The first big insider dealing case involving the internet has opened in New York with two of the main defendants pleading guilty to their part in a £5m fraud. In total, 19 people have been charged with trading secrets in chat rooms.

The case is likely to fuel concerns, voiced recently by financial services authority chairman Howard Davies, that similar practices will distort market activity in Britain.

FBI assistant director Lewis Schiliro said many fraudsters hoped the internet would provide a cover for their illegal activities.

"Those who rely on the myth of anonymity in using the internet to pursue their criminal activity should understand that law enforcement has the ability to pierce the veil they hide behind," he said.

At the core of the scheme, authorities said, was John Freeman, a part-time computer graphics worker who allegedly stole information from two investment banks, Goldman Sachs and Credit Suisse First Boston, for whom he was working.

The criminal complaint filed in United States district court in New York, accused Freeman of starting the scheme in mid-1997 after he lost money investing in a helmet manufacturer.

He made contact over the net with other disgruntled investors and suggested they trade on inside tips he was able to pick up in the course of his work.

Freeman, 34, of Brooklyn, pleaded guilty to conspiracy to commit insider trading and other charges.

Also pleading guilty was insurance agent James Cooper, who had traded on Freeman's information.

Sentencing has been deferred until September 15, when both men could face 10 years in prison each plus fines of about £700,000.

Freeman himself took a cut of the profits made by his "virtual" circle of investors, said the securities and exchange commission (SEC), the American financial regulator.

He staked none of his own money, believing the stock market to be too risky.

SEC enforcement chief Richard Walker said the case was "one of the most elaborate insider trading schemes in history".

He said he found it alarming to see a resumption of widespread insider dealing similar to the economic boom days of the 1980s.

The SEC said this is the first insider dealing case in which it is alleged that sensitive information was passed over the internet.

Among others accused of participating in the fraud are a dentist, a retired schoolteacher, a car salesman and a waiter. Associated Press