Internet Implicated in Stock-Fraud Arrests in California. Two California men were charged yesterday with conspiracy to commit securities fraud in a case that shows both how easy it is to inflate the price of stocks artificially on the Internet and, prosecutors say,
how quickly such culprits can be identified.
The United States attorney in Los Angeles and
the Securities and Exchange Commission
contend that the men -- Arash Aziz-Golshani
and Hootan Melamed, both 23 years old and
recent college graduates -- sent bogus messages
over the Internet to pump up the price of stock
in an obscure bankrupt company. The share
price rose from 13 cents to more than $15 in
less than two trading days last month,
prosecutors say, reaping $364,000 in profits for
Mr. Aziz-Golshani, Mr. Melamed and a third
man.
On Friday, Nov. 12, according to prosecutors,
Mr. Aziz-Golshani, Mr. Melamed and the third man, Allen Derzakharian,
26, sat down at public computers in the biomedical library at the
University of California at Los Angeles and tapped into the Internet.
Using 50 different Web identities, prosecutors say, the three men sent
more than 500 messages to three hot investment Web sites over the
weekend, all promoting shares of NEI Webworld Inc., a bankrupt
commercial printing company based in Dallas. They called NEI an
imminent takeover candidate even though they knew it was not,
prosecutors say.
The case, among the first involving charges of Internet fraud, illustrates
how easy it is to send stocks soaring by using the Internet. But
prosecutors say the case also sends an important message to people who
think the anonymity of the Internet allows them to manipulate stocks by
posting false statements about a company. Although many people who
violate securities laws have migrated to the Internet, regulators say this
case shows how quickly investigators can track down anyone who posts
bogus electronic messages about companies or stocks.
"The Internet is no longer the Wild Wild Web," said Christopher M. E.
Painter, an assistant United States attorney and the computer crime
coordinator for the central district of California. "It's a new territory that
law enforcement is trying to tame. We will go after these cases."
Regulators say that the men began promoting NEI Webworld
electronically after they had bought 97 percent of the company's available
stock for themselves at prices ranging from 5 cents to 17 cents a share.
In October, there was virtually no market activity in shares of NEI, which
traded on only 3 of 21 trading days. On Friday, Nov. 12, the stock
closed at 13 cents a share. But rhapsodic messages sent by the men over
the weekend whipped up investor interest in the shares, prosecutors say,
and the stock opened for trading the following Monday at $8.
Investors eagerly bought the shares,
pushing them to $15.50 in about a
half-hour, prosecutors say.
Meanwhile, Mr. Aziz-Golshani, Mr.
Melamed and Mr. Derzakharian sold
their shares into the buying frenzy at
prices ranging from 25 cents to
$15.1875. Mr. Aziz-Golshani made
$152,742 in profits, and Mr.
Melamed and Mr. Derzakharian, who had a joint brokerage account,
together realized $211,250 in gains.
Mr. Aziz-Golshani and Mr. Melamed were arrested in Los Angeles on
criminal and civil charges. Mr. Derzakharian was charged with civil fraud
by the S.E.C. but was not charged in the criminal case.
Richard H. Walker, director of enforcement at the S.E.C., said: "Let this
serve as a warning to con men: if you use the Internet to manipulate our
securities markets, we can and will find you. Though the perpetrators in
the case went to great lengths to hide from us, we discovered them within
a matter of days."
Under securities laws, it is illegal to engage in false representations or
manipulative practices when buying or selling a security. This is just what
Mr. Aziz-Golshani and Mr. Melamed did, prosecutors say. A Federal
judge froze the assets of all three men yesterday.
Mr. Aziz-Golshani's attorney, Randall J. Sunshine of Santa Monica,
Calif., said he could not comment on the complaint because he had not
read it.
Mark J. Werksman, the lawyer representing Mr. Melamed, said: "My
client denies manipulating the market in the way that the government
alleges. Until we know more about exactly what they claim my client did
and how the market was affected it's too early to tell how this case will
turn out."
According to the complaint, one of the men posted 10 identical messages
on various Yahoo finance message boards predicting a buyout of NEI,
whose stock trades under the symbol NEIP, by a private company called
LGC Wireless. Using the Web name "ticlopidinel," the messages said:
"Buying NEIP early would entitle you to a share of LGC Wireless when
it goes public next week. Look for a massive move to $5-$10 as
wireless stocks are very hot."
Prosecutors say that Mr. Aziz-Golshani and Mr. Melamed wrote the
message and based their Web name on ticlopidine, a stroke-prevention
drug that had been discussed in classes Mr. Melamed had recently
attended as a pharmacy student at Western University of Health Sciences
in Pomona, Calif.
When a skeptic in a chat room questioned the viability of an NEI buyout,
prosecutors say Mr. Aziz-Golshani posted this answer: "I called on
Saturday and no officers were in to answer my call, just a receptionist
who are always the last to know." Then he added, prosecutors say,
"People who know of the deal are buying in given the large volume the
last few days."
But no buyout came. After peaking above $15 on Monday, Nov. 15,
NEI shares closed at 75 cents. The stock closed yesterday at 18.75
cents a share.
Securities fraud has migrated to the Internet, regulators say, because
stocks can be propelled there with little more than effusive talk and rosy
predictions. Before the Web became stock-tip central, someone who
wanted to manipulate a company's shares had to employ rooms full of
stockbrokers flogging stocks to unsuspecting investors by telephone.
Now an electronic message does the trick instantly.
Prosecutors in the criminal case against Mr. Aziz-Golshani and Mr.
Melamed contend that the Internet promotion of NEI was not the first for
the two men. According to the complaint, although Mr. Aziz-Golshani,
who lives in Beverly Hills, told prosecutors that he operates a business
from his home selling leather jackets online, messages emanating from
computers at the U.C.L.A. biomedical library last September promoted
shares in a company called Justwebit.com Inc. A review of brokerage
firm account statements belonging to Mr. Aziz-Golshani and Hooshang
Melamed, Hootan Melamed's father, indicate that trades in the company
were made that resulted in profits to both. Mr. Aziz-Golshani graduated
from U.C.L.A. last spring. |
