Employee Arrested in PairGain Hoax
An employee of PairGain Technologies Inc., whose stock soared last week after an elaborately fraudulent Internet posting reported that the company was being sold, was arrested early Thursday at his North Carolina home for allegedly conceiving the hoax.
Gary Dale Hoke, whom the company described as a low- to mid-level engineer at its development and design center in Raleigh, was charged with one count of securities fraud, although authorities said the charges likely will be expanded.
He was released after posting a $50,000 bond.
Hoke, 25, has been employed at Tustin-based PairGain for more than two years and there had been no indications of trouble at work, said Charles McBrayer, the company’s chief financial officer.
If convicted, Hoke could face up to 10 years in federal prison and a $1-million fine, depending on the losses attributed to the fraud.
It’s unclear how many people lost money because of the scam, but an affidavit cited one Santa Ana investor who purchased 1,500 PairGain shares in two transactions, at $10.31 and $9.38, based on the report.
The scheme involved posting on the Web a false news report that PairGain, a maker of high-speed data transmission equipment for use over telephone networks, was being sold to Israel-based ECI Telecom for $1.35 billion, or about twice its market value at the time. The fraudulent Web site was made to look and behave exactly like that of Bloomberg News, the financial information service.
Hoke then allegedly used anonymous accounts at online finance message boards to tell investors of the corporate takeover and pointed people to the fraudulent Web site.
Based on the false report, investors bid up PairGain’s shares more than 30% before Bloomberg and PairGain disavowed the notice. Trading in PairGain stock that day was nearly seven times higher than usual because of the false report.
“Information travels so quickly, and as soon as someone posts something, it’s all over the place and it’s taken at face value,” said Christopher Painter, the assistant U.S. attorney handling the case.
Although Hoke used anonymous e-mail and Web-page services, a team of agents from the FBI and computer-crime specialists in the Securities and Exchange Commission’s Los Angeles office tracked him down using subpoenaed files from the Web services that he allegedly used to create the deception.
“A lot of people think that if they’re using an anonymous Web site and anonymous e-mail, that that’s enough to hide,” Painter said. “But there are logging addresses, and in this case that took us back to PairGain and to Mindspring, the Internet service provider that he used.”
Hoke allegedly used both his personal Internet account and his work account through PairGain to pull off the scam, which ultimately led law enforcement officials to him.
When a person signs on to the Internet, his or her computer is given an identifying number that tells Web sites where to send the page that is being requested. Many commercial online companies store and analyze logs of those visits for marketing, advertising and security purposes. The logs from those Web sites lead back to the Internet service provider and, eventually, back to the specific computer and account holder.
Hoke allegedly used both Mindspring and PairGain’s own corporate network to access the Internet. By using his own computer and Internet accounts, Hoke made the difficult tracing task much easier.
“It’s mind-boggling that somebody could do something so clever and be so stupid,” said McBrayer, the chief financial officer.
PairGain was first given an indication that an employee might have been involved earlier this week when law enforcement officials asked for data on how Hoke was using his account, McBrayer said.
Hoke, who has been suspended from his job pending the outcome of the case, owns stock in PairGain, but officials declined to say whether he profited from the hoax by selling when its price surged. An affidavit filed with the complaint Thursday said Hoke had accounts at two online brokerage firms, Ameritrade Inc. and E-Trade Securities Inc., and that he used his Ameritrade account in January to trade in PairGain stock.
Hoke’s attorney, Samuel Currin, declined to discuss the case. “Right now, I’m just trying to get the facts to determine exactly what happened and what all the allegations are,” he said.
In addition to the criminal charge, Hoke faces a civil lawsuit filed by Bloomberg earlier this week. The news service’s suit asked for unspecified damages from the creators of the bogus report that caused PairGain stock to fluctuate.
Ironically, PairGain stock has been trading at higher levels than last week, when the hoax boosted its shares to $11.25. That’s because two analysts raised their ratings on PairGain to “buy” from “hold.” On Thursday, PairGain stock closed at $11.69, down $1.31, in Nasdaq trading.
