Re: 3/8/00 - [LU] WSJ: Jury Convicts Stock Trader For Fake Posting on Lucent
Jury Convicts Stock Trader
For Fake Posting on Lucent
By AARON ELSTEIN
WSJ.COM
A federal jury convicted an online stock trader of securities fraud for posting a fake news release that was designed to resemble a profit warning from Lucent Technologies Inc.
Thursday's ruling against Fred Moldofsky, a 44-year-old former dentist from Houston, appears to be the first time a jury has convicted someone of securities fraud for posting bogus information online.
Mr. Moldofsky, who was tried in Manhattan federal court, faces as many as 10 years in prison and a fine of at least $1 million. Sentencing by U.S. District Judge Robert P. Patterson Jr. is scheduled for June 11.
Mr. Moldofsky says he plans to appeal. His lawyers, who come from the public defender's office, had no comment, and federal prosecutors declined to comment on the jury's decision.
Mr. Moldofsky posted his fake press release, which appeared to come from Lucent, on the evening of March 22, 2000, on a Yahoo! Inc. message board. The message said the Murray Hill, N.J., company expected earnings to fall short of expectations in that year's second quarter.
Lucent's stock, one of the most widely held in the country at the time, initially fell 3.6% following the release. The morning's decline wiped out nearly $7.1 billion of market value before word came that same day that the release was fake, prosecutors said, and the stock recovered.
Mr. Moldofsky's lawyers, who presented no witnesses at trial, didn't dispute that their client posted the message. But they contended that he didn't intend to profit from any fall in Lucent shares because he hadn't shorted the stock. They added that if he had intended to defraud investors, he wouldn't have posted a message when the market was closed, when investors had time to verify the inaccurate information.
Posting the message "was a dumb thing to do. It was stupid. But it wasn't a crime," Mr. Moldofsky's lawyer, Ian Yankwitt, told jurors.
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But Steven Peikin, an assistant U.S. attorney who led the prosecution, told the jury that whether or not Mr. Moldofsky succeeded in fooling investors didn't matter. The important thing was that he had tried to fool them, Mr. Peikin said.
And that's the argument the jury bought. After a week-long trial, it took the seven-man, five-woman jury three hours to reach a ruling. "We decided the whole thing came down to intent," said Carolyn Stoller, an advertising representative who served as the jury's foreman. "If we hadn't agreed on that, we would have spent a long time arguing."
Although others have been accused of posting false press releases on the Internet about such companies as Emulex Corp. and PairGain Technologies Inc., those cases never got to trial because the defendants pleaded guilty to fraud charges. Mr. Moldofsky's securities-fraud case was the first to be tried in court, said Blake Bell, a New York lawyer who tracks online-securities litigation.
"It's not guaranteed that Mr. Moldofsky will go to jail, because his lawyers can still try to make a deal with the prosecutors before he's sentenced," Mr. Bell said. "But I have no doubt that the prosecutors will be trying to make an example of him."
Mr. Moldofsky's conviction came on the same day that federal securities regulators settled a civil fraud case against Yun Soo Oh Park, a New York burrito vendor-turned-online stock picker better known as "Tokyo Joe." Mr. Park agreed to return about $755,000 in profits for failing to disclose that he sold stocks he was recommending others buy.
Mr. Moldofsky actively traded stocks using an account at Datek Online Holdings Corp., according to court records. He frequently sold tech stocks the same day he bought them and bought many stocks on margin, meaning he used borrowed money.
On March 22, 2000, the day Mr. Moldofsky posted the fraudulent messages about Lucent, he bought and sold 6,000 Lucent shares for a net loss in the transactions, according to prosecutors, who never quantified the loss.
Prosecutors say he posted 19 messages about Lucent on Yahoo the evening of March 22 and the morning of March 23, suggesting that Lucent would warn of an earnings shortfall. The telecommunications giant had already warned Jan. 6, saying quarterly earnings wouldn't meet expectations.
Prosecutors said Mr. Moldofsky attempted to exploit investor unease about Lucent by posting messages under various aliases on the evening of March 22, saying, for example, "Lucent Releases Earnings Warning! Damn!"
The message was identified as a "Company Press Release," datelined Murray Hill, N.J., and purportedly from PRNewswire, the service that disseminates actual Lucent news releases. The bogus release said the company expected second-quarter earnings to fall short of consensus estimates. The release also quoted the company's chairman at the time, Richard McGinn, as saying he was disappointed with the results.
Lee Mikles, a hedge-fund manager at Mikles Miller Management Inc. in Los Angeles, testified that an analyst showed him the release, believing it to be real. Mr. Mikles said he then sold short 50,000 Lucent shares. (Short sellers profit from falling stock prices by selling borrowed shares that they hope to replace later with stock bought at a lower price.)
But at 11:32 a.m. on March 23, Bloomberg News reported that the alleged Lucent earnings warning was fake, and the stock shot up 6.8% in minutes, according to court documents. Mr. Mikles testified that the news forced him to immediately cover his short position for a loss of $200,000.
In addition to the criminal conviction, Mr. Moldofsky faces a civil suit from the Securities and Exchange Commission on similar allegations.
He says he spent much of his time out of court this week in an Internet cafe in Times Square, scouring such message-board sites as Silicon Investor and Raging Bull. He says he wants to find people willing to testify that they knew about the Yahoo message but didn't change their investment decisions. "There's gotta be someone out there who can help me," he said. "Gotta be."
Write to Aaron Elstein at aaron.elstein@wsj.com
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