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Jonathan Lebed Case Study

Essay by   •  December 23, 2010  •  1,231 Words (5 Pages)  •  1,765 Views

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In 2000, Jonathan Lebed caused havoc in the stock trading industry. This 15 year old boy was accused of 'pumping and dumping' stocks over the internet. Jonathan actions proved that the internet can be a very powerful tool for fraud. This incident makes it evident that investors needed to take a closer look at the information they are receiving from the internet because information is being placed there by various persons whom may have bad intentions.

There is not much difference between the actions of Jonathan Lebed and that of professional financial analyst. Financial analyst makes predictions about the market everyday some of which are close and other are off target. These predictions are made based on the financial analyst examination of the stock market. Many analysts have different views regarding the same stocks however no one knows whose results are on target until the results from the stock market are revealed. Jonathan Lebed made his prediction based on his opinion of the performance of the stocks, the only difference between him and the financial analyst was his age and the lack of a degree. Financial analysts are not allowed to invest in the stocks they advice on however their clients can make investment decision based on their analyst predictions. Although some of these financial analyst predictions fall short of the true stock market performance their are not penalized for there errors in predictions, however Jonathan Lebed was penalized with a fine of almost $300,000 for his actions.

The SEC found Jonathan Lebed guilty of wrong doing under Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 which addresses fraud in the use on interstate commerce. Under these acts it is unlawful for a person to intentionally provide false statements for the purposes of deceiving buyers. Although this law does not state anything specific about internet use, the SEC was able to use this law based on the sentence fragment, "any medium of communication". Since the internet is a form on communication the SEC was able to apply this law to internet related cases.

The SEC use of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 in my opinion was unjustified. Section 17 (a) of the Securities Act prohibit acts, transactions, practices or courses of business that operate as a fraud or deceit in connection with the offer, purchase or sale of securities, including misrepresentations and omissions of material fact. Section 10(b) and Rule 10b-5 prohibit the use of any manipulative or deceptive device. The SEC was able to use this law against Lebed because they claimed that Lebed knowingly posted false information on website such as Yahoo Finance. Lebed did like most person do he expressed his opinion on stocks on the internet, no one was forced to take his advice. I think the SEC main issue was that because of Jonathan posting about certain stocks their stock prices raised. The SEC felt that these increases in the stock prices where not caused by the markets natural forces. With these changing times I think it is hard to distinguish what are the market natural forces. The stock market is faced with new challenges everyday. The stock market had to adjust when stock information became available over the internet. The stock market also had to adjust when stocks where available to be purchased via the internet. I think like the changing time the stock market now has to adjust to person like Jonathan making false predictions on stocks over the internet.

The internet in my opinion is the source of this entire problem. If the SEC wants to stop these sorts of activities measure should be taken to prevent them. I think the SEC should create criteria for websites giving investment information to follow. A stamp representing approval can be created so that website that meets the approval from the SEC can be distinguished from others. If this is done it would be easier for consumer to confidently research stocks information on the internet. Another approach the SEC can take to prevent this from reoccurring is to require that websites such as Yahoo Finance to be more stringent on who is able to post stock information on their website. Persons posting on

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