When Telling the Truth Is a Crime
Elgindy Faces Charges He Manipulated Stocks With Accurate Information
By John R. Emshmiller
Wall Street Journal
November 1, 2004
The trial of a controversial stock trader could shed new light on whether, in the age of the Internet, disseminating accurate information about a company can be part of a criminal stock-manipulation scheme.
The criminal proceedings scheduled to begin today in federal court in Brooklyn against Anthony Elgindy and his co-defendant, former Federal Bureau of Investigation agent Jeffrey Royer, involve allegations that range from racketeering and fraud to extortion and obstruction of justice. The alleged conspiracy headed by the 36-year-old Mr. Elgindy involved using illegal tactics while “shorting” certain small company stocks. Short selling is a trading technique that produces profits when a company’s stock price falls. Shorting a stock, like the opposite practice of promoting it, can be perfectly legal – depending on how it is done.
Among other things, the government contends Mr. Royer, while still at the FBI, illegally passed along confidential law-enforcement information to his co-conspirators about some of the target companies. The defendants are also charged with extorting stock from companies. Several other individuals have been charged in the case. Some have pleaded guilty. Others await separate trials.
One potentially provocative issue in the case concerns the question of using accurate information about a company – be it positive or negative – in stock manipulation. Over the years, stock fraud cases have focused on the dissemination of false information and courts have generally held that putting out accurate material wasn’t manipulative.
The prosecutors in the Elgindy case, however, are taking a more encompassing view of manipulative activity. In a letter late last year to presiding Judge Raymond Dearie, the U.S. attorney’s office in Brooklyn said the government’s case alleges “the release of accurate information can indeed be part of a market manipulation scheme.” The government also alleges that in some instances the defendants put out false information to the public.
“It’s an unconventional theory,” says Jacob Frenkel, a former Securities and Exchange Commission attorney who now is in private practice in the Washington, D.C., area. However, he adds, a manipulation case could be made involving the release of accurate information if it is shown to be part of a pattern of trading activity that was designed to artificially move the price of a stock.
In the late 1990s, Mr. Elgindy rose to prominence as a frequent and outspoken message poster on Internet stock chat sites, such as Silicon Investor. Mr. Elgindy subsequently started a private online chat site where members paid a monthly fee to obtain his stock insights, which mostly focused on shorting securities.
The indictment charges that Mr. Elgindy subsequently used his private Web site and its membership as part of the manipulation scheme. While spreading “negative” information online about a company, Mr. Elgindy would advise his fellow traders “to join him in short selling the stock…which was calculated to have the effect of driving down the price,” the indictment says.
While concerted action long has been part of stock-manipulation maneuvers, the Internet’s communicating power “has given rise to a new generation of deceptive techniques,” argues one government court filing. “While the government acknowledges that the techniques alleged here are different from those of the past generation of swindlers and louts, the evolution of manipulation into the virtual world does not provide immunity for the defendants’ conduct.”
In court filings, the defendants have argued that they were involved in legitimate stock-trading and stock-research activities that helped uncover misdeeds by companies. In online missives, Mr. Elgindy frequently boasted of his contacts with law-enforcement officials and how he passed along information to them about suspect stocks. |
