Hat tip to reader J.K. for this news item about civil and criminal charges brought against the alleged perpetrators of a cross-country pump & dump stock racket. One of the accused is Matthew Brown, who operates a stock message board site we've mentioned here before, Investor Hub.
J.K.'s mention of that news reminded me of an excellent New York Times Magazine article from 2001, written by Michael Lewis, about high school student who made a small fortune promoting stocks during the dot-com boom: "Jonathan Lebed's Extracurricular Activities". Jonathan Lebed made close to a million dollars buying stocks, pumping them on Internet message boards, and then selling after driving up their prices. This eventually drew the wrath of the SEC. One of the best parts of Michael Lewis's article is when he tries to pin the SEC down on what, exactly, made Lebed's stock promotion different from that of Wall Street's. This scene, which we'll enter in medias res, starts on page 8 of Lewis's article:
''Richard -- call Richard!'' [then-SEC Chairman Arthur] Levitt was shouting out the door of his vast office. ''Tell Richard to come in here!''
Richard was Richard Walker, the S.E.C.'s director of enforcement. He entered with a smile, but mislaid it before he even sat down. His mind went from a standing start to deeply distressed inside of 10 seconds. ''This kid was making predictions about the prices of stocks,'' he said testily. ''He had no basis for making these predictions.'' Before I could tell him that sounds a lot like what happens every day on Wall Street, he said, ''And don't tell me that's standard practice on Wall Street,'' so I didn't. But it is. It is still O.K. for the analysts to lowball their estimates of corporate earnings and plug the stocks of the companies they take public so that they remain in the good graces of those companies. The S.E.C. would protest that the analysts don't actually own the stocks they plug, but that is a distinction without a difference: they profit mightily and directly from its rise.
''Jonathan Lebed was seeking to manipulate the market,'' said Walker.
But that only begs the question. If Wall Street analysts and fund managers and corporate C.E.O.'s who appear on CNBC and CNNfn to plug stocks are not guilty of seeking to manipulate the market, what on earth does it mean to manipulate the market?
I finally came clean with a thought: the S.E.C. let Jonathan Lebed walk away with 500 grand in his pocket because it feared that if it didn't, it would wind up in court and it would lose.
I might as well have strolled into the office of the drug czar and lit up a joint.
''The kid himself said he set out to manipulate the market,'' Walker virtually shrieked. But, of course, that is not all the kid said. The kid said everybody in the market was out to manipulate the market.
''Then why did you let him keep 500 grand of his profits?'' I asked.
''We determined that those profits were different from the profits he made on the 11 trades we defined as illegal,'' he said.
Lewis goes on to underline the tautologies.
J.K. noted that Jonathan Lebed is still in the stock promotion business. Here is his site.
The photo above, of Jonathan Lebed, is the cover of the New York Times Magazine issue in which Lewis's article on Lebed was published. For some reason, the New York Times doesn't include the photos that accompanied its older articles in its online archive, so I got that image from Williamgaddis.org. For those too old or young to catch the allusion, the photo's caption is a play on the title of a short-lived cult TV drama from the mid-1990s called My So-Called Life.