Re: 8/26-7/00 - On Hair-Trigger Wall Street, a Stock Plunges on Fake News; Internet Wire to Turn Over Records in Fake Emulex Release Probe
August 26, 2000
On Hair-Trigger Wall Street, a Stock Plunges on Fake News
By ALEX BERENSON
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Edward Carreon for The New York Times
Paul Folino, chief of Emulex and the subject of false information.
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At 10:13 a.m. yesterday, investors in Emulex, a California company that makes fiber optic communications equipment, received some terrible news.
Bloomberg News, a leading financial news service, reported that the company's chief executive had resigned and that Emulex planned to restate its earnings for the last two years.
Investors rushed to shed their Emulex shares, and the stock plunged from $103 to $45 in 15 minutes. The drop stripped more than $2 billion from the company's market valuation before the Nasdaq stock market halted trading in the stock at about 10:30 a.m. The free fall dragged down several stocks of companies in similar businesses and even pulled down the broader Nasdaq.
Dow Jones News Service, CBS.Marketwatch.com, the cable channel CNBC and other financial news outlets soon joined Bloomberg in reporting Emulex's woes, referring to a press release from the company.
There was just one problem. The news was not true, as investors quickly learned, enabling Emulex to recover before the day was out. The statement was the latest -- and most devastating -- of several fake press releases and other hoaxes that have upset the financial markets. The two most prominent cases have been Lucent Technologies and PairGain Technologies.
With trading volume soaring and longtime financial news providers like Dow Jones competing furiously with newer Internet services like CBS Marketwatch, business reporters have never faced more pressure to put out information fast. And with traders quick to punish stocks of companies with bad news, the odds have never been greater that a hoax will cause a stock to rise or fall, harming investors caught in the crosscurrents.
"It's a scary thing to see something like this happen, because what the hoaxers are doing is taking advantage of the intense competition among the news agencies to get this thing out," said David Callaway, executive editor of CBS Marketwatch.
F.B.I. agents in New York and Los Angeles, along with the Securities and Exchange Commission, the National Association of Securities Dealers and the Chicago Board Options Exchange, are investigating the fake release.
The apparent motive for the fraud was to cause Emulex's stock to plunge, enabling someone to profit by buying put options or selling the stock short. Put options rise in value when a company's stock falls; short-selling is another way to profit from price declines. Many more Emulex put options than usual were bought on Thursday and yesterday, and a spokesman for the Chicago options exchange said it was conducting an investigation into who bought the puts. If caught, the perpetrators might be forced to give up their profits and could face criminal and civil fraud charges.
By the end of the day, Emulex shares regained nearly all their losses after the company said that its business was stronger than ever. The stock closed at $105.75, down $7.31, on exceptionally heavy trading of more than 11 million shares.
But that bounce will be cold comfort for Emulex investors who panicked and sold their shares yesterday morning, or who had "limit orders" to sell at some preset price, orders that were automatically executed as the company's shares plummeted. The S.E.C. and N.A.S.D. say that trades made yesterday morning will not be canceled.
"All transactions prior to the halt will stand," said Wayne Lee, an N.A.S.D. spokesman. So, investors who sold their shares at the wrong time have little chance of being made whole, although Mr. Lee said investors could ask their brokers to share their losses. Regulators said investors who lost money might also be able to bring lawsuits against the perpetrators if they are caught.
The genesis of the hoax appears to have been Internet Wire, a Los Angeles service that distributes press releases to news organizations and Web sites. At 9:30 a.m. Eastern time, just as the financial markets were opening, Internet Wire put out a release supposedly from Emulex that stated the company was revising its earnings for its quarter ended July 2 from a profit of 25 cents a share to a loss of 15 cents a share "due to compliance with generally accepted accounting principles."
The release stated that "Net earnings for fiscal 1998 and 1999 will also be revised," and some versions reported that Emulex's chief executive, Paul Folino, had resigned and that the S.E.C. had begun an investigation into Emulex's accounting.
The release was automatically posted on some Web sites, including the CBS Marketwatch site, and within a few minutes people on the Emulex message board on Yahoo began calling attention to it. "EMLX SEC investigation SELLLLL," wrote someone calling himself "charles-ptrs" at 9:46 a.m. After others questioned whether the release existed, "mtnbrdr" provided a link to the release.
Emulex stock, which had closed Thursday at $113.06, steadily slid in the first minutes of trading yesterday. By 10:13 it had fallen to about $103, losing almost 10 percent of its value. But Emulex stock is generally volatile, so the move did not garner much attention.
Then Bloomberg sent headlines summarizing the apparent press release to trading desks around the world, and the true rout began. In three minutes, Emulex stock lost another $10, sliding close to $90. Even without the Bloomberg headlines, that move would have been big enough to attract the attention of other news organizations, which closely monitor what stocks are rising and falling.
As CNBC, TheStreet.com and others geared up to produce their own stories, Emulex kept falling. At 10:20, it touched $75. By 10:26, it had fallen as low as $50.
At the same time, Emulex executives arriving at the company's offices at 7 a.m. Pacific time were perplexed by the decline in the company's stock, said Emulex's senior vice president, Kirk Roller. "I walked in, my administrative assistant immediately said to me, 'The stock's down 45 points,' " Mr. Roller said. "By the time I got to Paul, the stock was down 68."
Mr. Folino, Emulex's chief executive, and Mr. Roller immediately asked the N.A.S.D. to halt trading in the company's stock. The N.A.S.D. soon did, but the damage had been done, and news organizations, including TheStreet.com, which has a joint venture with The New York Times, continued to report on the fake release until nearly 11 a.m.
Matthew Winkler, Bloomberg's editor in chief, said Bloomberg had been right to report on the news release, especially since Emulex stock was already dropping. But Mr. Winkler said he was disappointed in his organization's handling of the episode. Bloomberg should have clearly explained that it had been unable to confirm the release or get a comment from the company, he said. Instead, the service simply rewrote the release as fact.
Rick Stine, managing editor of Dow Jones News Service, said financial news agencies were extremely competitive because the traders they serve can make big profits if they get news even a few minutes before their competitors.
"Does everyone want to be first? Yes," Mr. Stine said. As a result, Dow Jones will generally use information from press release agencies like PR Newswire and Internet Wire without checking directly with the companies mentioned in the releases, he said.
Internet Wire, which was founded only six years ago, is the smallest of the three major press release agencies, trailing PR Newswire and Businesswire, much older organizations. Dave Armon, senior vice president at PR Newswire, said his company had much stricter procedures to verify press releases than Internet Wire, including always checking releases with the companies that supposedly have put them out.
Emulex said Internet Wire never contacted the company to ensure the release was real. But Michael Terpin, chairman of Internet Wire, said his organization had fallen victim to a "sophisticated fraud." The people behind the fraud "were successful in convincing somebody from the nighttime shift that they had authorization from the daytime shift," Mr. Terpin said. "They obviously had some kind of familiarity with our policies and procedures."
Mr. Terpin said the other news agencies had also been fooled into carrying fake releases. "We have 135 employees," he said. "We're not a little fly-by-night company."
In the last two years, fake press releases have moved the stocks of Lucent and PairGain, other high-technology companies. Lucent fell after a fake report said its earnings would be less than expected, while PairGain jumped on a false report that it would be taken over.
Gary Dale Hoke, who worked at PairGain's engineering development operations in Raleigh, N.C., used online brokerage accounts at E*Trade and Ameritrade to buy and sell stocks, trading in PairGain shares and posting false messages on the Internet. He pleaded guilty to fraud and was ordered to pay $93,000 and sentenced to five years' probation, including five months of house arrest.
Copyright 2000 The New York Times Company
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August 27, 2000
Internet Wire to Turn Over Records in Fake Emulex Release Probe
By BLOOMBERG NEWS
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Related Article
On Hair-Trigger Wall Street, a Stock Plunges on Fake News
(August 26, 2000)
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os Angeles, Aug. 26 -- Internet Wire, a six- year-old public relations news service that issued a fake press release that sent Emulex Corp. shares plunging yesterday, has received a request for its records from investigators.
Michael Terpin, chief executive of Internet Wire, said the U.S. Securities and Exchange Commission issued a request, known as a subpoena, yesterday, and that federal prosecutors told him they also plan to review the company's records.
"They want to see anything remotely connected with the transmission," Terpin said in an interview.
The contents of the bogus release were cited by Bloomberg News and other news services as the reason for the drop in Emulex shares. Bloomberg was subpoenaed yesterday by the U.S. Attorney for the Southern District of New York and the SEC, said Richard Klein, a Bloomberg attorney with the New York firm Willkie Farr & Gallagher. Bloomberg supplied investigators with copies of published articles.
Richard Tofel, a spokesman for Dow Jones Newswires, which also published reports citing the fake news release, said he didn't know if the news agency had been subpoenaed. Officials at Marketwatch.com and CNBC-TV, which also carried reports citing the phony release, couldn't be reached for comment.
Bogus Release
Los Angeles-based Internet Wire sent the bogus release at 9:30 a.m. East Coast time yesterday. The release said Emulex reversed its fiscal fourth-quarter profit to a loss, was being investigated by the SEC and that Chief Executive Paul Folino had resigned.
Emulex, a maker of gear that speeds data on computer networks, in its own news release said the information was false and was starting its own investigation. Internet Wire also issued a statement saying the release was fake.
"We are the victims of a sophisticated fraud," Terpin said in the interview.
Whoever wrote the false news release understood Internet Wire's internal security procedures, which requires use of a password, and was able to trick the night crew into believing they had received authorization to post the release, Terpin said. The service has since changed its policies, he said.
The hoax was conducted by e-mail, Terpin said, making it likely that there are "electronic footprints" investigators can use to track down those responsible.
Stock Plunge
Terpin, 43, said he has talked to the FBI, but declined to say if there are any suspects. "Right now the FBI is asking all the questions," he said.
Joe Valiquette, spokesman for the FBI's New York office, said, "Our LA office is taking a look at that incident." FBI officials in Los Angeles didn't return telephone calls.
Within an hour after the fake news release was distributed, Emulex's stock plunged as much as 62 percent, wiping out more than $2 billion in market value. Trading on the Nasdaq Stock Market was halted at 10:33 a.m. The stock, which resumed trading about three hours later, fell 7 5/16, or 6.5 percent, to 105 3/4.
The Chicago Board of Options Exchange noticed unusual trading of Emulex options late this week. After the hoax surfaced, it opened an investigation, said spokesman Gary Compton.
"There was definitely something out of the ordinary on the trading floor," he said.
SEC spokesman Chris Ullman said the agency doesn't comment on specific investigations, but will review attempts to manipulate stocks.
"We're interested in any kind of manipulative act when it comes to the Internet," he said. "We'll vigorously prosecute suspected fraudulent behavior."
Options Trading
Among the options with increased trading activity last week were those giving the owner the right to sell Emulex shares at 80 in September. The owner of a put is betting that a stock will drop. Trading rose from 1 contract on Aug. 16 to 314 contracts last Friday. Yesterday, 785 of the contracts were traded.
Shares of Costa Mesa, California-based Emulex have more than doubled this month. Much of the rise came after the company on Aug. 3 said that fiscal fourth-quarter profit more than tripled, exceeding analysts' forecasts.
The Nasdaq Stock Market is also looking into the matter, a spokesman said yesterday.
In the past two years, several companies have been victimized by phony press releases or news articles published on the Internet that caused big movements in their shares. In most cases, law enforcement agencies tracked down who was behind the hoax.
Last June, a former PairGain Technologies Inc. engineer pleaded guilty to posting a false article on an Internet site that sent PairGain's shares soaring.
Lucent Technologies Inc. temporarily plunged on March 30 after a day trader posted a fake release concerning the telecommunications-equipment maker's profit on an Internet message board. A Texas man was charged after investigators collected evidence from Yahoo, America Online Inc. and the day trader's Internet-service provider.
Terpin said he plans to discuss how to reduce information fraud with rivals PRNewswire and Business Wire.
"Hopefully, after this, there is one less way to fool the media," Terpin said.
Copyright 2000 The New York Times Company
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