http://www.kentlaw.edu/faculty/rwarner/classes/legalaspects_ukraine/securities/case_studies/ledbed.htm

  Case Study: What Happens When a Fifteen Year Old Pumps and Dumps,
   Obtaining a Net Profit of Nearly $800,000?  The SEC Settles for
                              $285,000.

                                   

Jonathan Lebed and two of his friends came in fourth place in a
stock-picking contest sponsored by CNBC when he was just twelve years
old.  They had managed to turn an imaginary $10,000 into $240,000
during the first round of the competition.  From there, Lebed was
able to convince his parents to invest money in the stock market on
his behalf.  His parents first opened an Ameritrade account for him,
and upon his mother's decision to close that account, his father
opened an E*Trade account for him.  During two years of trading,
Lebed made a minimum of 27 trades, and netted nearly $800,000.  The
SEC later investigated these 27 trades and eventually declared eleven
of them as illegal trades and forced to Lebed to pay approximately
$272,000 in fines and over $12,000 in interest.  In particular, these
eleven trades occurred during the five and a half month period
between August 23, 1999, and February 4, 2000.  While Lebed never
admitted or denied the findings by the SEC, he consented to entry of
the findings and the imposition of sanctions.[1]

The SEC findings asserted that Lebed would purchase large blocks of
thinly traded microcap stocks, post between 200 and 300 messages on
the Yahoo! Finance message boards, hyping the stocks he had just
purchased, and then sell all of the stocks he had purchased, usually
within twenty-four hours of said purchase.  The messages that Lebed
posted would predict marked increases in the stocks value, i.e. he
would post comments that this stock would be the "next stock to gain
1,000%" or that a stock currently trading at just over a dollar would
be trading at more than $20 per share "very soon."  In response to
Lebed's messages, trading volume of these stocks would soar on
average from 60,000 shares per day to over a million shares on the
days he posted his messages.   For the eleven trades that the SEC
declared its findings, Lebed realized a net profit of $272,826.  The
individual gross profits ranged from over $11,000 per trade to nearly
$74,000.  Lebed professes that he did nothing wrong - he did nothing
different from Wall Street analysts.  He states that he learned how
people react to the stock market and acted on that knowledge.  
According to Lebed's friends, even Lebed's teachers would follow his
advice regarding the stock market.  While one of Lebed's friends lost
a significant amount of money on one of the trades Lebed pushed, he
states "[i]n 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."[2]

Depending on who you talk to, Lebed was either viewed as a person who
knowingly abused the system and broke the law, or someone who acted
no differently than Wall Street analysts acted and was able to use
the system to his advantage, actually performing no wrong-doing.  
Lebed's own father stated on 60 Minutes that he was proud of his son
and that he hadn't done anything wrong.  This belief can also be
evinced by the fact that after Lebed's first meeting with the SEC,
while his mother closed the Ameritrade account, Lebed's father opened
an E*Trade account so that Lebed could continue to trade stocks.  The
SEC, however, stated that Lebed violated Section 17(a) of the
Securities Act and Section 10(b) and Rule 10b-5 of the Exchange Act. 
These Acts "prohibit acts, transactions, practices or course of
business that operate as a fraud or deceit in connection with the
offer, purchase or sale of securities, including misrepresentation
and omissions of material fact."[3]  The SEC therefore ordered Lebed
pay his fine and to "cease and desist" from causing any further
violation of Section 17(a).

Even the news articles that covered Lebed's actions appear split on
whether he had done anything wrong.  While an article written by
Peter Carbonara for Money Magazine[4] appears to favor the SEC
decision (albeit wondering why the SEC let Lebed keep the remaining
$500,000 of profit), Michael Lewis, writing for New York Times
Magazine,[5] acknowledges that there were victims who suffered from
Lebed's actions, yet asserts that the SEC only settled because they
believed they would not be able to win in court, and that its
evidence was not as strong as it had alleged.


----------------------

[1] In Re: Lebed, No. 3-10291, 2000 SEC LEXIS 1964, at *1 (Sept. 20,
2000).

[2] Michael Lewis, He Wanted to Get Rich.  He Wanted to Tune Out his
School-Kid Life.  And Neither His Parents Nor the S.E.C. was in a
Position to Stop Him: Jonathan Lebed's Extracurricular Activities,
New York Times Magazine, February 25, 2001.

[3] Id. at *6.

[4] March 2001, available at http://www62.homepage.villanova.edu/
john.matthews/conkid.html

[5] February 25, 2001, available at http://
www62.homepage.villanova.edu/john.matthews/conkid.html