If this is really an insight, I'd politely suggest you've been listening too much to CNBC and not enough to every other media outlet in existence, all of whom have waxed long and hard about fickle investors, the impact of perception and hype on the market, and the underlying worthlessness of most of the high-flying stocks.

Money itself is artificial. A dollar is just a promise; even if we were to return to the gold standard the whole system would still be predicated on the value of gold, which is hugely inflated next to its intrinsic usefulness.

And there's nothing more artificial than software. A bunch of bits, with no meaning at all except the informational manipulations they represent. Should we abandon standards and practices because there's nothing "real" there?

What this guy did is fraud. He made up stuff in order to convince people to funnel money to him. If a business owner posed as a stock analyst and hyped his company he'd (hopefully) get arrested, as would a stock analyst who bought and sold stock coincident with making public recommendations on it. Yes, his victims were foolish to listen to him, but this is true of most scam victims. That doesn't excuse the scam.

[ Parent ]
artificiality (4.50 / 2) (#15)
by fuzzrock on Sun Feb 25, 2001 at 08:29:02 PM EST

One of the points the original article made really well, and that I paid too little attention to, is that 'artificial' is an incredibly vague word. What I meant by it and what you saw were not the same. What I meant was an overall indictment of the stock market system - there was no way anything he could have done would NOT have been 'artificial', because the whole system has lost whatever relevance to reality it ever had.

So what was fraud? The guy basically said that the stocks were undervalued, and apparently he believed it, and even had some evidence for it. If you believe what he says, (and I do) he would go and look for companies that fit a certain profile. Within that profile was being undervalued.

As for this:

If a business owner posed as a stock analyst and hyped his company he'd (hopefully) get arrested, as would a stock analyst who bought and sold stock coincident with making public recommendations on it.
... while true, that's not telling the whole story. Analysts get paid big bucks to make shit up. They don't neccasarily own the stock they make shit up about, but the money comes from those same companies. Explain to me how that's morally different?

[ Parent ]
It's if they make stuff up (5.00 / 1) (#18)
by bjrubble on Mon Feb 26, 2001 at 03:05:11 AM EST

Analysts have very strict rules about what they cite. An analyst who makes stuff up is going to get dropped like a rock. They can give their opinion, and they may give it with more or less invective and passion, but they can't cite figures and statistics that are false.

Now, if this guy really didn't make anything up, I'm much more skeptical of the SEC's actions. But everything I've heard about this case implies that he did in fact make up data to sell his point.

In any case, I think the SEC is going to have to rethink its regulations in light of the decentralized nature of modern investment analysis. The stock market can't be left to sort itself out -- there's just too much money involved, and you can bet this incident will embolden more sophisticated operators with bigger designs. But markets require transparency, and if there's not some way to enable disclosure alongside financial advice I think there's going to be trouble down the road.

[ Parent ]
Question (3.16 / 6) (#8)
by logiceight on Sun Feb 25, 2001 at 04:09:39 PM EST

Are stock market analyis allowed to own stock?

Oh yes... (4.00 / 4) (#10)
by Phage on Sun Feb 25, 2001 at 04:41:06 PM EST

See this story. This analyst/broker is a prime example of how to make money at the expense of the public.

I don't find Heathens to be sexy, as a general rule.
[ Parent ]

My thoughts on this (4.60 / 10) (#9)
by fluffy grue on Sun Feb 25, 2001 at 04:14:01 PM EST

Two things...

First of all, I make my thoughts on stupid investors and stock advisors clear on my stocks page.

Secondly, DNKY is severely undervalued at only $0.45/share, and I think it can really take off.

"Is not a quine" is not a quine.
I have a master's degree in science!

[ Hug Your Trikuare ]

guilty, kill the parents (3.14 / 7) (#11)
by bakednotfried on Sun Feb 25, 2001 at 05:11:05 PM EST

As usual, it all comes down to intent for me. It appears to me that Jonathan Lebed posted his emails to inflate the stocks prices so he could make money. Apparently, this is against the law. I guess he broke the law. The fact that people do this every day on CNBC and Shop at Home doesn't seem to matter.

To me however, this is not the point. This kids parents need to be slapped!

Lets see, his dads response to the situation, was "to mutter something about how he wasn't the person who brought the computer into the house and so it wasn't his responsibility to deal with this little nuisance".

And his mother. She's still crying "My problem with the S.E.C., was that they never called. One day we get this package from Federal Express with the whatdyacallit, the subpoenas inside. If only they had called me first."

What?! They called you into an 8 hour conference 2 years before! Hello?!

sorry, i seem to have been tweaked a little here.


have a day,

-- once in a while you get shown the light in the strangest of places if you look at it right

Nuke the Little Bastard (3.00 / 7) (#13)
by Bad Harmony on Sun Feb 25, 2001 at 05:47:39 PM EST

I have no sympathy for Jonathan Lebed. He isn't stupid, and I can't believe that he didn't know exactly what he was doing. The fact that he is 15 isn't an excuse.

Some people are saying that he just took advantage of the greedy and/or stupid. That may be true, but it is irrelevant. Fraud and stock market manipulation are still crimes, even if the victims are not as smart as you are.

White collar crimes are not "victimless crimes", and it isn't "only money". For most people, it takes substantial time and energy to earn the money that they invest. When you steal their money, you have also stolen a piece of their life.

5440' or Fight!

the smoking gun (4.33 / 3) (#20)
by streetlawyer on Mon Feb 26, 2001 at 05:44:14 AM EST

The phrase which makes a mockery of Lewis' article is the following:

I am hearing that a number of HUGE deals are being worked on.

Either he had information about deals, or he didn't. If he did, that's insider dealing, and he's committed an offence. If he didn't it's fraud. There is no possible innocent explanation for having posted that sentence, and it's very difficult to trade stocks without knowing that fact. It's not a case of a kid just happenining to be really good at picking stocks; this is a story of a pump-and-dump artist.

Just because things have been nonergodic so far, doesn't mean that they'll be nonergodic forever

Age of owning equities... (3.66 / 3) (#21)
by Mr Tom on Mon Feb 26, 2001 at 09:58:16 AM EST

Can you actually own equity at age 15? (In the UK I think you need to be at least 18) And if not, how would he go about actually profiting from this? I mean, I don't think you can even have derivatives.....


Yes, what he did was wrong. But I'm surprised that it ever came to court. I mean, would /you/ be happy standing in front of a judge and the media and saying "Yes, your honour, I make all my stock market moves based on what I read from Yahoo message boards. Without checking the sources."


I doubt any of the big IBs would give this kid a job in 5 years, but he's got the whole PT Barnum thing, and I respect him for that.

-- Mr_Tom<at>gmx.co.uk

I am a consultant. My job is to make your job redundant.

Immaterial (5.00 / 1) (#23)
by pig bodine on Mon Feb 26, 2001 at 06:00:19 PM EST

The trading accounts were opened in his parent's names, so he didn't own any stock himself. As for making money, he did it the same way every other day trader does: buying low and selling high. Finally, nobody is actually required to state in court that they were lead astray by his false reports, as the charges were filed by the SEC, not other investors. Also, he was never taken to court. Did you read the article?

[ Parent ]
This is share 'pushing' (3.00 / 1) (#25)
by hughk on Tue Feb 27, 2001 at 03:39:48 AM EST

When an analyst/fund manager/CEO appears on a business program we know who they are and where their claims are coming from. They are also regulated by the SEC so a CEO can not claim that a deal is about to be made unless he can substantiate it (even if it falls through).

Rumour sprending on the markets is a game that is about 300 or so years old. In person, the guys spreading the rumours had to be fast of foot - in case they get throttled when the predictions went wrong.

More recently we have people like the SEC to control the excesses. In these days of the Internet, it is more difficult to nail the guy making a prediction, because of identities.

If you pretend to be someone else for the purposes of making money - this is very illegal and it is no longer even an SEC matter, it is fraud.

there should be statues of this kid. (3.33 / 3) (#26)
by sayke on Tue Feb 27, 2001 at 06:29:58 AM EST

by highlighting the artificiality and absurdity of the entire stock market, he performed a very valuable service. what, credibility a commodity? what, critical thinking can save you money? what was that - people can lose money gambling? no way... who woulda thought. heh.

and now for my impression of the SEC twonks: "what this kid was doing isn't right, because, uhh, he's a kid, and not wearing a suit, and only grown-ups with suits should have that kind of influence! nobody should trust people who aren't officially santioned, let alone non-sanctioned people without suits! people should trust us! thats what we have suits for; so you know who to trust...! how dare that kid state his opinions in a public forum and have people agree with him! hell, next thing you know, people will be walking around stating their opinions right and left, and other people will be believing them, and then some of the poor, misguided, wayward lambs will start saying they don't need us! us, mind you! the experts! heresy! what would the rabble do without us, their financial priest-class, mediating their interactions with their god? what would they do without our advice? if it wasn't for us, uhh, errr, the world would be a horrible place! yes! hell in a handbasket! barefoot commies would be smoking joints on their front porches, and stuff! it would be chaos, i tell you! anarchy!"

etc... heh. cliche o' the month: "deeply entrenched authority figures find their positions of power undermined. news at 11." isn't it a beautiful time to be alive? =)

sayke, v2.3.1 /* i am the middle finger of the invisible hand */

Heh (none / 0) (#28)
by leviathan on Wed Feb 28, 2001 at 10:37:29 AM EST

Basically, you're saying 'this kid is to stock markets what trolls are to slashdot'.

I wish everyone was peaceful. Then I could take over the planet with a butter knife.
- Dogbert
[ Parent ]
Blind (none / 0) (#27)
by blues5150 on Tue Feb 27, 2001 at 02:54:55 PM EST

The blind lead the blind and the rest just follow.

They that can give up liberty to obtain a little temporary safety deserve neither liberty nor safety. Benjamin Franklin

What constitutes illegal manipulation of the market? | 28 comments (28 topical, 0 editorial, 0 hidden)
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