Bogus report boosts Internet stock

Experts say fraud is getting more sophisticated on the online message boards where investors troll for hot stock tips.

As proof, they point to an elaborate hoax, perpetrated on Yahoo! Finance and possibly other sites that succeeded in driving up the stock of PairGain Technologies Inc. Wednesday morning. "I've never seen anything like this before," said Mike Riley, senior producer for Yahoo! Finance. "It's just all the more reason to verify these things from another source."

At 6:27 a.m. PT Wednesday, a Yahoo! Finance user identified as "staceylTN" posted a hyperlink apparently directed to the Web site of the Bloomberg financial news service, along with the note, "BUYOUT NEWS!!! ECILF is buying PAIR... Just found it on Bloomberg..."

At the other end of the hyperlink, readers found a page that duplicated the look and feel of the Bloomberg site, and announced telephone-equipment maker PairGain's acquisition by the Israeli firm ECI Telecom Ltd. The fake page was quickly taken down -- it was gone by the time Yahoo! investigators got to it -- but a second posting, around the same time, put the official-sounding report directly on the Yahoo! message board.

PairGain's shares climbed rapidly following the posts, which appeared on Yahoo! nine minutes after the stock market opened for trading. The stock of the digital subscriber line (DSL) company climbed from 8 1/2 to as high as 11 1/8, a rise of about 30 percent. Yahoo! said both posts have now been removed from the site, since the violation of trademarks is a violation of Yahoo!'s terms-of-use agreement.

The bogus report was, at first glance, indistinguishable from a real Bloomberg wire report. While the fake Bloomberg page was posted on Angelfire, a free Web page service, the poster took the trouble to disguise its URL (http://204.238.155.37/biz2/headlines/topfin.html) with authentic-seeming directory names, and translated the "angelfire.com" domain into a numeric IP address.

One obvious tip-off, though, was that Angelfire, like other free Web page services, includes pop-up ads on each page. Users would have been greeted with a commercial for Lowestfare.com, MiningCo.com, or other Angelfire advertisers. With the dateline, "PETAH TIKVA, Israel, and TUSTIN, California April 7," the report spoke of a transaction with "an implied value of $1.35 billion," including the "equity purchase price as well as a technology development incentive plan."

Companies who offer online investors' forums say they constantly remind their users to approach information posted on the boards with scepticism, and they say investors have largely gotten the message.

But as users' sophistication rises, so does that of pranksters and stock manipulators. As the Internet and message boards become more routine, people are being a little bit more cautious," said Marthe laRosiliere, associate general counsel of The Motley Fool, an online investing site. "But this is the most elaborate hoax I've seen."

"I got a call from a friend saying there was a release out that PairGain was going to be bought at around $18 a share," said John Todd, an analyst at C.E. Unterberg, Towbin. "So I checked the price and saw that it was still $7 to $8 below the alleged purchase price. Even though it smelled fishy, the greed element began to overpower logic."

Assuming the false release was true, PairGain shares would have raced up to at least $18 a share based on the phony purchase price. But since the stock was hovering at only $11 and change, Todd said it became obvious that something was amiss.

Todd said he then called PairGain Chief Financial Officer Charles McBrayer to clarify the situation. "He told me there was absolutely no truth to it and he had no idea who put it out there," Todd said. "But to someone who's day trading or doesn't really investigate a release like that, it would be too late." (PairGain officials could not be reached for comment.) PairGain, which develops high-speed DSL technology, is rated a "hold" by 11 of the 20 analysts following the stock.

Its shares soared to 24 1/8 last April before tumbling to a 52-week low of 6 in October. Last quarter, it posted a profit of 7 cents a share, which is about what First Call analysts are projecting for the March quarter.

Shares of ECI Telecom hardly moved on Wednesday's roller-coaster news. While the fake report was only definitely placed on Yahoo! Finance, reports said it also appeared on the Bloomberg.com site for a time.