Gary Dale Hoke, 25, was arrested by the FBI at his home Wednesday in North Carolina for allegedly disseminating false information about the company, whose stock is publicly traded, according to the U.S. attorney's office in Los Angeles.
Hoke was released on bail and was ordered to appear in a Californian court at an unspecified date Assistant U.S. Attorney Christopher Painter reportedly said. The prosecutor described Hoke as a middle-level employee. There is no allegation that anyone else in the company was involved, Painter said. The investigation is continuing and the company is cooperating, he said. Securities fraud is punishable by up to 10 years in jail and a $1m (£600,000) fine.
The hoax was perpetrated by copying Bloomberg's Web page design and creating a false news story that on April 7 caused a dramatic increase in the trading value of PairGain. The bogus report said PairGain would be acquired by an Israeli company, ECI Telecom, for $1.35bn (£600,000)-- twice its market value at the time. During the day, the PairGain stocks rose as high as $11.12 1/2 from a closing price the day earlier of $8.50. When it became apparent that the story was fake, the stock price dropped.
Hoke was accused of creating the false report in a federal complaint filed late Wednesday in federal court and unsealed today. The complaint charges that investors who paid the inflated price for PairGain were defrauded. The government complaint does not specifically allege that Hoke traded in PairGain stock on April 7, but an affidavit said Hoke has a history of using online trading companies to purchase and sell securities, and he traded PairGain stock as recently as January.
The complaint names one victim of the hoax, a Californian investor who purchased 1,500 shares of PairGain stock after learning of the report. The complaint alleges Hoke used a free Web page service operated by Angelfire.com and a free e-mail service operated by Hotmail.com to create the scam.
The FBI used recorded Internet addresses to make the trace, the U.S. attorney's office said. According to prosecutors, Hoke also allegedly posted a bogus e-mail message about PairGain under the subject line "Buyout News" on a financial news message board operated by Yahoo!. The message contained a link to the bogus Bloomberg site.
This week, Bloomberg LP filed a lawsuit over the hoax in U.S. District Court in New York City. The lawsuit identified the defendants only as John Does and seeks unspecified damages. An attorney for Bloomberg said the suit would help the company learn the identities of those involved.