Forum Archive Index - July 2001

["Corkhill, Sarah (London)" <CorkhSar@exchange.uk.ml.com>]

Hello everyone.

The joys of a Bloomberg screen in the office. Michael Lewis is a columnist
and I hope I don't get in trouble for sending you this (written last year)
but I though you might enjoy it. Very true but saving you from yourself is
what it's all about, isn't it?

Cheers,
Sarah

By Michael Lewis - Author of Liar's Poker

"Paris, Oct 26 (Bloomberg) - Last month the Securities and Exchange
commission charged a minor with fraud for the first time in its history.
Fifteen year old Jonathan Lebed, of Cedar Grove, New Jersey, was accused by
a government he was not old enough to vote for of buying shares in small
companies, hyping those stocks on Yahoo! Finance's messages board, and then
dumping the shares at a profit.
On Jan 5, to take one example - the teenager bought 18,000 shares in
something called Man Sang Holdings Inc at prices ranging from $1.38 to $2 a
share. Then, using aliases, he posted a lot of not terribly persuasive
messages praising the company: "The next stock to gain 1,000 percent" "the
most undervalued stock ever," that sort of thing. Then he logged off the
Internet, leaving orders in the market to sell the stock if it reached a
certain price. Then he left for school. The next day he sold his Man Sang
Holdings stake for between $3.81 and $4 a share. 
According to the SEC, Jonathan, who was at the time only 14, made $272,826
in the stocks of nine different companies. When they finally caught up to
him after seven months of trading, the SEC fined him $285,000, which,
including interest, left him exactly where he started. Or so they said at
the time. Last week the Wall Street Journal reported that Jonathan's take
was more like $800,000. It was described as "a textbook case of securities
fraud."

Cases like this one cause you to wonder about the textbook. Obviously, it's
true that a mere boy cost some really stupid grownups millions of dollars.
Man Sang Holdings, which on a normal day trades around 60,000 shares, traded
1.1 million shares the day after Jonathan posted his messages on Yahoo
Finance, which suggests that a lot of people read his messages and ran out
and bought shares in Man Sang Holdings.
There is only one meaningful difference between the teenage stock
manipulator and, say, the typical Wall Street Internet analyst who has been
plugging the stocks of doomed companies for the past year: the kid pretended
to be more that one person. Mary Meeker - to take the most prominent example
of a Wall Street analyst whose deeply compromised opinion has cost investors
billions - may speak for the thousands of people who work for Morgan Stanley
Dean Witter & Co But, in the end, for better or worse, there's only one of
her.  Jonathan Lebed spoke for a virtual village of day traders.

And that, to the SEC, makes all the difference.  I asked an investigator for
the SEC who negotiated with Lebed, why it was illegal for someone to put
whatever he wanted on Yahoo Finance message boards.  He said that if Lebed
has posted one or two messages plugging a stock, it wouldn't have been
illegal. But at some point "between the first and the 300th message he
became a crook" the investigator said.
That tells you a lot about securities fraud. It's hard to define exactly
what it is, but the people who work for the SEC know it when they see it.
Still, I wonder. Would they have gone after young Jonathan if no investors
had acted upon his Internet musings? If Jonathan had gone to school and
persuaded a few hundred of his classmates to spread a rumour that they had
found the next company whose shares would go up 1,000 percent, would the SEC
have gotten involved? Of course not. If the shares in Man Sang Holding had
not soared after Jonathan posted his messages, the SEC would not have
bothered to track Jonathan down to punish him. Jonathan would have made no
money. And no one would have cared what he posted on the message boards.

In short, the SEC's notion of fraud hinges on their belief that people read
Lebed's Internet postings and were fooled by them.
This I doubt. There may still be idiots in the world who buy shares in Man
Sang Holdings (which is based in Hong Kong and in the pearl business) after
a perfect stranger calls it "the most undervalued stock ever", but they
aren't customers of Yahoo Finance. The sort of people who buy shares in Man
Sang Holdings after they read a publicity blitz on an Internet message board
do so because they see a chance to catch a wave. They're betting that
whoever was posting the messages would keep on posting them and that the
stock would be getting favourable - if unreasonable - publicity. That is,
they were making exactly the same bet Jonathan Lebed was making, in the
hopes they, too, would make a quick killing.
The usual argument made against the SEC is that, by protecting people from
their own stupidity, they only encourage more stupidity. That argument now
needs to be updated. The SEC is unable to distinguish between fraud that
needs to be prosecuted and fraud that doesn't because it has lost touch with
the mind of the American investor.

Our securities police operate with the same black and white mental
photograph of the average investor that was taken in 1934, when the
securities laws were written.  That photograph depicts an ordinary citizen,
innocent of the inner workings of the stock market, searching for some place
to invest his hard-earned wages so that he has a nest egg to retire on.
Guess what? He's been dead for years!"



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