Regulators Search for Fake PairGain Story Source

Federal and state regulators are searching for the source of a faked news story posted on the Internet that boosted PairGain Technologies Inc. shares, and legal experts said they expect a swift crackdown to prevent the spread of similar securities fraud.

Lycos Inc., the No. 3 Internet search directory, announced Thursday it had been contacted by the Securities and Exchange Commission and New York state authorities. It will provide information to them after it receives subpoenas, said spokesman Brian Payea.

Lycos operates the service where the phony Web page appeared and is “cooperating fully,” Payea said. A PairGain official also said he was contacted by the SEC.

Massachusetts-based Lycos said it expects to receive an SEC subpoena for documents, Payea said.

“We have to protect the privacy of our users, so we are waiting until we have to officially provide information,” he said, adding that Lycos did nothing illegal.

The SEC declined to specifically comment on the faked PairGain story.

With a recent explosion of interest in Internet chat rooms, stock market Web sites and online trading, securities regulators must move quickly, experts said.

“The commission will dedicate a lot of resources to it because they want to prevent copycats and this has gotten a lot of publicity,” said Washington lawyer Harry J. Weiss, a former SEC associate enforcement director, about the investigation.

The story described a nonexistent takeover bid for Tustin-based PairGain and was presented in a format that mimicked a Web page of Bloomberg News, a unit of New York-based Bloomberg LP.

PairGain Chief Financial Officer Charles McBrayer said the SEC told him the company may have to produce some documents related to the hoax. The company “has nothing to hide” and will provide any records requested, McBrayer said.

The hoax sent PairGain shares soaring 31% Wednesday morning before the story was denied by PairGain, a telephone equipment maker, and its Israeli rival, ECI Telecom Ltd. The story claimed ECI agreed to acquire PairGain for $1.35 billion.

Shares of PairGain, which makes high-speed data-transmission products, fell 25 cents Thursday, to $9.13, in Nasdaq trading.