3 Charged in Web Scheme to Boost Price of Tiny Stock

The federal government on Wednesday charged three Southern California men, including two recent UCLA graduates, with stock fraud, saying they used the Internet to manipulate the price of a tiny stock and generate a fast $364,000 profit.

The case, an allegedly elaborate stock fraud using Internet bulletin boards--and many aliases--to pump up investor interest in thinly traded shares, reflects a surprisingly rapid response by regulators: The alleged fraud occurred just one month ago.

The case also appears to be the first time charges of Internet stock manipulation have been brought against people who aren’t affiliated with the company involved, regulators said.

The Securities and Exchange Commission and the U.S. attorney said the three men--Arash Aziz-Golshani, 23, of Beverly Hills, Allen Derzakharian, 26, of La Crescenta and Hootan Melamed, 23, of Pomona--posted hundreds of messages on Net chat rooms over one weekend last month, falsely claiming that NEI Webworld Inc. would be purchased by another company.

To mask their identities, the men posted their messages from public computer terminals at the UCLA Biomedical Library, according to government documents.

The three men bought large blocks of NEI Webworld stock the week before their postings appeared, and unloaded the shares on Nov. 15, a Monday--after enthusiasm generated by their messages caused the price to briefly rise as high as $15.31 from a mere 13 cents the previous Friday, the government said.

The stock, traded on the largely unregulated OTC Bulletin Board electronic market, fell back that afternoon when no merger announcement materialized.

The SEC charged each of the men with two counts of stock fraud and was granted a temporary restraining order to freeze their assets. In documents filed in U.S. District Court for the Central District of California, the U.S. attorney also charged Aziz-Golshani and Melamed with one count each of criminal conspiracy to commit securities fraud, which carries a maximum penalty of five years in prison.

Aziz-Golshani and Melamed were taken into custody but released Wednesday after posting bail of $100,000 each.

Melamed’s attorney, Mark Werksman, said his client denies the charges, but he refused further comment. Aziz-Golshani’s lawyer, Randall J. Sunshine, declined to comment. Derzakharian could not be reached for comment.

According to the government, the three men sent out a well-orchestrated series of messages on three chat sites (Yahoo Finance, Raging Bull and Freerealtime.com) beginning on Nov. 12, a Friday.

The messages said that NEI Webworld, a Dallas company that is now going through bankruptcy liquidation, would undergo a “reverse merger” with a private San Jose company, LGC Wireless Inc., according to the government. In truth, no merger was ever contemplated, regulators say.

Though its name seems to imply a connection to the Internet, NEI Webworld was in the commercial printing business. The “web” part of its name refers to a type of printing press, said Erich Schwartz, SEC assistant director of enforcement.

To generate excitement and make their posts appear legitimate, the three men put up several hundred messages using more than 50 screen names that “gave the appearance of an ongoing conversation,” the SEC charged.

Some messages were titled “Monday high flyer” and “big gains on Monday.”

“It made it appear this information was emanating from a large number of people,” Schwartz said. “It had the appearance of a widespread dialogue.”

When one investor challenged their claims by saying he had called LGC and found that there was no merger, Aziz-Golshani sent back a message questioning whether the investor could reach company officials over the weekend, according to government documents.

“At 13 [cents] it’s not much of a risk given the upside is tremendous,” the message continued. An investor failing to buy the stock would “miss out on massive profit on a small investment,” the message added.

Aziz-Golshani and Derzakharian are recent UCLA graduates. Aziz-Golshani now sells leather jackets over the Internet from his home, the government said. Derzakharian and Melamed are now pharmacy students at Western University of Health Sciences in Pomona, the suit said.

Court documents indicate that regulators were alerted by the action in the stock. Unusual price gains often are flagged by the surveillance units of trading venues--in this case the National Assn. of Securities Dealers.

Regulators, who also are believed to routinely cruise Net chat rooms, then traced the men’s messages about NEI Webworld to the UCLA library, where security cameras later identified them, the government said.

To find the source of the messages, the government said it subpoenaed Yahoo to supply the Internet protocol address of the computer from which some of the messages were sent. A protocol address is a number that identifies a specific computer connected to the Internet.

Several of the Internet screen aliases used by the three men incorporated names of prescription drugs, including Prozac, heparin and digoxin, according to government documents.

The original Yahoo message, for example, was from a user identified only as “ticlopidine1,” the government said.

An affidavit filed by the U.S. attorney in the case quotes another UCLA student saying Aziz-Golshani, Melamed and other UCLA students have previously been involved in boosting shares of other thinly traded stocks.

According to the document, a student named Arash Danny Molayem told an investigator that he and the others had been involved in “posting stocks”--buying shares of a small company, spreading false information using various screen names and then unloading the stocks for a profit.

Molayem said they manipulated several stocks, including JustWebIt.com Inc. and Food Vision Inc., according to the document.

During a four-day period in late September, shares of JustWebIt.com, a Salt Lake City-based Internet services company, surged as high as $6.88 from 75 cents on a big spike in trading volume.

Several messages posted on Raging Bull talked up the stock over those days, the affidavit said. Some of the messages emanated from the UCLA Biomedical Library, the document said.

Brokerage records of Aziz-Golshani and Hooshang Melamed, Melamed’s father, show purchases of the stock on Sept. 23 and 24, and profitable sales on Sept. 28, the affidavit says.

Investors’ use of the Internet to tout tiny stocks has been a burgeoning problem for regulators.

In one high-profile local case, a former employee of PairGain Technologies pleaded guilty in summer to fraud charges related to manipulation of the company’s stock, after he planted a fake news story online about an alleged takeover.

Officials advise investors to be extremely careful about what they read--and believe--in Internet chat rooms, especially in cases of tiny stocks traded on the OTC Bulletin Board.