Federal probe casts shadow over PairGain Technologies

Shares of telecommunications-equipment maker PairGain Technologies Inc. (Nasdaq: PAIR) fell 1 1/8, or 8 percent, to 13 11/16 Wednesday on news that two prominent executives are the subject of a federal criminal investigation.

The investigation centers around some investments made back in 1995 by S. Jay Goldinger, a Beverly Hills, Calif.-based brokerage firm.

PairGain, along with retailer Pier 1 Imports Inc. (NYSE: PIR) and several other companies and individuals, used S. Jay Goldinger to buy U.S. Treasury bonds, a very common investment for major corporations.

According to PairGain, the brokerage firm secretly used the funds to trade derivatives without its consent. This risky investments ultimately cost PairGain $15.8 million. S. Jay Goldinger's clients lost more than $100 million in the fiasco.

At issue, however, is when PairGain officials actually discovered the problem and how long they took to inform investors.

PairGain claims it unearthed the scandal in November 1995, three months after the Justice Department said the shady dealings took place.

Although the $15.8 million didn't have a direct impact on PairGain's earnings, it certainly hurt the company's balance sheet.

Chairman Charles Strauch and CFO Charles McBrayer have both been named in the investigation.

PairGain officials contend they informed investors as soon as they realized there was a problem.

"From our perspective, we don't think there's anything to it," said Chandan Sarkar, an analyst at Soundview Technology Group. "It's definitely hurting the stock, but there shouldn't be any long-term impact on the stock."

Sarkar maintains an "accumulate" rating on the stock and has set a 12-month price target of $17 a share.

PairGain missed analysts' estimates in its first quarter, earning $4.2 million, or 6 cents a share, on sales of $60.9 million.

First Call consensus expects it to earn 6 cents a share in its second quarter and 33 cents a share in the fiscal year.

Oddly, this isn't the first major controversy of the year for PairGain.

Back in April, a bogus press release was posted on several Web sites claiming that ECI Telecom Ltd. (Nasdaq: ECILF) would buy PairGain for $1.35 billion.

PairGain shares shot up more than 30 percent before the press release was debunked.

PairGain shares hit a 52-week high of 20 1/8 in June before falling to a low of 6 in October.

Ten of the 19 analysts following the stock maintain either a "buy" or "strong buy" recommendation.