PairGain Hoaxer Sentenced to Home Detention, Probation : Courts: Gary Dale Hoke must also pay $93,000 restitution to investors in the Tustin firm.

A former employee who drove up the price of PairGain Technologies Inc. stock by posting a fake news story on the Internet was sentenced Monday to five months of home detention and five years of probation.

Gary Dale Hoke, 26, of Raleigh, N.C., also was ordered to pay $93,000 to about 30 investors who purchased stock of the Tustin maker of communications equipment and sold it at a loss after the company denied the bogus report that it was about to be purchased by an Israeli company for $1.35 billion.

Hoke, who did not profit from the hoax, pleaded guilty to two counts of securities fraud. He was originally charged with five counts and faced a maximum sentence of 10 years in prison and up to $1 million in fines per count.

In a separate settlement with the Securities and Exchange Commission, Hoke admitted disseminating fraudulent information about PairGain and agreed to comply with federal antifraud regulations in the future.

U.S. District Judge Terry Hatter in Los Angeles dismissed prosecutors’ recommendation of 12 to 13 months in prison, saying he was convinced Hoke’s decision to post the fraudulent story was an aberration in an otherwise honorable life.

Hatter questioned whether the lack of Internet safeguards to prevent posting of false messages was partly to blame for the scam.

Hatter also criticized professional investors who failed to verify the fake report before buying PairGain stock, and said he was impressed by a letter in which Hoke’s mother said her son was “a victim of the Internet.”

“It doesn’t seem right that we proceed with this matter criminally when we don’t have protections out there,” he said.

Hoke told Hatter that he posted the story to counter chat room messages that disparaged PairGain and the value of its stock. Hoke said he believed the messages were posted by traders who hoped to profit by driving down the price of the company’s shares.

Hoke owned 1,000 shares of PairGain, but he sold none of them during the hoax. He holds options on another 5,000 shares.

“As a PairGain stockholder, it just made me unhappy. I felt I could influence the negative remarks people were making in a positive way. It was stupid,” Hoke told reporters outside the courtroom.

“We’re very pleased by the outcome,” said Hoke’s attorney, Samuel Currin of Raleigh.

Hoke, who was employed at PairGain’s North Carolina facility as a computer hardware engineer when he posted the story, now works for a Raleigh software firm.

The home detention portion of the sentence was designed to allow Hoke to work so he can pay restitution.

Christopher Painter, the assistant U.S. attorney who prosecuted the case, said Hoke wanted to make money on the deal but got cold feet when the fake story generated more trading activity than he expected.

The sentence will serve as a deterrent, even though Hoke received no prison time, Painter said.

“He was ordered to pay substantial restitution and he’s subject to a five-year period where his conduct is substantially limited,” Painter said. Among other things, Hoke cannot conduct any financial dealings over the Internet, and if he does use the Internet, he has to use his real name.

The money Hoke was ordered to pay will compensate investors who lost money on the hoax, although the amount “probably underrepresents the losses that were actually caused,” Painter said.

Hoke planted the story, made to look like a Bloomberg News Service article, by using a fake name and an Internet service that offers users free Web pages. Hoke then linked the Web page to messages about PairGain that he posted in Internet chat rooms.

Investigators identified Hoke as its creator by tracing the Web page and chat room postings to his Internet service provider, Painter said.

The April 7 hoax pushed up PairGain stock by more than 30%, from $8.50 per share to as high as $11.25. Trading that day totaled 13.7 million shares, about seven times its average trading volume. The price of PairGain stock fell back to $9.38 when the company issued a statement denying that such a deal was in the works.

Internet stock hoaxes commonly consist of false messages posted in investment chat rooms. The PairGain hoax was unique in that Hoke created a Web page and story credible enough to dupe even sophisticated investors, Painter said.

Those taken in included a number of professional investors, including James Cramer, president of the New York money management firm Cramer Berkowitz and co-founder of the financial Web site TheStreet.com.

Bloomberg LP, parent company of the news service, has filed a related lawsuit against Hoke in federal court in New York City, seeking unspecified damages.

Bloomberg News and Dow Jones News Service contributed to this report.