U.S. Charges Three Men With Web Stock Manipulation (Update1)
(Adds details of charges)
Los Angeles, Dec. 15 (Bloomberg) -- Three men, including two recent graduates of the University of California at Los Angeles, were charged with illegally netting $364,000 by using the university's computers to manipulate a stock through Internet chat rooms.
The case is the first Internet stock-fraud case filed by the SEC against people unaffiliated with the company whose stock they allegedly manipulated for profit, SEC spokesman Chris Ullman said.
The U.S. attorney's office in Los Angeles also filed criminal charges against two of the men. ''Though the perpetrators in this case went to great lengths to hide from us, we discovered them within a matter of days,'' SEC enforcement director Richard H. Walker said.
The three men used 50 aliases in sending messages to 500 Internet bulletin boards, the SEC alleged. The stock they allegedly manipulated, NEI Webworld Inc., soared one morning to $15.50 a share, from a previous closing price of 13 cents, then collapsed to 25 cents a share a half-hour later, the SEC alleged.
The three people charged by the SEC all live in California. They were identified as Arash Aziz-Golshani, 23, an Internet leather-jacket retailer who recently graduated from UCLA; Allen Derzakharian, 26, another recent UCLA graduate who is a pharmacy student at the Western University of Health Sciences in Pomona, and Hootan Melamed, 23, also a pharmacy student at the same school.
Golshani and Melamed also were charged by federal prosecutors with conspiracy to commit securities fraud, an offense that carries a maximum penalty of 5 years in prison. Golshani was arrested Tuesday, and Melamed has agreed to surrender to federal officials today. Their attorneys couldn't be reached for comment.
The SEC's civil complaint, filed in Los Angeles federal court, alleges that the defendants manipulated the stock of NEI, a bankrupt commercial printing facility owner based in Dallas.
The three bought large blocks of NEI stock and used computers at UCLA's biomedical library to send a fraudulent message to Internet financial message boards, the complaint contended. These message boards were operated by Yahoo! Finance, Raging Bull and FreeRealTime.com.
The messages sent by the defendants, who used many pseudonyms, predicted the acquisition of all outstanding NEI shares by a closely held San Jose, California firm, the suit alleged. In fact, no such purchase was ever planned, the SEC contended.
One messages said, ''People who know of the deal are buying in given the large volume the last few days,'' according to SEC court documents. The defendants used pseudonyms such as ''Blue Algae,'' ''Green Matter,'' and ''Betty Johnson,'' the commission alleged.
As a result of the alleged manipulation, the company's stock, which closed at 13 cents a share on Friday, Nov. 12, opened at $8 on Monday, Nov. 15, the suit alleged. It then soared to $15.50 that morning, and collapsed to 25 cents a half- hour later, the SEC contended.
Some of the defendants sold their stock after it had risen, the SEC alleged.
NEI filed for Chapter 7 liquidation before the alleged fraud took place. It had no assets or operations during this time, though its stock still traded on the Nasdaq Stock Market's over-the-counter bulletin board, the suit alleged. The company wasn't charged with any wrongdoing.
The SEC previously has alleged that company executives, brokerages, and stock promoters connected with a company have used the Internet to manipulate its stock. This case is the first to charge that someone who has no connection to a company profited from manipulation of its stock, Ullman said.
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