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Fraud never easier _ or easier to catch

While the Internet has made stock manipulation a startlingly simple process, it also leaves a virtual trail to the perpetrators.

April 1999: In Raleigh, N.C., a 25-year-old man dummies up a bogus Bloomberg Web site announcing false news that the company he works for, PairGain Technologies, has been bought.

He hits the stock chat rooms on the Internet, talking up the "deal" and attracting the attention of traders. PairGain's shares jump 31 percent, experiencing 11 times the normal trading volume. The company's value and his personal stake take off.

He is caught in seven days.

December 1999: At UCLA, four students using computers in the biomedical lab _ and as many as 50 different screen names _ tout the shares of NEI Webworld, a Dallas over-the-counter stock, in chat rooms on the Internet.

In two business days, its shares soar from 15 cents to $15. Using a Webstreet Internet brokerage account, the students dump their stock, collectively realizing a profit of $370,000.

They are caught in a month.

March 2000: In San Jose, Calif., the employee of a technology company learns by company e-mail that his firm, Vidia Corp., has landed a lucrative contract with Microsoft Corp. He logs on to his online brokerage and allegedly begins assembling options on the company's stock, reportedly reaping more than $400,000 in illegal gains based on insider information.

He is arrested in five months.

August 2000: In the Los Angeles area, a 23-year-old former employee of an Internet-based news release wire service allegedly dummies up a fake announcement from Emulex Corp. He shorts the stock as it tanks, buys it up at the bottom and rides it to the top, supposedly netting $240,000 in ill-gotten gains.

He is arrested in six days.

Such is securities fraud in the Internet age. Authorities say manipulating markets or illegally profiting from market swings has never been easier, faster or cheaper.

Back in the heady days of the 1980s, the insider trading cases that garnered the most attention required corporate titan status a la Ivan Boesky as insiders worked deals while assembling lucrative secret holdings in those same companies through straw holders on the outside.

Or investors ran boiler room operations, purchasing large holdings of cheap stock, bidding up the market value through excessive trading and cold calling, then dumping the shares at a high point while other investors were left holding the bag.

Today, all it takes is a computer, Internet access and an online brokerage account and _ voila _ instant insider.

Never before have individual traders with so little power on Wall Street had so much access and opportunity to move the markets. While the online brokerage business has made Wall Street more democratic, it's also leveled the playing field for securities fraud, making it possible for anyone with a modicum of financial sophistication.

While it's become easier to commit securities fraud, it's also become easier to catch the people behind it. Committing white-collar crime always has created some kind of paper trail, but the trail that gets created in the Internet age is far more detailed, experts say.

"The good thing about Internet fraudsters, whether it's securities fraud or other kinds of fraud, is there's usually money involved," said Christopher Painter, deputy chief of the computer crime section of the Justice Department.

"Unlike hacking cases, that creates a trail. Internet fraud people have not achieved the sophistication of the hackers. That's not going to last forever, so law enforcement has to be vigilant in tracking these people down."

As the financial markets become increasingly important to everyday investors, investigators are noticing a number of attendant types of white-collar crime bubbling up with it.

Although the number of Internet-related securities fraud incidents have been relatively few so far, some law enforcement officials say the Internet has transformed their mission. They are adding new positions dealing with Internet fraud and hiring certified public accountants to unravel accounting frauds.

Even traditional investigations of non-Internet crime require computer searches and retrievals from computers, e-mails and the like.

"It hasn't changed fraud to the extent that we're seeing anything new _ we haven't created any new laws to prosecute it," said Marc Fagel, chief of the Internet enforcement unit of the Securities and Exchange Commission's San Francisco office. The new division has been created within the last year.

"What the Internet has done is made it much easier for people of limited resources to perpetrate that sort of fraud very efficiently," Fagel said. "The flip side is, it's much easier for us to find."

Consider the case of Mark Simeon Jakob, 23, arrested by FBI agents Aug. 31 after he allegedly manufactured the fake release about Emulex and e-mailed it to his former employer, Internet Wire.

When the news release went out on the morning of Aug. 25 _ after being picked up by other news wires _ it caused a temporary $2.2-billion drop in the value of Emulex shares plus untold losses for investors.

Emulex stock mostly rebounded by the end of the day after chief executive Paul Folino refuted the bogus report about the company.

Within hours, federal agents recovered the Internet Protocol, or IP, number where the e-mail originated. It was in the computer laboratory at El Camino Community College, where Jakob was a student.

Agents also recovered the coding on the Microsoft Word template used to create the false news release, which happened to be licensed to the Library Media Technology Center at El Camino. They also found the IP number of the computer that was used to create the fake Yahoo e-mail account from which the news release was sent, which also corresponded to El Camino.

Furthermore, investigators found a student who told them he had seen Jakob using a laboratory computer at the time the e-mail was sent. In addition, investigators discovered indications on the computer that it had been used to create the fake news release.

And they found records of the trades executed in Jakob's Datek brokerage account from his computer at his former job and at the business center in the Mandalay Bay Hotel in Las Vegas, where Jakob was a registered guest.