FBI agents today arrested Gary Dale Hoke, 25, at his home in Raleigh, North Carolina. He was arraigned this morning and ordered to report to the U.S. attorney in Los Angeles, then released on $50,000 bail.
Authorities said Hoke is a PairGain employee and owns stock in the company, which makes high-speed Internet connection products. Authorities tracked Hoke to a fraudulent news story posted April 7 after combing through network logs of at least five companies, according to an affidavit.
Hoke, who allegedly used PairGain computers to spread the story, faces a maximum penalty of ten years in prison and $1 million in fines if convicted. His attorney said he was still reviewing the charges and had no immediate comment.
The story falsely claimed that an Israeli company was acquiring PairGain for $1.35 billion in cash. Shortly after the story was posted, PairGain's stock surged from $8.50 per share to $11.25. The stock later dropped after the hoax was exposed.
The story, which was attributed to Bloomberg, incorporated graphics used by the financial news service. Bloomberg recently sued five "John Does" in connection with the incident.
The fake story was posted on Angelfire, a site offering free Web page hosting. Apparently to help create the impression that the story originated from Bloomberg, however, only Angelfire's numeric identifier appeared in the address. On April 7, a Yahoo chat room visitor claimed to have "buyout news" that had just run over Bloomberg. The message included a link to the bogus Bloomberg story.
FBI investigators combed through Angelfire and Yahoo logs and almost immediately learned that the offending posts had been made from someone using computers owned by Tustin, California-based PairGain. The investigators also searched PairGain logs, Internet service provider MindSpring, and email provider Hotmail, which Hoke allegedly used in posting the false story. All of the companies complied with a subpoena to turn over logs of Internet protocol addresses and other information collected.
According to the affidavit, the bogus story caused PairGain's trading volume to surge to more than six times its normal rate. The company's volume, typically 2 million shares, hit 13.7 million the day the story was posted. The surge flagged the attention of regulators at the National Association of Securities Dealers, who contacted PairGain executives.
According to the affidavit, Hoke had accounts with at least two online brokerages and had traded PairGain stock as recently as January. There was no evidence he had sold any of the stock on April 7, when PairGain's shares surged.