Internet Hoax Sends O.C. Tech Stock Up 31%
In one of the biggest and most elaborate Internet stock frauds yet, an unknown perpetrator constructed a bogus announcement that an Orange County-based technology company was being acquired for $1.35 billion, driving the company’s stock up 31% Wednesday morning.
The hoax underscores mounting concerns about stock manipulation and other fraud on the Internet. The instant and free flow of information over the Net, a soaring stock market and a booming online trading industry are providing fertile ground for such scams.
The hoax involving Tustin-based PairGain Technologies was unusual in its detail and precision. It used a free Web page service owned by Lycos Inc. to create a site that looked and behaved almost identical to that of Bloomberg News, the financial information wire service. The false report was then spread on Yahoo Inc.’s finance message boards, causing investors to bid up PairGain’s shares, making it one of the day’s most actively traded stocks.
The perpetrator’s goal, conceivably, was to boost the stock price in order to unload shares at a better price.
Most cases of online stock fraud involve small companies whose stocks are thinly traded. The PairGain case is significant because the company’s stock is worth more than $650 million. There are 52.8 million shares in public hands, and nearly 2 million of those are traded every day.
PairGain has long been the subject of acquisition rumors, and the alleged acquiring company named in the hoax, ECI Telecom Ltd. of Israel, is often mentioned as a potential suitor, making the ruse all the more believable. Officials at both companies said they had no idea who was behind the deception.
So elaborate was the mystery posting that it coincided with the Jewish holiday of Passover, making it difficult to contact ECI executives, although they later issued a statement disavowing both the deal and the fraud.
PairGain executives broke their usual policy of not commenting on takeover rumors, issuing a statement more than four hours after the market opened.
“There are absolutely no discussions underway,” Chief Executive Charles Strauch said in an interview. “This was totally and completely made up. As straight as I can say it, there is absolutely nothing going on. Period.”
The phony story alleged that Israel’s largest manufacturer of telecommunications equipment would acquire PairGain, which makes high-speed data transmission products, for $1.35 billion in cash and other compensation.
“ECI has not been in negotiations with PairGain. ECI has not acquired PairGain. The rumors are completely fictitious,” ECI investor relations manager Leo Hinkley said in a statement, also breaking the company’s policy regarding commenting on buyout rumors.
The Securities and Exchange Commission, which has made investigating Internet stock fraud a priority, declined to say whether it had launched an investigation of the matter.
Wednesday’s false report was posted on a site hosted by Angelfire, a Lycos subsidiary that provides free space to create a Web page and is part of the Lycos Network, one of the most visited areas on the Web. It is unclear when the page was created or who created it, Lycos executives said.
Both Yahoo and Lycos said it was their policy not to reveal information about their subscribers unless legally compelled to do so, which usually involves a court-ordered subpoena.
Someone anonymously posted a message about the supposed acquisition on a bulletin board run by Yahoo and gave a link to the site, which looked virtually identical to a page from the Bloomberg News site. The bogus site not only used Bloomberg’s logos, images and fonts, it also functioned like Bloomberg’s site, with the links taking Internet users to appropriate pages on Bloomberg’s Web site.
Bloomberg officials declined to comment.
Duplicating the appearance of a Web site is a relatively easy task using software that is available for free. Space to post the Web site is also free, as is membership to Yahoo’s bulletin boards.
“This was a well-researched hoax. The Web page looked like a Bloomberg.com press release, the page looked real,” said John Todd, an analyst with the San Francisco firm of C.E. Unterberg Towbin who follows PairGain. “This was not some benign, low-level joke; there was a lot of money floating around this morning.”
It wasn’t until PairGain employees monitoring the bulletin boards saw the messages and alerted Bloomberg that the site was taken down by Angelfire.
PairGain stock, which closed Tuesday at $8.50 on Nasdaq, soared as high as $11.13 on the false report early Wednesday. The stock fell after the scam was uncovered, closing up 88 cents, or 10%, at $9.38.
Computer users leave data trails with every network they touch, but computer experts said it is possible for the perpetrator of the hoax to go undetected.
“In theory, it is possible to completely cover your tracks,” said Mike Riley, senior producer of Yahoo Finance. “For all intents and purposes, the message boards are anonymous. Just as you wouldn’t trust just anyone who comes up to you on the street, you would double-check anything that’s posted there.”
Still, last week’s apprehension of the suspected author of the Melissa computer virus illustrates how traceable people can be.
“There are pluses and minuses to using this medium, and one of the minuses [for criminals] is that it can leave a trail. There are ways to look for fingerprints,” SEC spokesman John Heine said. “We haven’t run across the perfect crime yet.”
Online securities fraud has been a major source of concern to regulators, who as recently as two weeks ago testified before Congress on the issue. The number of complaints about online investing scams received by the SEC rose 330% last year. On average, the commission receives between 200 and 300 complaints a day regarding online investing.
The commission began to closely watch the Internet for securities law violations in 1995 and in the last year has brought 66 Internet-related cases, including a sweep in October that netted 44 defendants and another in February that resulted in accusations against 13 others.
While the medium may be different, the frauds are essentially the same, commission officials said.
“The cyber-scams we have seen break down into essentially three categories: ‘offering’ frauds, market manipulations and touting,” Richard Walker, the SEC’s director of enforcement, told Congress last month. “While these scams are nothing new, the Internet facilitates their perpetration by virtue of its speed, low cost and relative anonymity.”
The commission, which last year created a 135-member office dedicated to Internet enforcement, has brought 18 cases involving stock price manipulations taking place over the Internet, regulators said.
Furthermore, individual investors increasingly are taking trading into their own hands by going online, meaning they can instantly act on information they get over the Internet.
One out of seven stock trades are handled over the Net and 340,000 trades are executed online every business day, according to a study by Credit Suisse First Boston.
In the case of Wednesday’s deception, an investor seeing the false statement about PairGain on the Internet could, with a few taps at a computer keyboard, trade on that information.
Given regulators’ recent emphasis on cracking down on Internet fraud, observers expect swift action.
“It would be totally embarrassing if the SEC didn’t get these guys,” said Russell Mokhiber, editor of the weekly newsletter Corporate Crime Reporter.
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Price Spike
Shares of PairGain Technologies rocketed as high as $11.13 on Wednesday on a phony takeover report. The stock fell back after the fraud was exposed but still closed up for the day. Prices approximately every 30 minutes of Nasdaq (Eastern time):
11 a.m.: $11.13
Wednesday close: $9.38, +88 cents
Tuesday close: $8.50
Source: Bloomberg News
