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A 15 year-old boy from New Jersey who used the Internet to manipulate stock profits has agreed to pay back his ill-gotten gains of $285,000 (US$), the U.S. Securities and Exchange Commission (SEC) announced Wednesday. The Commission said it had never before brought charges against a minor.
Classifying the case as a "large pump and dump scheme," Ronald Long, District Administrator at the SEC's Philadelphia District Office, told the E-Commerce Times that "individuals who rely on financial information from chat rooms and message boards do so at their absolute peril. They are almost guaranteeing themselves a financial loss."
Parents Opened Account
According to Long, Jonathan Lebed used a custodial brokerage account established for him by his parents that -- because of the way it was set up -- allowed the teen to make his own trading decisions.
Lebed's parents did receive a brokerage statement showing that their son was trading and making money, but the SEC had no evidence that they knew their son was committing securities fraud, according to Long.
Long pointed out that while this is the first time they have seen a child so young involved in securities fraud, this case points out the dangers of giving "kids unfettered access to the Internet."
The Power of Spam
The SEC found that on 11 separate occasions between August 23, 1999 and February 4, 2000, Lebed, who was 14 at the time, purchased large blocks of thinly-traded microcap stock through his brokerage account. Within hours of making each purchase, Lebed sent out hundreds of false and misleading messages touting the stock he had just purchased.
In addition to spam, the teen also posted messages on various Yahoo! Finance message boards.
Lebed's messages and posts, made using multiple fictitious names, included baseless price predictions and other false and misleading statements. For instance, one of his messages claimed that a company trading at $2 per share would be trading at more than $20 per share "very soon." He promoted one stock as the "most undervalued stock ever" and predicted another would be the "next stock to gain 1,000 percent."
Record Highs
After his fictitious postings caused the price to skyrocket, Lebed dumped all of his shares of the stock -- usually within 24 hours -- and profited from the increase in price his messages had caused. In some instances, Lebed placed a sell limit order before the market closed on the day he purchased the stock to ensure that he would not miss the price increase of the stock while he was in school the next day.
The SEC said that on the day he sold his shares and realized his profit, the trading volume in the stock either reached record or near-record highs. In some instances Lebed's postings caused stock prices to reach 52-week highs for both volume and price.
Lebed's profits on each trade ranged from $11,000 to nearly $74,000. The stocks he purchased were in a variety of sectors, including the entertainment and toy industries.
Never Again
The order Lebed signed does not require him to admit or deny the Commission's findings, but does require that he refrain from similar behavior in the future. Lebed's youthful transgressions could also come back to haunt him if he decides to pursue a career in the securities market. Long said that good brokerage firms usually search the SEC's public records before making hiring decisions.
The settlement of $285,000 includes his illegal profits of $272,826 and $12,174 of prejudgment interest.
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