Total Fraud.

A 15-year-old may have been charged by SEC, but he wasn't alone in greed

IN recent weeks, 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, N.J., 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 message 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 allegedly 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 at the time was only 14, made $272,826 in the stocks of nine different companies. When they finally caught up to him after seven months of trading SEC fined him $285,000, which, including interest, left him exactly where he started. Or so they said at the time.

The Wall Street Journal recently reported that Jonathan's take was more like $800,000. It was described as "a textbook case of securities fraud."

Large following

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 than 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 had 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 rumor 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 Holdings 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.

Who got hurt

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 is 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 favorable -- if unreasonable -- publicity. That is, they were making exactly the same bet that Jonathan Lebed was making, in the hopes that 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.

Michael Lewis is a columnist for Bloomberg News.