Pump And Dump

Youngest Person To Be Charged With Illegal Stock Dealing

Jonathan Lebed promised the Securities and Exchange Commission he wouldn't manipulate stock prices anymore but he tells Correspondent Steve Kroft that there's nothing wrong with it.

The 16-year-old, who, in addition to his promise, turned over $285,000 to the SEC to settle civil charges that he committed fraud in stock deals, speaks on 60 Minutes in his first interview to be aired Sunday, Oct. 22.

At 16 years of age, Jonathan Lebed isn't old enough to drink or vote. Yet federal authorities say he is smart enough to have engineered a sophisticated stock manipulation scheme that netted him hundreds of thousands of dollars in illegal profits. Last month, Lebed made headlines around the world as the youngest person - and the first minor - ever to be accused of securities fraud. Officials say his strategy was to buy a stock, hype it relentlessly on the Internet and then sell it when the price soars-- what the SEC calls "pump-and-dump."

Until last month, Lebed seemed to be a fairly typical high school junior in Cedar Grove, New Jersey. He's an avid fan of the New York Mets and professional wrestling, and if anything set him apart, it was his fascination with the stock market.

With his parents' permission, he has been playing the stock market from his bedroom computer since he was 13 years old. And as the pile of crumpled twenties on his dresser might indicate, doing quite well. "While some teenagers my age would be trading baseball cards, I see bigger potential in this," says Lebed.

For someone who has just turned 16, Lebed has a relatively long track record for picking stocks. Three years ago, he and a couple of classmates took fourth place in a nationwide contest sponsored by the financial network CNBC.

On paper, his team turned a hypothetical $10,000 into $240,000 - enough to convince his parents, Connie and Greg Lebed - he's a supervisor with Amtrak; she's an office temp - that it was time for their son to stop playing on paper and start playing for real. "I thought it was a very good thing for him to be doing," says Connie Lebed.

Shortly after opening his first on-line trading account, Lebed discovered the volatile penny stock market, where shares of small companies range from a few cents to a few dollars. "It was a lot more interesting than the larger companies," says Lebed, "and it's a lot more fun."

To minimize his risks, Lebed said he did his own research on stocks by scouring SEC filings, looking through press releases and by inspecting the companies first-hand.

But there was more to Lebed's strategy than just research. "Basically, find companies that are extremely undervalued, that would be worth a lot more, if everybody knew about it," says Lebed.

Lebed got the word out by sending hundreds of messages under a variety of names. His on-line recommendations, accompanied by legitimate financial data, were always quite bullishHe called one of his holdings "the most undervalued stock" in history. Another was going to be the "next stock to gain two thousand percent."

Lebed invested in a small company called Firetector. After buying a large block of shares at $2.45 a piece, he went into cyberspace and plastered messages predicting that the stock would be at "$20 very soon." And just as soon as other investors jumped in, Lebed cashed out, pocketing a profit of $19,000.

Unfortunately for Lebed, the SEC had been monitoring his trades since 1998 and earlier this year finally decided to accuse him of securities fraud.

Arthur Levitt is the chairman of the SEC. He says Lebed seems to have mastered an age-old wall street swindle called the "pump-and-dump." Says Levitt, "A pump-and-dump is really buy, lie and sell high."

But Lebed sees it differently. "Yes, (I manipulated stocks), but I wasn't doing anything wrong...I wasn't posting any kind of false information," says Lebed, who asserts the hundreds of recommendations he posted, sent out under many different names, were all based on his research.

Levitt doesn't buy it. "(Lebed) used fictitious names. He made predictions...without any foundation," says Levitt. "The purpose...was not to help investors...but rather to line his own pockets as soon as he hyped the price of the stock."

Lebed disagrees that the messages he sent out were nothing more than bogus chat room hype. He says his recommendations were always based on accurate information and sound financial analysis. His attorney, Kevin Marino, says the only things Lebed may be guilty of are not fully understanding the finer points of securities law - and perhaps a little over-enthusiasm.

"There was some manipulation (but); I don't think, as you look at his conduct, that you could draw a principled distinction between what he did and what is done every single day of the week on Wall Street," says Marino.

The distinction, according to the SEC, is that the Wall Street analysts Lebed watches on television are not supposed to profit personally from their own predictions. But even the highly regarded financial publication Barron's seemed to believe that Lebed "adapted standard brokerage house procedure and put out wildly bullish buy recommendations larded with fancy...what little Jon seemingly wasn't aware of was that only chartered financial analysts are legally entitled to engage in the practice."

Lebed took positions that were big even by Wall Street standards, once putting $200,000 on one stock, Manchester Equipment, and making a $50,000 profit. He was 15 at the time.

Rather than go to court over the allegations, Lebed negotiated a settlement with the SEC. He agreed to turn over $285,000 that he earned from 11 trades, without acknowledging that he did anything wrong. His lawyer called it a business decision, and given that Lebed made in the neighborhood of $800,00, it seems like a pretty good decision.

Lebed's parents are very proud of his work, but unhappy that the SEC took away some of his profit. "[The settlement payment] does not make me happy," says Greg Lebed. "He earned it. He did a lot of work. He didn't sit behind a garage smoking pot, or stealing wheels off a car." The family has a new $40,000 Mercedes SUV, thanks to Jonathan.

Jonathan has made peace with the SEC, but may still have to deal with federal prosecutors who could press criminal charges. He's still high on trading stocks, however. Asked if he would let the SEC action stand in his way, Jonathan replies, "Absolutely not."