SEC Settles Case Against Teen Accused of Internet Fraud

Sept. 21, 2000 -- He was a teen reportedly obsessed by Wall Street, waking up early to make dozens of trades before heading to high school. And according to federal agents, that obsession led him to a quarter-million-dollar take in an illegal Internet stock fraud scheme.

The Securities Exchange Commission said Wednesday it has settled its case against northern New Jersey 15-year-old Jonathan Lebed, who the agency said had bought large blocks of cheap penny stocks, then hyped them on financial message boards using phony names. As prices rose he would dump the stock — within 24 hours — and collect his profits.

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 spike while he was in school the next day.

An ‘Extraordinary, Intelligent Person’

Lebed’ lawyer, Kevin H. Marino, interviewed on ABC’s Good Morning America, described him as an “extraordinary, intelligent person” who has done “phenomenally well as an investor.”

Added Marino: “He certainly agreed he will not engage in improper activity. But I think you can expect to see Jonathan Lebed in lots of entrepreneurial activities.”

As part of the settlement, Lebed has agreed to return the money he made, including interest, which totals $285,000, according to the SEC. The agency had brought civil fraud charges against Lebed for 11 alleged manipulations, involving nine stocks, which took place from Aug. 23, 1999, to Feb. 4, 2000.

Lebed neither admitted nor denied the commission’s findings, but agreed to refrain from similar behavior. SEC officials said it is the first time the agency has brought charges against a minor.

SEC: Internet Stock Tips Risky

Regulators said the case demonstrates the risks of Internet stock tips. Ron Long, administrator of the SEC’s Philadelphia office, which handled the case, told Good Morning America that investors have to be careful.

“The statements were benign. Not a lot of substance behind them. But they were put in hundreds of chat rooms under different postings. He would change his screen names to put new postings up. One problem that we have in this area is that investors are highly susceptible to this type of manipulation,” Long said.

He encouraged investors to be “highly skeptical” of any advice they receive from the Internet.

“People should do thorough research before making investment decisions and verify all information before acting on it,” Long said Wednesday.

Mike Dunn, a spokesman for New Jersey-based Datek Online Holdings, a leading online brokerage firm, called the case an isolated incident. “These are not the kind of things that are widespread,” Dunn said.

While Datek does not offer its customers trading advice, Dunn said consumers in general can protect themselves against stock scams by doing their homework and becoming educated investors. That includes trying to determine the source of any information online, a task that can be tricky because anyone — possibly with any motive — can access a bulletin board and pan or tout a stock.

Some Traders Hurt by Fraud

The SEC could not comment on how it learned of Lebed’s trading. Marino said the case began after the SEC identified trades “it felt were problematic.”

Lebed traded in custodial accounts at two brokers that were in his father’s name, the SEC said. The stocks involved, traded over the counter or on the Nasdaq Stock Market, were: Manchester Equipment Co. Inc., Just Toys Inc., Yes Entertainment Inc., Fotoball USA Inc., Man Sang Holdings Inc., West Coast Entertainment Inc., Havana Republic Inc., Classica Group Inc., and Firetector Inc., according to SEC documents.

“We’ve not alleged any harm against these companies. But anyone who was in the market and paying attention to these messages was hurt if they bought in too late or sold too late,” Thompson said.

No aggrieved investors have contacted the SEC, and no decision has been made on whether they should be compensated, Thompson said.

The SEC found that after Lebed bought a stock he sent hundreds of identical, false e-mail messages, each under a fictitious name, touting the stock he had just purchased.

One claimed that a company trading at $2 per share would be trading at more than $20 per share “very soon.” Other postings claimed that a stock would be the “next stock to gain 1,000 percent” and was “the most undervalued stock ever.”

Lebed’s profits on each trade ranged from more than $11,000 to nearly $74,000, ultimately totaling $272,826. The $285,000 settlement reflects prejudgment interest of $12,174.

ABCNEWS Radio, ABCNEWS’s Heesun Wee and The Associated Press contributed to this report.