Long Island Man Arrested for Internet "Pump and Dump" Stock Scheme Involving False Claims Designed to Prey on Public Concern about Terrorism and "Bird Flu" Virus
Scheme Targeted Over 20 Companies and Generated More Than $870,000 in Illegal Trading Profits
A criminal complaint was unsealed in U.S. District Court in Brooklyn, New York, this morning charging FAISAL ZAFAR, a Long Island computer consultant, with conspiracy to commit securities fraud for his role in a “pump and dump” scheme that targeted over 20 publicly-traded companies and netted over $870,000 in illegal profits.1 The scheme involved the posting of false press releases and messages on the Internet that were designed to artificially inflate the targeted companies’ stock prices by preying on investors’ fears about terrorism and avian influenza, more commonly known as the “bird flu.”
The charges were announced by ROSLYNN R. MAUSKOPF, United States Attorney for the Eastern District of New York, and MARK J. MERSHON, Assistant Director-in-Charge, Federal Bureau of Investigation, New York Field Office.
Federal agents arrested ZAFAR and executed a search warrant at his residence earlier today. He will be arraigned this afternoon by United States Magistrate Judge Lois Bloom at the U.S. Courthouse, 225 Cadman Plaza, Brooklyn, New York. The investigation was conducted with the assistance of the United States Securities and Exchange Commission (“SEC”). The SEC filed a related civil complaint today against ZAFAR in the Eastern District of New York seeking, among other things, a temporary restraining order and asset freeze.
According to the complaint, between April 2004 and March 2006, ZAFAR and others purchased the securities of more than 20 publicly-traded companies (the “targeted companies”) through on-line brokerage accounts at prevailing market prices. Shortly after purchasing the targeted companies’ shares, ZAFAR and others used a variety of on-line aliases to post false messages containing purportedly positive information about the companies on various financial message boards. The targeted companies’ stock prices increased significantly as a result of the false Internet postings. ZAFAR and his co-conspirators then proceeded to sell their own shares in the targeted companies at artificially inflated prices for over $870,000 in ill-gotten gains.
The complaint describes the following examples of ZAFAR’s efforts to fraudulently manipulate the targeted companies’ stock prices:
• In August 2005, ZAFAR posted messages on a Yahoo message board claiming that a company called Trans-Industries, Inc. (“TRNI”) had obtained a $100 million contract from the Department of Homeland Security related to the prevention of terrorist attacks against the New York City subway system. One of ZAFAR’s posts stated: “TRNI to receive $100 mill contract from Homeland Security. . . After London terror attacks, NYC subway system to be made safer and TRNI to supply parts to do so.” In fact, TRNI had no such contract.
• In October 2005, ZAFAR posted a message on a Yahoo message board claiming that a company called Kent-Industries, Inc. (“Kent”) was in the process of acquiring an unnamed company that was capable of producing a vaccine for the “bird flu,” a common name for the potentially deadly avian influenza virus. This message stated that Kent would “get approximately $930 million worth of business THIS QUARTER ALONE” as a result of the acquisition. In reality, there was no such acquisition.
• Between November 2004 and December 2004, ZAFAR posted several fraudulent messages appearing to contain the text of press releases purportedly issued by a company called Spar Group, Inc. (“Spar”). The first bogus press release, posted in November 2004, stated that Spar would be receiving a “$29.2 million award” resulting from an arbitration proceeding with “Federated department stores subsidiary Macy’s.” The second bogus press release, posted in December 2004, stated that Spar had entered into a $56 million contract with Kmart. Both of these press releases were complete fabrications that were issued without Spar’s consent or authorization.
• In January 2006, ZAFAR posted a fraudulent message on Yahoo claiming that analysts had predicted a significant price increase in the stock of a company called Williams Industries, Inc. (“WMSI”). The message stated: “[It] looks like WMSI [is] getting a major reconstruction contract in Iraq, which could cause a major rally and cause WMSI to break $5.00 today.” This message, like the others, was completely false.
In each of these cases, and in many other instances, the stock prices of the targeted companies increased significantly as a result of ZAFAR’s bogus Internet postings. Furthermore, in virtually every case, ZAFAR and his co-conspirators were able to profit by selling their shares in the targeted companies at artificially high prices.
“When Internet scam artists exploit investors’ fears about matters like terrorism or international health epidemics to line their own pockets, it is not only a crime, it is truly reprehensible,” stated United States Attorney MAUSKOPF. “Cyberspace will provide no refuge for fraudsters. They will be caught and prosecuted to the fullest extent of the law.” Ms. MAUSKOPF thanked the United States Securities and Exchange Commission for its assistance in this case.
FBI Assistant Director-in-Charge MERSHON stated, “The Internet has become the land of opportunity for criminals venturing into the next big fraud scheme. This case sends a strong message to fraudsters: ‘You're not going to get away with using the Web to catch unsuspecting investors and make them your victims. The FBI will catch you and you will be held accountable for your crimes.’ ”
If convicted, the defendant faces a maximum sentence of 25 years imprisonment, five years supervised release, and a $250,000 fine (or twice the gross gain or loss as a result of the offense).
The government’s case is being prosecuted by Assistant United States Attorney Martin Coffey.
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