<nettime> NYT: Internet Hoax on Wall Street

["nettime's_roving_reporter" <nettime@Desk.nl>]

http://www.nytimes.com/library/tech/99/04/biztech/articles/08hoax.html

April 8, 1999

Fake Internet News Account Sends a Stock Price Soaring

By EDWARD WYATT

One of Wall Street's oldest frauds has been updated for the Internet age.

Using a personal World Wide Web site intended to look like an Internet page
of Bloomberg News, someone posted a fake report early Wednesday that said
an American technology company called Pairgain Technologies Inc. was being
taken over by an Israeli rival for a hefty price. The report spread to a
Yahoo message board and then to other sites frequented by stock traders,
who quickly bid up Pairgain's stock by more than 30 percent.

By midday, the stock retreated as the takeover report was debunked, but it
still finished the session as the 12th most heavily traded issue on Nasdaq,
ahead of such popular ones as Amazon.com and E*trade Group.

The hoax, which is under investigation by the Securities and Exchange
Commission and Nasdaq officials, shows the startling influence of Internet
chat rooms and the power of day traders, who can easily move the price of
relatively small stocks with their trades.

Investors who were duped into buying shares at the temporarily inflated
price have suffered at least paper losses, though it could be weeks before
regulators are able to sort out who was trading.

Bloomberg said the article was not the work of any of its reporters, and as
of last night, the prankster had not been identified.

Pairgain, a Tustin, Calif., maker of telecommunications equipment, and its
reputed suitor, ECI Telecom Ltd., denied being in merger talks.

False rumors about a company have percolated as long as markets have
existed, and prank announcements of takeovers have occurred during times of
intense interest in the stock market, like the late 1980's, when corporate
raiders garnered headlines. But analysts called the Pairgain story -- which
made generous use of the scrolling text, Web links and icons familiar to
Internet users -- one of the most sophisticated examples of such fraud in
years.

Anthony Elgindy, an online stock trader who operates Pacific Equity
Investigations, a stock research service, called the fake report
"incredibly believable."

"It was detailed enough -- with quotations and remarks and attributions --
that it reads as if it came from a press release that the company wrote,"
he said.

The fraud was well orchestrated. The posting appeared on the Internet just
a half-hour before trading began on the Nasdaq market, leaving little time
for anyone to check with the companies but enough for investors to place
orders to buy shares.

It started at 8:55 A.M.on Angelfire.com, a Web site operated by Lycos Inc.,
which lets individuals create their own Web pages. The report first
appeared not on a message board or in a chat room, but on a personal page
that could have been created by any registered Angelfire user. The report,
carrying the Bloomberg.com logo, said that ECI had agreed to buy Pairgain
for $1.35 billion in cash, twice Pairgain's market value just a day earlier.

How the news traveled to broader investment circles on the Internet is not
yet clear. But roughly a half-hour later, a reference to the Angelfire
posting and a link to the page appeared on a Yahoo message board devoted to
investment topics, which was quickly followed by postings on other Internet
sites.

"Wahooooo!!! I knew this day would come!," wrote one enthusiastic investor
on the Yahoo message board for Pairgain, minutes after word of the
"takeover" appeared. Another calculated a takeover price of $19 a share,
quite a jump from the Pairgain closing price of $8.50 on Tuesday. A third
noted that Pairgain's products, which allow for high-speed transmission of
data over traditional copper wires, "will 'pair' well" with ECI's products
for digital communications.

Once stock trading began, Pairgain shares rose sharply on heavy volume,
peaking at $11.125.

At the end of the day, Pairgain was priced at $9.375, up 10 percent from
Tuesday's close. And nearly 13.7 million Pairgain shares changed hands in
one day, roughly 13 times the average daily volume.

The stock began to retreat as Internet investors began to question the
report and fell further after Pairgain and ECI denied reaching a deal or
even being in talks.

The fake announcement seemed to confirm what had been rumored for months.
Charles McBrayer, Pairgain's chief financial officer, said similar rumors
have cropped up four times in the last year. In addition, two Israeli
newspapers reported last month that ECI was in talks to acquire an American
technology company, possibly Pairgain.

"The Internet should be helpful to individual investors," McBrayer said.
"But in this case, the fakery was done so well that it looked little
different than if the news came from a legitimate source."

Signs of fraud, however, were picked up by amateur sleuths who scan many
online chat rooms for signs of misbegotten investment hype. Shortly after
10 A.M., one Yahoo participant noted that the Web page announcing the
takeover was not in fact part of Bloomberg's larger Web site, and the real
Bloomberg site carried no word of the takeover news. Another chipped in
that a taped message at Pairgain's investor relations phone number, which
would review news about the company, did not mention that there would be a
major announcement.

S.E.C. and Nasdaq officials declined to comment on whether they were
investigating the hoax; as a practice, they rarely comment on
investigations. But McBrayer said he had talked with officials from the
S.E.C.'s Internet fraud division, as well as Nasdaq's market surveillance
staff, both of which, he said, were looking into the incident.

Brian Payea, a spokesman for Lycos, said the company had not yet been
reached by regulators. He declined to identify the individual who created
the fake Web site, saying it was company policy not to release information
on members unless compelled by legal authorities.

Angelfire said it removed the posting early yesterday afternoon after it
was reached by Bloomberg's lawyers.

Chris Taylor, a spokeswoman for Bloomberg L.P., said the news service's own
computers were not involved in the hoax.

Virtually anyone with Internet access can save an image from a particular
Web page and then, using that template, insert their own text to create an
authentic-looking but fraudulent Web page. In fact, Angelfire removes
several pages a day from its site created by users who have misused the
copyrighted material of other sites, Payea said.

In many ways, the hoax was an old tale in a new guise. In recent years, the
markets and news services have been occasionally duped by false reports
that seemed authentic.

In 1989, a caller to the Nasdaq market's market surveillance unit
identified himself as the chief financial officer of Sybase Inc. and asked
that the company's stock be halted for a pending news announcement. Trading
was halted for more than a half-hour before Nasdaq officials determined the
call was a hoax.

In 1989, the stocks of NWA, parent of Northwest Airlines, and Pan Am were
halted in trading on the New York Stock Exchange after the Reuters news
service reported on a fake takeover bid for both companies.

And in 1987, a financial adviser from a prominent Cincinnati family called
the Dow Jones News Service and announced a takeover bid for Dayton Hudson,
the Midwestern retailer, which the news service reported. The bid was later
determined to be a hoax, and regulators brought charges of fraud against
the adviser, in 1989 barring him from the securities business.

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