FOR IMMEDIATE RELEASE 99- 148 SEC Charges Former Money Manager S. Jay Goldinger With Defrauding PairGain Technologies, Inc. PairGain and Two of its Top Executives Charged with Financial Disclosure Violations; the Executives Agree to $25,000 Penalties CFTC and U.S. Attorney Announce Related Settlement and Guilty Plea Washington, DC, November 8, 1999 -- The Securities and Exchange Commission today charged S. Jay Goldinger, once a well-known Beverly Hills-based money manager, with stealing $15.9 million from the Tustin, California-based public company PairGain Technologies, Inc. The theft occurred as part of a Ponzi-like scheme whereby Goldinger commingled the funds of PairGain and his other clients, then engaged in massive securities-futures trading misallocations. Through the scheme, which occurred during 1994 and 1995, Goldinger shifted tens of millions of dollars from some clients, including PairGain, to certain other clients while simultaneously generating enormous commissions and fees for himself. The Commission also today charged PairGain, a manufacturer of telecommunication products, and two of its top executives with failing to properly account for and timely disclose what initially appeared to be investment losses from unauthorized trading, but in reality were thefts by Goldinger. Also today, the U.S. Attorney for the Central District of California announced that Goldinger has been charged with four felony counts of wire fraud in connection with his fraudulent trade misallocation scheme. The Commodity Futures Trading Commission today also charged Goldinger and his brokerage firm, Capital Insight Brokerage, Inc., with commodities fraud. The U.S. Attorney further announced that PairGain has agreed to plead guilty to a one-count felony for failing to maintain internal accounting controls and accurate financial books and records in violation of the federal securities laws. The company was arraigned this morning and is scheduled to be sentenced this afternoon in Santa Ana, California. Richard H. Walker, Director of the SEC's Division of Enforcement, said, "Today we are sending two messages. The first is a reminder of the simple proposition that if you steal -- even if by means of a complex investment scheme -- you will be criminally prosecuted. Second, public companies must ensure that they accurately and timely disclose their investment results. Even when public companies entrust their funds to well-known and supposedly reputable money managers, they must understand the trading strategy used, its objectives and associated risks, and closely monitor the results." SEC Allegations The SEC's complaints, filed in the Central District of California, allege that: From September 1993 until November 1995, PairGain invested some of its excess cash with Goldinger, a well- known expert on U.S. Treasury securities. Goldinger told the company that he could outperform Treasury securities by using certain proprietary strategies. Goldinger misrepresented his strategy as fully hedged and low risk. Unbeknownst to anyone at PairGain, Goldinger was commingling the company's funds with other investors' funds, placing futures trades, and routinely shifting profitable trades to some clients and losses to other clients through massive trade misallocations. Goldinger's scheme eventually collapsed when he began to suffer overall trading losses, leaving PairGain and others with tens of millions of dollars in losses. In 1994, PairGain first became concerned about Goldinger's trading and learned that his options trading was highly risky. That year the company's trading account statements seemed to show large losses (due to Goldinger's trade misallocations), but account statements prepared by Goldinger appeared to reflect healthy profits. When questioned, Goldinger lied, claiming that PairGain had gains. Unable to determine what Goldinger was doing and uncertain whether the company had gains or losses, PairGain asked for its money back. Goldinger returned all the company's money with a sizable profitbut not through liquidating PairGain's investments, as he claimed. Rather he raised the money by secretly transferring profitable trades to PairGain through his misallocation scheme. The following year, 1995, PairGain invested $28.1 million with Goldinger but told him to buy only short- maturity Treasury securities. Instead, Goldinger covertly shifted almost all of the company's money to other clients who wanted to cash out or whose accounts he had previously plundered. By early June 1995, the company again questioned Goldinger's trading. When confronted, Goldinger admitted that he had engaged in unauthorized options trading. Goldinger then told the company that it would have a very sizable loss if he liquidated PairGain's investments by the end of June (the company's quarter-end). PairGain believed that its losses would be approximately $2 million if Goldinger liquidated. In reality, the losses amounted to $26 million and were from Goldinger's improper shifting of losing trades to the company. The company never attempted to independently verify the amount and reasons for its losses. Instead, for the next five months (from July through mid-November 1995) PairGain relied solely on Goldinger's version of events. PairGain instructed Goldinger to try to recoup the company's losses, and to do so Goldinger placed increasingly-heavy risky bets in Treasury options for PairGain's account. At the same time, PairGain failed to properly account for and disclose its investment losses in two quarterly filings with the Commission and falsely stated that its funds were held in investment grade, interest bearing securities. All the while, PairGain, its chairman and former chief executive officer, Charles S. Strauch, and its chief financial officer, Charles W. McBrayer, each knew or was reckless in not knowing that the company had material investment losses and that its remaining funds were exposed on risky options. Finally, in December 1995, after Goldinger told PairGain that he could not recover any more of the company's funds, PairGain disclosed that it had lost $15.9 million on investments with Goldinger. SEC Settlements: Simultaneously with the filing of the SEC's complaints and its administrative proceedings against PairGain, the following settlements were agreed to: S. Jay Goldinger: Without admitting or denying the SEC's allegations, Goldinger agreed not to violate the antifraud, periodic reporting, books and records, and internal accounting control provisions of the federal securities laws, and agreed to disgorge his ill-gotten gains (plus prejudgment interest thereon) and pay civil money penalties in amounts to be determined later. Goldinger has also agreed to a bar from associating with any securities broker or dealer. PairGain Technologies, Inc.: Without admitting or denying the Commission's findings, PairGain consented to a Commission order directing the company to cease and desist from committing or causing any violations or future violations of the antifraud, periodic reporting, books and records, and internal accounting control provisions. Charles S. Strauch and Charles W. McBrayer: Without admitting or denying the SEC's allegations, Strauch and McBrayer agreed not to violate the antifraud provisions. In addition, McBrayer agreed not to violate the periodic reporting, books and records, and internal accounting control provisions. Strauch and McBrayer have each also agreed to pay civil money penalties of $25,000. Other Settlements * CFTC's Settlement with Goldinger: Goldinger agreed not to violate the antifraud provisions of the federal commodities and futures laws and to pay $6 million in disgorgement, offset by any payments made by Goldinger in his criminal case. * U.S. Attorney's Plea Agreement with PairGain: PairGain agreed to plead guilty to one felony count for failing to implement a system of internal accounting controls and failing to maintain accurate financial books and records. The company also agreed to four years probation and to pay $1.4 million ($1 million as a fine and $400,000 for the costs incurred by the government for investigating and prosecuting this matter). PairGain also agreed to do the following during its probation: * retain, within 60 days, an expert to examine and make recommendations on the company's internal accounting controls and record-keeping; and * file with the SEC quarterly periodic reports and financial statements that (1) are reviewed by its outside accountants, (2) are signed by all members of the company's board except Strauch, and (3) are not prepared exclusively by Strauch and McBrayer. The Commission thanks the CFTC and the U.S. Attorney's Office for their cooperation in this matter. Details of the Commission's actions are available on the Internet at www.sec.gov. For further information contact: Kathleen M. Hamm, (202) 942-4637 Assistant Director, Division of Enforcement # # #