Amazon Price: $14.37
ne day some social historian will look back with wonder on the havoc wreaked by the Internet. The events on Wall Street alone will offer him material for an entire chapter. Buried in the footnotes to that chapter will be the wry little anecdote about the first child to manipulate the stock market. The two great forces that propel mankind forward - anecdote and accident - are not historically respectable, so that's all this story will get: a footnote. It deserves much more than that.
On September 21, 2000, the U.S. Securities and Exchange Commission settled its case against Jonathan Lebed. The SEC's press release explained that fifteen-year-old Jonathan-the first minor ever charged with stock market fraud-had used the Internet to promote stocks from his bedroom in Cedar Grove, New Jersey. Armed only with accounts at AOL and E-Trade, the kid had bought stock, then, using "multiple fictitious names," posted hundreds of messages on Yahoo Finance message boards recommending that stock to others. He'd done this eleven times between September 1999 and February 2000, the SEC said, each time triggering chaos in the stock market. In advance of the chaos he'd left sell orders in the marketplace, in case his shares rose in price. Each time they did. The average daily trading volume of the small companies he dealt in was about 60,000 shares; on the days he posted his messages volume soared to more than a million shares. More to the point, he'd made money. Between September 1999 and February 2000 his smallest one-day gain was $12,000. His biggest was $74,000. Now the kid had agreed to hand over his illicit gains, plus interest, which came to $285,000.
When I first read the newspaper reports I didn't understand them. It wasn't just that I didn't understand what the kid had done wrong. I didn't even understand what he had done. And if the first news stories about Jonathan Lebed raised questions-What did it mean to use a "fictitious name" on the Internet, where every name is fictitious? Who were these people who traded stocks naively based on what they read on the Internet?-they were trivial next to the questions raised a few days later, when a reporter asked Jonathan Lebed's lawyer if the SEC had taken all of the profits. They hadn't. There had been many more than the eleven trades described in the SEC's press release, the lawyer said. The kid's take from six months of trading had been nearly $800,000. Initially the SEC had demanded he give it all up, then backed off when the kid put up a fight. As a result, Jonathan Lebed was still sitting on half a million dollars, which he'd made in less than six months of trading.
At length, I phoned the Philadelphia office of the SEC, where I reached one of the investigators who had brought Jonathan Lebed to book. I was maybe the fiftieth journalist he'd spoken with that day, and apparently a lot of the others had had trouble grphping the finer points of securities law. At any rate, by the time I asked him to explain to me what, exactly, was wrong with broadcasting one's private opinion of a stock on the Internet, he was in no mood.
"Tell me about the kid," I said.
"He's a little jerk."
"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."
On one of those gray winter mornings that make New Jersey seem even more unfairly like New Jersey, I landed at Newark Airport, where I was met by a lawyer named Kevin Marino. Marino was on his way out the door of his Newark office on April 5, 2000, when Jonathan Lebed walked in with his father. Marino had agreed to see the Lebeds as a favor to a mutual friend, but he didn't have much interest in their bizarre case, or in any case. He'd been working too hard and hadn't seen enough of his wife and two sons and so had decided to take a long vacation out West. But before he did that, to placate his old friend, he spent an hour with Jonathan and Greg Lebed of Cedar Grove, New Jersey.
In that hour a couple of things became clear. The first was that Greg Lebed, though outraged that the government was demanding that his son hand over $800,000, still didn't fully understand what his son had done to accumulate it. The other was that Jonathan Lebed, who didn't appear to much care what became of his money, knew more than he was saying. "Greg didn't understand what Jonathan was up to and Jonathan wasn't saying what Jonathan was up to," says Marino. "I had a sense he wasn't buying what anyone was telling him, but he wouldn't say anything. So I ask him: 'What's it like to be dragged in and cross-examined by the government? What were they like?' And he made this face like he didn't want to say that they didn't have a clue, but that's what he's thinking. So I asked him: 'What did you think of their questions?' And he thinks about that for a minute and then says, deadpan, 'Some of them were good.'"
Fifteen years of defending people accused of white-collar crimes had left Marino essentially incapable of being shocked by human behavior. But when he comes to speak of the case at hand-how Jonathan Lebed came to be a poster boy for Internet stock fraud-his voice admits wonder. "I had a very clear sense right away that there was something dramatic and unusual about him. For a kid his age he had huge nerve."
Cedar Grove, New Jersey, was one of those Essex County suburbs defined by the fact that it was not Newark. The real estate prices appeared to rise with the hills. The houses at the bottom of each hill were barely middle class; the houses at the top might fairly be described as opulent; but in some strange way they were all the same house. Even million-dollar homes built on streets with names like Tiffany Court were less upper-class mansions than some middle-class person's idea of upper-class mansions. Indistinguishable from the homes on either side of them-same manicured lawn, same grandiose entryway, same more-crystal-than-crystal chandeliers-they were, in essence, giant tract houses. In Cedar Grove rich just means having more of exactly what you had when you weren't rich.
About a third of the way up the first hill, Marino stopped and turned left. For most of the ride down from Newark he'd been describing his seriocomic negotiations with the SEC, which had ended with a phone call from an SEC lawyer who said he was "surprised and disappointed" that the media had discovered the $550,000 Jonathan Lebed had kept. Marino had just wanted to keep as much money as possible for his client; the SEC was more concerned with maintaining the illusion that crime didn't pay. When news broke that the kid was still sitting on more than half a million dollars, the illusion broke with it. Now Marino slowed the car and said, "You are about to see the Sticking Point." Before I had time to ask what he meant we had turned into a driveway and I was able to see what he meant: parked in front of a distinctly modest home, hood ornament out, was a bright green Mercedes SUV. Just before the SEC called him, Jonathan Lebed had taken $41,000 of his profits and bought a car. He was still too young to drive the car himself but he enjoyed being driven around in it. "That was the sticking point in my negotiations with our government," says Marino. "The SEC couldn't get past the Mercedes. It still ticks them off."
The first person to the door that day was Greg Lebed. Jonathan's father cut a figure. Black hair sprouted in many directions from the top of his head and joined together deep in the middle of his back. The "Ape Drape." The curl of his lip seemed designed to shout abuse from a bleacher seat. Dress him up as an Eskimo and drop him into the Arctic Circle and he'd remain, unmistakably, Essex County. Anyway, that was the first impression he made, of a man perfectly untamed, a creature at home only in the New Jersey wild. He'd furthered this impression in his brief encounters with the mass media. As he'd tossed fifty or so journalists off his front lawn, he'd declared, "I'm proud of my son." That hit the newspapers and elicited no end of moral indignation from the SEC. Poked and prodded about the comment by an interviewer from 60 Minutes, he'd gone on to say, "It's not like he was out stealin' the hubcaps off cars or peddlin' drugs to the neighbors."
But when he wasn't busy being outraged or indignant, Greg was unfailingly polite, almost meek. He apologized to me for taking so long to answer the door. He was down in his basement, he said, fiddling with his trains. That's mainly what he did when he was home: played with his model train set in the basement. You'd be upstairs fixing a cup of tea, enjoying the tranquillity of Cedar Grove, when Greg would take his vintage B&O Railroad engine out for a spin around the basement tracks and all of a sudden there was a shriek and a whistle that made the house feel like it was built on top of Penn Station. But I didn't learn that until later. On that winter afternoon Greg led us to the family dining room and, without the slightest help from me, worked himself into a fury. "Youse want to see something!" he hollered. "Let me just shows youse something!" He pulled out a photocopy of the front page of the New York Daily News. One side displayed a snapshot of Bill and Hillary Clinton beside the headline "Clintons Cleared: insufficient evidence on Whitewater says report"; the other side had a picture of Jonathan Lebed beside the headline "Teen Stock Whiz Nailed." Over it all, in Greg's furious hand, was scrawled: "U.S. Justice at Work."
"Look at that!" Greg shouted. "This is what goes on in this country!" Then, as suddenly as he'd erupted, he went dormant. "Don't bother with me," he said, "I get upset." He offered seats at his dining room table. From that moment his anger ceased to be frightening, and became something else.
Connie Lebed now entered. Jonathan's mother had a look on her face that as much as said, "I assume Greg has already started yelling about something. Don't mind him, I certainly don't." When her husband yelled, she was as good as deaf.
"It was that goddamn computer what was the problem," said Greg, testily.
"My problem with the SEC," said Connie, ignoring her husband, "was that they never called. One day we get this package from Federal Express with the whaddyacallit, the subpoenas inside. . . . If only they had called me first." She would say this six times before the end of the day, with one of those marvelous northern New Jersey harmonica-like wails that conveys a sense of grievance maybe better than any noise on the planet. If only theyda caaaawwwwlled me.
"The wife brought that goddamn computer into this house in the first place," Greg said, hurling a thumb at Connie. "Ever since that computer came into the house this family was ruined."
Connie absorbed the full frontal attack with an uncomprehending blink, and then, as if her husband had never spoken, said to me, "My husband has a lot of anger. He gets worked up easily. He's already had one heart attack." She neither expected nor received the faintest reply from him. They obeyed the conventions of the stage: whenever one of them stepped forward into the spotlight to narrate, the other receded, and froze like a statue. The US government had made a point of asking Greg how he got on with what he invariably called "the wife," so I didn't need to.
SEC:How would you describe your relationship with your wife, just generally?
GREG: So, so. There have been a lot of problems lately, such as this.
SEC: I mean do you communicate and talk?
GREG: Oh, yes, yes.
SEC: You discuss things?
SEC: But this whole thing that we are investigating has created some tensions?
SEC: Anything abnormal?
GREG: Just a lousy period. In other words, it ain't a happy thing, you know.
SEC: Well, who was angry about it, you or her or both?
GREG: Well, it upset me.
GREG: And, of course, it upset her.
SEC: Did you have any sit-downs with Jonathan, the three of you?
SEC: Prior to [your] contact with the SEC, was your relationship with your wife better?
SEC: And you communicated more?
Ten minutes into that first conversation at the Lebed dining room table Jonathan slouched in. But even that verb does not capture the mixture of sullenness and truculence with which he entered the room. He was long and thin and dressed in the prison costume of the American suburban teenager-pants too big, sneakers gaping, a pirate hoop dangling from one ear. He looked away when he shook my hand, and said "Nice to meet you" in a way that made it clear he couldn't be less pleased, then sat down and said nothing while his parents returned to their split-screen narration. At a glance, it was impossible to link Jonathan in the flesh to Jonathan on the Web. I had a fat file of the collected Internet postings of Jonathan Lebed and they were marvelously bombastic. For instance, just two days before the FedEx package arrived on the Lebeds' front doorstep bearing the SEC's subpoenas, Jonathan had logged onto the Internet and posted
two hundred separate times the following plug for a company called Firetector (ticker symbol FTEC):
DATE: 2/03/00 3:43pm Pacific Standard Time
FTEC is starting to break out! Next week, this thing will EXPLODE . . .
Currently FTEC is trading for just $21/2. I am expecting to see FTEC at $20 VERYSOON . ..
Let me explain why . . .
Revenues for the year should very conservatively be around $20 million. The average company in the industry trades with a price/sales ratio of 3.45. With 1.57 million shares outstanding, this will value FTEC at . . . $44. It is very possible that FTEC will see $44, but since I would like to remain very conservative . . . my short term price target on FTEC is still $20! 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!!! This is the #1 INDUSTRY you can POSSIBLY be in RIGHT NOW. There are thousands of schools nationwide who need FTEC to install security systems . . . You can't find a better positioned company than
FTEC! These prices are GROUND-FLOOR! My prediction is that this will be the #1 performing stock on the NASDAQ in 2000. I am loading up with all of the shares of FTEC I possibly can before it makes a run to $20. Be sure to take the time to do your research on FTEC! You will probably never come across an opportunity this HUGE ever again in your entire life.
The author of that and dozens more like it now sat dully at the end of the family's dining room table and watched his parents take potshots at each other and their government. There was not an exclamation point in him. Clearly just trying to get his client interested in the conversation for the benefit of an outside observer, his lawyer, who had been watching in silence what was to him a familiar scene, recalled the day the SEC handed over Jonathan's name and address to the press. He called to tell the Lebeds that they should stay inside and not have anything to do with
journalists, and certainly not answer any questions. On cue, journalists from just about every place on the planet overran the Lebeds' front yard. News trucks. Fat guys with huge cameras. Screeching women in sneakers. Connie called Greg and told him she wanted to move away from Cedar Grove, to a place where no one knew them. Their eleven-year-old daughter, Dana, burst into tears and ran out the back door with the promise that she was going to live the rest of her life at a friend's house. Greg hollered expletives into the phone and hopped on a high-speed train to Triple Bypass. Jonathan was the only one who remained calm. While Connie spoke to the family lawyer-whose card was now glued to the wall over the phone-Jonathan walked out the front door and presented himself to the mob.
"Jonathan," Connie wailed. "Kevin said not to go out there. Wheyougoin'?"
"What's going on there?" Marino shouted.
"Jonathan's outside holding a press conference!!!"
That's just what he had done. He had strolled out the front door and told the reporters that he would talk to them on condition that they mention the name of his new web site in their newspapers.
Connie now said, "I'm inside yellin', 'JON-A-THAN! Come in! Come in! Kevin says come in!' And he's not comin' in. So I take the phone out to the front and make him talk to Kevin. Kevin yelled at him to get in the house."
"It was so fun that day," Jonathan said, then ducked back inside his shell.
It took another twenty minutes for their attorney to drag the family together into the general discussion of Jonathan Lebed's life and works, and another few weeks of me pestering them to get a general answer to the question: How on earth did Jonathan Lebed happen? The story finally came out in full over dinner one night. In its short version, it ran roughly as follows:
Not long after his eleventh birthday, Jonathan opened an account with America Online. He went onto the Internet, at least at first, to meet other pro wrestling fans. He built a web site dedicated to the greater glory of "Stone Cold" Steve Austin. But at about the same time, by watching his father, he became interested in the stock market. In his thirty-three years working for Amtrak, Greg Lebed had worked his way up from a simple laborer to middle manager. Along the way he'd accumulated maybe twelve thousand dollars of blue-chip stocks. Like half of America, he'd come to watch the market's daily upward leaps and jerks with keen interest.
Jonathan saved him the trouble. When he'd come home from school, he'd turn on CNBC and watch the stock market ticker stream across the bottom of the screen, searching it for the symbols inside his father's portfolio.
"Jonathan would sit there for hours staring at them," said Connie, as if Jonathan were miles away.
"I just liked to watch the numbers go across the screen," Jonathan said.
"I don't know," he said. "I just wondered, like, what they meant."
At first the numbers meant a chance to talk to his father. He'd call whenever he saw one of his father's stocks cross the bottom of the television screen. This went on for about six months before Jonathan declared his own interest in owning stocks. On September 29, 1996, Jonathan's twelfth birthday, a savings bond his parents had given him at birth came due. He took the $8,000 and persuaded his father to invest it on his behalf in the stock market. The first stock he bought was America Online, at $25 a share-in spite of a lot of adverse commentary about the company on CNBC. "He said that it was a stupid company and that it would go to 2 cents," Jonathan said, pointing at his father, who obeyed what I came to understand as the family rule, and sat frozen at the back of some mental stage. AOL rose five points in a couple of weeks, and Jonathan sold it. From this he learned (a) you could make money quickly in the stock market, (b) his dad didn't know what he was talking about, and (c) it paid him to exercise his own judgment on these matters. All three lessons were reinforced dramatically by what happened next.
What happened next was that CNBC-which Jonathan now rose at five each morning to watch-announced its stock-picking contest for children. Jonathan had wanted to join the contest on his own but was told that he needed to be on a team, so he went and asked two friends to join him. Several thousand student teams from schools across the country, each consisting of at least three children, set out to speculate their way to victory. Each afternoon CNBC announced the top five teams of the day. To get your name read out loud on television you obviously opted for highly volatile stocks that stood a chance of doing well in the short term. Jonathan's team-which dubbed itself "the Triple Threat"-had a portfolio that rose 51 per cent the first day, which put them in second place. They remained in the top three for the next three months, until, in the last two weeks of the contest, they collapsed. "The problem was that in the last two weeks I listened to my teammates," said Jonathan. "I did it all until the end and then I let them talk me into buying Netscape and Western Union. So we finished fourth."
Even a fourth-place finish was good enough to fetch a camera crew from CNBC, which came and filmed the team in Cedar Grove. The Triple Threat was featured in the Verona-Cedar Grove Times and celebrated on television by the Cedar Grove Township Council. "From then everyone at work started asking me if Jonathan had any stock tips for them," said Greg. "They still ask me," said Connie. From that time also dated Jonathan's most distinctive attribute: his attache case. In it he kept reams of stock market research; and he never went to school without it. Everywhere Jonathan went he found grown-ups asking for advice about the markets. A couple of them were professional stockbrokers. "He was taking a physics test," said Connie, "and the biology teacher knocked on the door and pulled him out of class to ask him if he had any stock ideas."
"No," said Jonathan, "that teacher already had his stocks. He had a list of five stocks that he thought had bottomed out, and he wanted to know what I thought." He said this in an indifferent tone, as if it happened every day, because it did. The effect on Cedar Grove public opinion of the SEC's call was to confirm the general suspicion that Jonathan knew something other people did not.
By the spring of 1998 Jonathan's ambitions were growing. He was now thirteen. He had glimpsed the essential truth of the market-that even people who called themselves professionals were often incapable of independent thought, and that most people, though obsessed with money, had little ability to make decisions about it-and realized he was special. He knew what he was doing, or thought he did. He'd learned how to find everything he wanted to know about a company on the Internet; what he couldn't find he ran down in the flesh. It became a routine in Connie Lebed's life to drive her son to various corporate headquarters to make sure they existed. Considering an investment in a bagel company, Jonathan made her drive him to taste the bagels on the other side of New Jersey. When he wanted to invest in a cigar company, he attempted to take the entire family seventy-five miles out of its way on a vacation to Florida so that he could inspect the company's newest retail outlet.
Jonathan entered the next CNBC competition, but soon became bored and abandoned it after a few weeks. "What's the point of doing it with fake money?" he said. Instead his mother opened an account with Ameritrade. "He done so well with the stock contest, I figured, Let's see what he can do." said Connie.
What he did was turn his $8,000 savings bond into $28,000, inside of a year. At around the same time, he created his own web site devoted to companies with small market capitalization-penny stocks. The web site was called Stock-Dogs.com. ("You know, like racing dogs.") Stock-Dogs.com plugged the stocks of companies Jonathan found interesting, or that people Jonathan met on the Internet found interesting. At its peak Stock-Dogs.com had maybe fifteen hundred visitors a day. Even so, the officers of what seemed to Jonathan to be serious companies
wrote to him to sell him on their companies. Within a couple of months of becoming an amateur stock market analyst, he was in the middle of a web of people who spent every waking hour chatting about and trading stocks on the Internet.
The mere memory of this clearly upset Greg even more than usual. We were sitting around the dining room table, in the middle of dinner, when he was forced to retrieve it.
"He was just a little kid!" he exploded. "These people who got in touch with him could have been anybody."
"How do you know?" said Jonathan. "You've never even been on the Internet."
"I started to get scared shit," Greg said. "Suppose some hacker comes in and steals his money! Next day you type in and you got nuttin' left."
Jonathan snorted. "That can't happen." He turned to me. "Whenever he sees something on TV about the Internet he gets mad and disconnects my computer phone line."
"Oh yeah," said Connie, brightening as if realizing for the first time that she lived in the same house as the other two. "I used to hear the garage door opening at three in the morning. Then Jonathan's little feet running back up the stairs."
"Youse goddamn right I unplugged it," said Greg. He turned to me to explain. "The phone line was in the garage." It didn't seem to bother him in the slightest that every time after he'd unplugged it, his son waited until he'd gone to bed, then ran down and plugged it back in. It didn't seem to occur to him that he might be able to control his child's actions. The point was: at least he'd done something.
"He'd see something about credit card fraud and he'd start shouting," said Jonathan. "He believes it, like, happens very commonly, and it doesn't.
Anyway, if someone steals your credit card on the Internet, it's not your responsibility. He doesn't even know that."
"I haven't ever even turned a computer on!" said Greg. "And I never will!"
"He just doesn't understand how a lot of this works," explained Jonathan, patiently. "And so he overreacts sometimes."
"I know, I know," said Greg, turning to me. "I'm supposed to know how it works. It's the future. But that's his future, not mine!"
Greg and Connie were both born in New Jersey, but from the moment the Internet struck, they might as well have just arrived from Taiwan. When the Internet landed on them it had redistributed the prestige and authority that goes with a general understanding of the ways of the world away from the grown-ups and to the child. The grown-ups now depended on the child to translate for them. Technology had turned them into a family of immigrants.
"Anyway," said Connie, drifting back in again. "That's when the SEC called us the first time."
The first time?
Copyright © 2001 Michael Lewis. All rights reserved
Email this article | Respond to this article