March 3, 2000 10:20 AM PST

Stock manipulators move beyond bulletin boards

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SEC fears stock manipulation online

June 12, 1996
Stock manipulation on the Internet has reached new heights, moving from hyping stocks on bulletin boards to posting fabricated company announcements on Web sites.

Within the past year, two companies have been hit with such cyberattacks, causing their stocks to jump before they could dispute the information.

Authorities suspect these incidents will occur more often as the Internet's popularity grows among those seeking to defraud investors seeking legitimate information.

This new form of manipulation is particularly hard for investors to detect, as most people assume that information appearing on a company's Web site is genuine. By contrast, with anonymous postings on bulletin boards, most investors have learned to question the source.

Aastrom Biosciences is the latest victim in these attacks. Last month, an apparent hacker posted a bogus announcement on Aastrom's Web site, stating the company would merge with Geron, a biopharmaceutical company.

Aastrom's stock, which closed at $4 the previous day, rose nearly 30 percent in early trading before the companies could refute the false information. Even after the misinformation was made public, shares ended up 10 percent that day at $4.41; the stock later fell to about $3 and is now trading around $5.50.

Last April, PairGain Technologies, which sells digital subscriber line (DSL) products, also fell prey to stock manipulation because of a bogus merger posting that stated ECI Telecom was acquiring PairGain in a $1.35 billion deal. The deal was hyped on bulletin boards with links to a fake Web site designed to look like the Bloomberg news service. On the site, a fabricated announcement explained the supposed deal.

"We were trading around $8 before this happened, and in about two hours our stock spiked up to $12," said Charles McBrayer, PairGain's executive vice president. "We started getting calls from analysts asking us about the sale, and that's when we found out about it."

The company later learned that a new employee, Gary Hoke, had created the site and posted the false announcement. Hoke, who pleaded guilty, was ordered to pay $93,000 in restitution and was given a five-year probation sentence.

"He was planning on trading the stock, but when he saw it take off...he got cold feet," said Chris Painter, computer crime and Internet fraud coordinator for the U.S. attorney's office in Los Angeles.

Thousands of investors believed the fabricated posting, generating volume that was seven times the normal level, Painter said. He estimated that investors who bought the stock on the bogus news and sold after the companies disputed the announcement lost more than $100,000 that day.

"This is the next level of sophistication in manipulating stocks," McBrayer said. "I worry about the implications...We didn't have our system hacked, so it was completely out of our control, and that's a little bit scary."

The Internet has made this form of stock manipulation easier to commit and extremely effective, Painter said.

"With PairGain and Aastrom, the (criminals) couldn't mock up a copy of the San Francisco Chronicle and airdrop it on everyone's porch or create a false company report and mail it out to all investors," Painter said. "But with the Internet, they have essentially done that and reached vast audiences."

Although the Internet has brought a substantial increase in attempts to manipulate stocks via bulletin boards and now through fabricated announcements, Painter said other forms of cyber-stock manipulation are likely to evolve as the Internet continues to grow.

"But as we increase our civil and criminal cases against such people, we hope that will keep others from doing it," Painter said.

 

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