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Acquisition Hoax Sends PairGain up 31%

Wall Street: Elaborate Internet scam spread false rumor that firm had been bought by ECI Telecom.

April 08, 1999|JONATHAN GAW | TIMES STAFF WRITER

In an elaborate hoax that underscores the concern over stock fraud on the Internet, shares of PairGain Technologies soared 31% Wednesday morning after someone posted a false report that the company was being acquired.

The bogus announcement, unusual in its detail and precision, 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.

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. So elaborate was the scam that it coincided with the Passover holiday, making it difficult to contact ECI executives, although they later issued a statement disavowing both the deal and 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," said Chief Executive Charles Strauch 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 Tustin-based PairGain, which makes high-speed data transmission products, for $1.35 billion in cash and other compensation.

"EDI has not been in negotiations with PairGain. ECI has not acquired PairGain. The rumors are completely fictitious," said ECI investor relations manager Leo Hinkley, in a statement that also broke the company's policy regarding statements on buyout rumors.

The instant and free flow of information over the Internet, a soaring stock market and a booming online-trading industry are providing fertile ground for fraud and stock manipulation.

Most cases, however, involve small companies whose stocks are thinly traded. The PairGain case is significant because the company has a market capitalization of more than $650 million. There are 52.8 million shares in public hands, and nearly 2 million of those are traded every day.

The Securities and Exchange Commission, which had 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 to the fraud that the site was taken down by Angelfire.

PairGain stock maintained a significant amount of its gain even after the scam was uncovered, closing Wednesday at $9.38, up 88 cents, or more than 10%.

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.

Last week's apprehension of the suspected author of the Melissa computer virus illustrates how traceable people are, even in the supposedly anonymous cyberspace.

Given regulators' recent emphasis on cracking down on Internet fraud, observers expect swift action to be taken.

"It would be totally embarrassing if the SEC didn't get these guys," said Russell Mokhiber, editor of the weekly newsletter Corporate Crime Reporter.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

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 on Nasdaq (Eastern time):

Tuesday close: $8.50

11 a.m.: $11.13

Wednesday close: $9.38, +88 cents

Source: Bloomberg News

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