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A Crime That Paid

While the Feds torment small-time pump-and-dumpers like Tokyo Joe Park, the big-time dumpers—like Global Crossing's Winnick and WorldCom's Ebbers—are totally in the clear.

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If you are going to pump your stock up and then dump it on the pitiful public, make sure you use the national media and Wall Street analysts to do the hyping. Be careful to unload hundreds of millions of dollars' worth of stock, not just several thousands of dollars' worth. Insist that you have a ton of legitimate reasons to sell, not that you wanted to scam the public while the scamming was good. Get your general counsel to blast the investigative press at every turn as tools of the "short sellers."

There. Now pay me $800 an hour for that advice. And not just because I am a lawyer licensed to practice law in New York. Because I have just told you how to avoid being prosecuted for the most obvious securities crime in the book: pumping and dumping stock you know is worth a fraction of what you say it is.

What else can be the take-away from the outrages that are Tyco, Enron, Global Crossing, and WorldCom? These became billion-dollar companies overnight because they were hyped by managements that made unconscionable predictions, none of which came true or were based on reality. Their CEOs were actors on the CNBC stage, making grand statements that appeared to have credence but couldn't have been more bogus. While the predictions were being asserted, they sold and sold and sold. . . . And now the executives who did the pumping and dumping, who reaped billions of dollars in sales, are going to get away with it. It's been more than a year since Enron's execs unloaded all that stock after hyping the company on CNBC, but nobody's been indicted for the crime of selling inflated securities to the unsuspecting public. Jack Grubman's been barred for life from the securities business for pushing, among other stocks, WorldCom on Salomon Smith Barney's customers, but former CEO Bernie Ebbers, his partner in the hype, hasn't been charged with anything, and he was able to borrow hundreds of millions of dollars against his stock—same as selling—to buy vast amounts of property around the globe. Tyco's execs just told the press that while the company created hundreds of millions of dollars in fictitious gains that allowed Dennis Kozlowski to dump shares at top-dollar prices, there's nothing illegal about that. Thanks, David Boies! And at the end of 2002, the Feds dropped criminal charges against Gary Winnick for selling $740 million of Global Crossing stock into hype he created and nurtured about that scam.

The CEO's were actors on the CNBC stage, making grand statements that couldn't have been more bogus.

The selective nature of the prosecution for the crime of pumping and dumping astounds me. Consider the cases of Jonathan Lebed and "Tokyo Joe" Park, two small-time Internet hypesters. The Feds pursued Lebed, a teenage high-school student, for pumping up small-cap stocks and then selling them online, forcing him to disgorge $285,000 in ill-gotten gains. Tokyo Joe, a former burrito vendor who became a Net stock guru, returned $750,000 after the SEC brought all of the resources the government could muster against him for hyping small-cap stocks to his flock of paid investors.

The Feds went to great lengths to tell the media about these prosecutions, issuing statement after statement saying that they would track down anyone who used the Net to pump-and-dump.

Terrific. Go get 'em.

What's the difference, though, between those who hype stocks they don't believe in on the Web and sell them, and those who come on national TV, praise their own stocks, and then dump them even as they know that the fundamentals may be deteriorating? Why is it okay to bag journalists and analysts and enlist them in the task of getting and keeping your stocks up, but illegal to make similar assertions on the Web and then sell? You can manipulate CNBC but not the Web? You can bamboozle the New York Times but not the chat rooms on Yahoo? You can sell all you want as long as you have filed all of the requisite Rule 144 forms?

I don't think the federal government has a handle on how silly it looks to the average fraudster that Tokyo Joe and Lebed get the hobnailed-boot treatment but Winnick, Ebbers, and Kozlowski get the free pass. You can't sell $750,000 of stock without a full-court press against you, but when you sell $740 million, the Feds give you the Christmas present of your life and tell you that they aren't going to pursue you? Does that make any sense at all?

We don't believe in show trials in this country. But if ever there were a moment when the Feds should be orchestrating giant, high-profile prosecutions for executives who juiced their stocks to the public and then relentlessly sold them, it would be now. Millions upon millions of securities buyers no longer trust the whole process because they think they are being lied to by anyone saying anything good about stocks. And why shouldn't they think that way, given that the bigger the whopper, the more blessed the exec?

Millions of securities buyers no longer trust the whole process because they think they are being lied to by anyone saying anything good about stocks. And why shouldn't they?

What should be done? Simple. Indict all of these men for pump-and-dump. Get a jury of peers, of which the vast majority will probably have lost huge amounts in at least one of these giant scams, not to mention the sheer impossibility of finding a judge who didn't get trashed by a Tyco or a WorldCom or a mutual fund that owned one of them. Produce the raw-hype tapes from CNBC in conjunction with the sales made almost simultaneous with the pump. Put the handful of reporters and editors on the stand who tried to tell the truth but were threatened with suits or dismissal for doing so or were slammed and muddied by the targets as being "tools of the shorts." Let the executives and their lawyers whine about how the sales were necessary for estate planning, or new swimming pools, or alimony, or whatever. And then see what the juries do.

I don't know if everyone will be convicted. But I do know this: If these trials aren't brought, the take-away of the era is, if you pump-and-dump $750,000 worth of stock, you're going down, but if you pump-and-dump $750,000,000, you're golden. Or, to put it another way, if the Feds don't go after these sellers, then they ought to make the pumping and dumping legal. At least that way, the prosecutions would no longer be arbitrary and justice would be blind to both the rich and the poor who scam the stock market.


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