01:40 PM

Feds Bust Stock 'Pump And Dump' Botnet Scheme

Authorities said a group used hacking, spam, and malware to artificially inflate securities prices and then sell shares at a profit.

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Federal agents arrested Christopher Rad, 42, of Cedar Park, Texas, on Monday and charged him with committing securities fraud and transmitting email messages containing fraudulent information. He faces five years in prison and a $500,000 fine.

Rad's arrest stems from an admission made last year by James Bragg, 42, of Chandler, Ariz. According to authorities, on October 20, 2010, Bragg pleaded guilty in federal court "for his role in hiring botnet operators and engaging in mass email campaigns to pump up the value of stock prior to dumping shares." Bragg, who committed the crimes while based in Thailand, named Rad as a co-conspirator.

Authorities also accused two hackers -- named only as B.T., a Russian botnet operator, and D.S. -- as co-conspirators, though not defendants in the case, as they reside outside of the United States.

According to a federal indictment unsealed on Monday, "Rad acted as a middleman between stock promoters seeking to pump shares of stock, and computer experts located inside and outside of the United States who used various means, including 'spam' email campaigns, 'botnets,' and hacking to pump the stock."

According to the indictment, Rad and Bragg used the botnets -- designed to evade anti-spam controls -- to blast millions of emails to people touting the stocks. The indictment also alleged that "the perpetrators further hacked into the brokerage accounts of unsuspecting third parties, liquidated the existing holdings, and used the balance to trade in a particular stock, thereby pumping up the stock price." Allegedly, they also prearranged trades to make it look like there was an active market for the stock.

The scheme operated from at least November 2007 through February 2009, the indictment said. So-called "pump and dump" schemes involve artificially inflating the value of a stock, after which the promoters behind the scheme sell their shares for a profit. The Securities and Exchange Commission prohibits such "manipulative stock schemes," which are illegal.

The penny stocks they allegedly pumped and dumped included the ticker symbols RSUV (Remote Surveillance Technologies) and VSHE (VShield Software). According to news reports, both companies now appear to be defunct.

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