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2HRS2GO: Manipulation scheme showcases teen trading

COMMENTARY -- The Emulex (Nasdaq: EMLX) hoaxster had nothing on this one.

You've probably read about the news by now, but in case you haven't, the Securities and Exchange Commission settled civil fraud charges against Jonathan Lebed, accused of stock manipulation via the Internet. That kind of crime isn't news these days, not after a number of well-publicized cases, including the now-infamous case that victimized Emulex.

The settlement announced yesterday wouldn't be news either, except for a minor -- and I do mean minor -- detail.

Lebed is 15. Federal regulators say he was 14 when he started doing it.

He's hardly old enough to shave or engage in sexual fantasies, yet there he was, dreaming of ways to fatten his portfolio.

And fatten it he did. Lebed racked up $272,826 in profits by trading microcaps over a five and a half month period.

SEC officials won't detail the course of their investigation, but once they were onto Lebed, it didn't take very long to see his pattern. He'd tout some low volume issue using "hundreds" of posts on Yahoo! Finance and other websites with message boards, buy a few thousand shares, watch the stock rise a few more points, then dump the stock.

Obviously, it's a tactic that only works with thinly traded stocks. Lebed's playthings included Manchester Equipment (Nasdaq: MANC); Man Sang Holdings (NasdaqOTC: MHSI.OB); Fotoball USA (Nasdaq: FUSA); West Coast Entertainment (NasdaqOTC: WCEC.OB); Havana Republic (NasdaqOTC: HVAR.OB); The Classica Group (Nasdaq: TCGI); and Firetector (Nasdaq: FTEC).

You can draw all kinds of common sense conclusions from Jonathan's Not-So-Excellent Adventure. Don't believe message board hype. Do your research. Stay away from micro-caps, which are susceptible to trading games.

It's the usual stuff known by everyone and disregarded by a foolhardy minority. I'm sure those few will continue their pursuits; those folks tend to evaluate everything in terms of execution, rather than conception.

In fact, you can see foolish posts already for one of the companies Lebed traded in, Manchester Equipment. Rather than blasting Lebed for twisting his stock, "msgenius_2000" believes the boy should be commended:

"Hey this kid really dialed in on MANC. They should let him keep the money. The idiots who listened deserve what they got. Maybe the kid is related to an insider..."

There's not much to be done for folks with that mindset.

Still, this case confirms something long suspected by many people: a large portion of Yahoo! Finance posts are generated by kids, either actual children or adults whose brains failed to grow along with their bodies.

And that leads to one question we ought to be asking: why was this child trading at all? The United States has this weird idea that "investing" is something that should be encouraged at an extremely early age, but ponder this: we've set age limits for working, voting, marrying, drinking, smoking, driving, Olympic gymnastics, military service, R-rated movies, federal politics and gambling, among others. We don't let 14-year-olds buy something as innocuous as a lottery ticket, so why let them spend thousands of dollars on the stock market?

Yet Internet brokerages promote themselves with "humorous" commercials featuring a teenager that supposedly bought a helicopter with his online trading profits, or a punk named Stuart bringing enlightenment to stuffy executives. Of course, the ads never point out that the executive is probably Stuart's boss because he's a better businessman or a better networker, both of which are more valuable skills than the ability to fire up a laptop and open a trading account.

Jonathan Lebed traded under a "custodial" account tied to his father. According to Mauro Wolfe, the SEC's investigating attorney in this case, Dad Lebed knew about his son's profits but remained ignorant of the details.

Mischief is in a kid's blood, so you can be sure Jonathan Lebed won't be the last teenage stock manipulator on the Internet. "I would hazard a guess that you will see this more often," says Joy Thompson, of the SEC's Philadelphia district office, which busted Lebed.

The nation's overall interest in stocks was bound to filter down to teenagers, and technology makes it easy for them to fulfill their dreams of being Trader Dude (or TrAd3r D3Wd, in Internet-teen speak).

I don't want to overgeneralize. Plenty of teens would be fine investors. Probably the percentage of teens that would commit stock fraud is roughly the same as the numer of adults.

But adults shoulder greater responsibility -- the man accused in the Emulex case faces jail time. At any rate, the number of troublemaking teens isn't the point.

Kids should be encouraged to be kids, not set up with online brokerage accounts, custodial or otherwise. They'll have the rest of their adult lives to make money; adolescence should be spent as an adolescent, especially if your family is sufficiently wealthy that it can subsidize trades involving thousands of shares.

Granted, kids have been tracking stocks for a long time; I remember getting a brief lesson in following the market from my 7th grade math teacher.

Yet it's only recently that kids began trading stocks actively. Before, you followed them the same way you tracked the statistics of batters. You watched, you rooted, but never got directly involved.

With the rise of the Internet, kids now risk money, and in increasing numbers. Being rich for its own sake sounds like the strangest ambition for a youth. But it's there.

Children used to idolize sports stars, epic heroes, military figures, or even criminals perceived as rebels against the Establishment, like John Dillinger or Butch Cassidy.

Now my nephew tells his mother he wants to be Bill Gates, "but not a nerd." He wants the wealth, but isn't interested in Gates' actual work.

At least if he emulated the Sundance Kid, he might practice horseback riding. 22GO>