Legality of stock price manipulation depends on who's doing manipulating

By DAVID MOON, Moon Capital Management
August 4, 2002

It was his age that shocked me most. People have been breaking rules since the Garden of Eden ' and God knows we've seen plenty of that lately. But in 2000, when 15-year old Jonathon Lebed admitted he had been manipulating stock prices since he was 14, like a lot of people my reaction was indignation. I blamed his parents who obviously never taught him right from wrong. I blamed Wall Street for being duped by a tenth grader. I blamed his teachers who looked the other way while a student turned study hall into Enron. I blamed a society that allowed Bill Clinton to do what he did with impunity.

It seems that the budding Bernie Ebbers would buy a bunch of a stock for 20 cents a share, then go on his personal website to tout the company. It doesn't take much excitement to cause a 20 cent stock to rise. The 1,500 daily visitors to Johnny's website happily obliged. Johnny would then dump his stock - at a profit. His 'pump and dump' scheme netted him more than $800 thousand.

Little Johnny did agree to pay a fine of $285,000 and promise never to manipulate stock prices again. I would have forever filed this story away in that place of forgotten news stories ' except that the recent devastation on Wall Street caused me to rethink the definition of stock manipulation.

It is against the law to do something to try to cause the price of a stock to change ' at least you can't use the stock market to try to artificially manipulate a stock's price. Of course, if you're the president of a company, everything you do is supposed to eventually increase the price of your stock. But you're not supposed to make comments in the newspaper solely for the purpose of making your stock price increase or decrease. Imagine if a company was in the process of buying back some of its own shares and wanted to do so at lower prices. A company president could simply say that its sales in Argentina were going horribly, raw materials costs were increasing and that he was depressed over the recent death of his dog. Just for good measure, the president might also make mention that he didn't have the greatest confidence in their auditors and he sure hopes the SEC never investigates them for accounting irregularities.

That president would get his wish and have a chance to buy back some of his company's stock a lower prices. Much lower prices. And he would almost immediately get to visit SEC investigators. Then he would go to jail or be on the news each night with Martha Stewart or have to pay a big fine, just like Jonathon Lebed.

I thought about this a couple of weeks ago one Saturday morning as I was reviewing the week's carnage in the Dow Jones Industrial Average. In the middle of a horrible Friday afternoon, three prominent analysts released positive market comments. The President then made a statement of support for stocks. The Treasury Secretary followed suit. The power structure on Wall Street and Washington was doing everything within its vast power to stop the day's decline. And they succeeded. Stock prices recovered several hundred points following the optimistic comments.

In other words, these folks did exactly what Jonathon did; they manipulated stock prices. So someone could make some money. When the Treasury Secretary does it, ostensibly to help the masses, we consider it a courageous patriotic act. But, it is a crime when a teenager who doesn't yet shave does it.

It is dangerous when the same activity elicits different responses depending on whether it benefits the one or benefits the many.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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