LOS ANGELES, June 21 (Reuters) - A man who posted a fake news story on the Internet earlier this year, in what prosecutors said may have been the first instance of Internet-based stock manipulation, pleaded guilty on Monday to federal securities fraud.
Gary Dale Hoke, 25, a former employee of PairGain Technologies Inc., was arrested on April 15 and charged with posting a bogus story that said PairGain was the target of a billion-dollar corporate takeover.
The fabricated news story, which appeared on a Web site which purported to carry stories from Bloomberg News, sent PairGain <PAIR.O> stock soaring 31 percent before tumbling back down when the hoax was revealed. Prosecutors said Hoke, since fired by PairGain, may have been the first to perpetrate a "stock manipulation scheme" via the Internet.
Hoke, who pleaded guilty to two charges of securities fraud in federal court in Los Angeles, faces as much as 20 years in prison and $2 million in fines when he is sentenced Aug. 30.
His guilty plea and federal sentencing guidelines mean, however, that he is likely face a lesser penalty. A spokeswoman for PairGain was not immediately available for comment.
In pleading guilty to U.S. District Judge Consuelo Marshall, Hoke admitted on Monday that he posted the bogus report with the purpose of defrauding buyers and sellers of PairGain stock, said Assistant U.S. Attorney Christopher Painter. Hoke owned shares of PairGain common stock and options to purchase more, and intended to profit from the phony report, Painter said.
The false news story said PairGain -- a Tustin, California, maker of high-speed access phone products -- was going to be taken over by an Israeli company for $1.35 billion.
The report came amid rumors that PairGain would be acquired by another company, and investors who paid an inflated price for PairGain stock were defrauded when the price fell back to its pre-hoax levels, prosecutors said.
The seesawing of PairGain stock highlighted the perils that investors face as they weigh tips from Internet bulletin boards and chat rooms, where postings go largely unregulated and rumors spread like wildfire.
Hoke, a computer engineer in PairGain's Raleigh, North Carolina, design center, attempted to hide his identity when posting the fake news story, prosecutors said. FBI agents were able to track him down using Internet Protocol addresses that were recorded when he accessed certain Web page services.
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