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Internet Implicated in Stock-Fraud Arrests in California

The New York Times
December 16, 1999

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. Stocks can be propelled there with little more than effusive talk and rosy predictions.

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 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.


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