Re: 9/1-2/00 - [EMLX] LA Times: Suspect Held in Online Stock Market Fraud; Assets of Accused Stock Market Hoaxer Seized; In Wake of Emulex Hoax, Blame Game Begins
Friday, September 1, 2000
Suspect Held in Online Stock Market Fraud
Internet: A 23-year-old El Segundo man allegedly made $241,000 in profit with false news release on high-tech firm.
By JOSH MEYER, Times Staff Writer
The FBI arrested a young El Segundo man Thursday in the audacious stock market hoax that rocked Wall Street last week, sending shares of Emulex Corp. plummeting 62% and costing investors in the high-tech firm an estimated $50 million in losses.
Mark Simeon Jakob, 23, an El Camino Community College student and active stock trader, orchestrated the fraud to recoup severe losses suffered on trades he made in the Orange County company, and used his inside knowledge of how Internet financial news wires work to pull it off, authorities alleged Thursday.
The hoax--which involved a bogus report that Emulex would restate earnings, and that its chief executive had quit--allowed Jakob to not only wipe out his losses but to make an additional $186,000 in profit by buying near the stock's low during the company's roller coaster ride last Friday, officials said.
In all, authorities said, Jakob made $241,000 from the hoax, which raised concerns about the alarming speed and ease with which Wall Street can be manipulated in the fast-moving Internet Age.
Jakob was taken into custody without incident just after 6 a.m. Thursday, when a handful of FBI agents and a federal prosecutor showed up at his parents' El Segundo house, where he lives.
"The amazing thing is that he thought he would get away with it," said FBI Special Agent Richard B. Wade.
Jakob, who will be arraigned Sept. 18, was charged in a criminal complaint with one count each of securities fraud and wire fraud. He faces a maximum of 15 years in prison if convicted on both counts.
At a brief court appearance Thursday evening, a federal judge set bond for Jakob at $100,000 but ordered him to undergo a psychiatric evaluation before he can be released.
His arrest was hailed by officials at Emulex, a Costa Mesa firm that makes high-speed data-storage products.
"We believe this was an unprecedented act of electronic terrorism," said Emulex Chief Executive Paul Folino. "The person who got hurt was really the small investor that reacted quickly."
Folino estimated that with about 2.3 million shares changing hands last Friday before trading was halted, shareholders lost about $50 million on the bogus news.
Jakob's alleged scam was certainly elaborate; he even traveled to and from Las Vegas where he stayed in two swank hotels to establish an alibi and make stock transactions online from a hotel computer, according to FBI affidavits and interviews.
But, authorities said, it wasn't very sophisticated. And that allowed specially trained "cyber-agents" from the FBI to follow a trail of digital footprints that led them to Jakob, who they said e-mailed the phony news release to a news wire service.
What's more, agents said, Jakob became a suspect almost immediately because he had such an obvious motive: He stood to lose as much as $97,000 based on his "short sale" of 3,000 Emulex shares in mid-August.
In a short sale, a trader borrows stock from a brokerage and sells the shares in the market--usually in a bet that the price will soon decline, allowing the trader to repay the loan with stock bought at a lower price.
Instead, Emulex's stock price went up dramatically, leaving Jakob suffering mounting paper losses.
"He's losing money, big, and he doesn't like that," said Special Agent James V. DeSarno, Jr., who heads FBI operations in Southern California. "He's got to figure out a way to get out of that. So we're looking at motive here."
On the surface, Jakob would seem an unlikely agent of such "electronic terrorism."
Neighbors said Jakob is one of five children in an immigrant family from Eastern Europe, who were often seen leaving their modest two-story home for religious services on Friday evenings.
At El Segundo High School, Jakob was a member of the Young Republicans. At El Camino college, he studied business and was a frequent visitor to the computer lab from where authorities said he sent the bogus news release.
Suspect Described as Active Investor
Jakob, in an America Online profile page, listed his hobbies as visiting Las Vegas, snowboarding, the beach, dancing and playing the stock market.
His personal quote on the page: "Let it ride!!!!"
Authorities said he appears to be fluent in the language of Wall Street--trading actively through an Internet account, and operating on "margin," or making trades with borrowed money.
"He's not your average 23-year-old college student," said Valerie Caproni, regional director of the Securities and Exchange Commission's Los Angeles office. She described Jakob as an active investor and frequent trader.
Jakob also learned the ways of Wall Street by working at Internet Wire, a firm that distributes company news releases and financial information over the Internet to other business Web sites.
Jakob, authorities said, was in the content production department, receiving news releases and formatting them so they could be posted on the Internet.
He quit Internet Wire a week before the hoax.
According to FBI affidavits and interviews with investigators, Jakob had sold 3,000 shares of Emulex short on Aug. 17 and 18, at prices between $72 and $92 a share.
So when the stock rose well past $100, Jakob stood to lose nearly $100,000 on his wrong-way bet.
It was then, authorities said, that Jakob hatched a plan to drive the price of the stock down so he could recover his losses.
According to the FBI, this is how Jakob perpetrated the hoax:
At 7:49 p.m. on Aug. 24, Jakob sent an e-mail to Internet Wire's overnight staff, making it look like it had been written by "Ross Porter," supposedly an employee of Emulex's public relations firm. Authorities said Porter doesn't exist.
"Porter" said he had an "extremely important" news release, and that he'd been told by the day-side staff to have the overnight desk post the release the next morning at 9:30 a.m. East Coast time.
"Porter" included the bogus news release in the message and in a separate attachment, and asked that it be posted on Internet Wire's "business-earnings and technology hardware," an obscure designation that only legitimate users of the system would know.
He also said it was the first news release "out of the 10-pack," a term that Internet Wire employees would recognize as their own code for paying a bulk rate for 10 postings.
Jakob also used other terms that made Internet Wire employees feel safe in putting out the news release without checking its legitimacy.
"Basically, it was a form of social engineering," a computer hacker term for hoodwinking people into thinking you're someone you're not, Wade said.
It worked.
Internet Wire employees posted the news release on the Internet Friday morning, believing its authenticity already had been verified.
The release said that Emulex's accounting was under SEC investigation, that it would restate earnings to show a loss, and that its chief executive had quit.
Within moments, the news release was spread through other news outlets, and wreaked havoc on Emulex stock. It plunged as low as $43 from $113.06 on Thursday as panicked investors sold.
Shortly thereafter, an employee of Internet Wire got a phone call: Take the fraudulent news release off the wire. It wasn't true.
By 10:30 a.m. trading in the stock was suspended on Nasdaq. Federal authorities immediately mobilized on both coasts.
In Los Angeles, the FBI dispatched teams of agents specially trained in ferreting out securities fraud, and others trained in cyber crime, or how to track down computer-savvy criminals who use the Internet to commit fraud.
Agents quickly traced the e-mail to a computer at the Library Media Technology Center at El Camino college in Torrance. The e-mail account had been set up to make it look as though it was from the public relations firm. That too had been created on an El Camino computer.
About the same time, other agents interviewed Internet Wire employees and learned that a man named Mark Jakob had left the company the Friday before, under good terms.
The agents were told Jakob talked often about trading stocks, and that he attended El Camino. He became the top suspect, but not the only suspect.
"We went down that path very hard," Special Agent Ronald L. Iden said, "but not to the exclusion of others."
While some agents tried to place Jakob at the computer center the evening that the e-mail was sent, others looked into the young man's background, his financial history and his movements in recent weeks. They also asked the SEC for a record of all his stock transactions.
One agent found a copy of the fake news release in a computer file at the El Camino computer center.
Another found the list of users who had signed in that evening. Jakob's name wasn't on it. A computer room technician also said that Jakob was a frequent user but he didn't recall seeing him that night.
But other witnesses did, identifying Jakob from a Department of Motor Vehicles photo of him that FBI agents circulated.
Working around the clock over the next five days, agents determined that Jakob was actively trading in the short window of time after the news release tanked Emulex's stock and trading was halted.
During that window while the stock was free-falling, Jakob executed trades to cover his losses from the short-sale gamble, snapping up 3,000 shares at bargain prices.
From that, he made $54,696 in profit above and beyond his losses.
Those trades, FBI agents determined, were made from a computer at the business center at the Mandalay Bay hotel in Las Vegas. At the time, Jakob had a room at the Luxor hotel just down the street.
Minutes later, Jakob bought 3,500 more shares at about $51 a share, or $181,359 total.
Because the stock rebounded quickly when trading resumed--closing Friday at $105.75--Jakob immediately made a huge profit, the SEC said. He allegedly sold the shares Monday for $368,174, for a net profit of $186,815.
His total profit in the scam: about $241,000, the SEC said.
Agents waited until Wednesday night before determining they had enough evidence to arrest Jakob, cementing what they said is a solid case by finding an additional eyewitness who said he was in the computer room at the time the bogus release was sent.
A search warrant was obtained and agents showed up early Thursday to arrest him.
"All of these kinds of criminals believe they are smarter than the last guy who got caught," said DeSarno, the FBI's local chief. "This case really is a great example of some good old-fashioned detective work combined with our ability to use new technologies to catch them."
* * *
Internet-Based Stock Scam
According to the FBI and other authorities, this is how Mark Simeon Jakob perpetrated and profited from his alleged scam.
Aug. 17, 18: Jakob borrows 3,000 shares of Emulex and sells them at between $72 and $92 a share, a "short sale" that is a bet the stock price will decline. If the stock indeed falls below the sales price thereafter, the short seller makes a profit.
* * *
Aug. 18-24: Emulex stock shoots upward instead, settling at $113 a share by Aug. 24.
* * *
Aug. 24: From a computer lab at El Camino Community College, Jakob sends an e-mail to his former employer, Internet Wire, at 7:49 p.m. In it, he pretends to be a public relations spokesman for Emulex who has an "extremely important" news release that must be put on the Internet to financial news services in the morning.
* * *
Aug. 25, morning: Internet Wire puts out the phony news release, saying that Emulex is revising its last quarter's profits to show a loss, that the SEC is investigating the company and that its chief executive has resigned. None of it is true. The news shakes Wall Street and the company's stock plummets 62% before trading is suspended.
* * *
Aug. 25, morning: In a quick series of trades from Las Vegas, Jakob buys 3,000 shares of Emulex to cover his short-sale losses and makes $54,696 in profit. Then he buys 3,500 more shares for $181,359, all before trading is suspended.
* * *
Aug. 25, afternoon: The FBI already has identified Jakob as a prime suspect, based on tracking of the e-mail, interviews with people at Internet Wire and other gumshoe work.
* * *
Aug. 28: Jakob sells the 3,500 shares for $368,174 as the stock rebounds, making an additional profit of $186,815.
* * *
Aug. 31: FBI, armed with a court-approved search warrant, arrests Jakob at the El Segundo home he shares with his parents and seizes his computer and financial records.
* * *
Researched by JOSH MEYER / Los Angeles Times
Times staff writers Karen Alexander, Walter Hamilton, Karen Kaplan and correspondent Gina Piccalo contributed to this report.
latimes.com
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Saturday, September 2, 2000
Assets of Accused Stock Market Hoaxer Seized
Probe: Emulex scam suspect remains in custody awaiting a court-ordered psychiatric evaluation.
By JOSH MEYER, Times Staff Writer
Federal authorities seized about $400,000 in assets of accused stock market hoaxer Mark Simeon Jakob and scoured banks and brokerage firms Friday in a search for more of his stock market profits.
Authorities moved quickly to freeze his assets because, they said, the 23-year-old college student appeared anxious to liquidate his brokerage accounts in the days after an audacious stock market scam rocked Wall Street on Aug. 25.
The hoax, involving a phony news release, initially battered the stock of Emulex Corp., an Orange County tech firm.
Jakob, who remained incarcerated Friday at the Metropolitan Detention Center in downtown Los Angeles, is accused of manipulating Emulex stock in an effort to recoup losses from previous trades in the shares. Authorities say he netted $241,000 in profit with the hoax.
On Monday and Tuesday, Jakob pulled $71,184 from his accounts and tried to withdraw the remaining $406,767, Securities and Exchange Commission officials said.
But Jakob was unsuccessful in getting the remaining sum because authorities had contacted his brokerages as early as Aug. 25 to tell them Jakob was a suspect, and to put a hold on his accounts, said FBI Special Agent Matt McLaughlin.
SEC regulators said Friday that they are trying to find the withdrawn $71,184 and any other assets Jakob has.
"We can't say at this point what exactly happened to that money," said Sandra Harris, the SEC's associate regional director for enforcement.
But by Friday, authorities had identified and seized about $400,000 in other assets, which they believe includes the $241,000 that Jakob is accused of making on Emulex trades.
SEC Regional Director Valerie Caproni described Jakob as a very aggressive "day" trader who often bought and sold large volumes of stock in a single session.
"Pretty amazing," Caproni said of Jakob's portfolio. "Almost a quarter of a million of it came from Emulex. And the rest, he was a day trader. He did a lot of trading."
The assets were seized from Jakob's accounts at three brokerages--Datek, Suretrade and J.B. Oxford--and from Washington Mutual bank.
Assistant U.S. Atty. Pamela Johnston said Jakob's parents personally posted a $100,000 surety bond that was approved by her office. But Jakob won't be released from prison until a psychologist gives him a mental evaluation and determines he isn't a danger to himself or others in the community. That wasn't expected to occur until after the weekend.
The FBI arrested Jakob early Thursday after an intense weeklong probe that began immediately after a phony news release sent Emulex shares plummeting 62% on Aug. 25.
Jakob, an El Camino Community College student, used his inside knowledge of how Internet financial news wires work to pull off the hoax, authorities allege.
Jakob did it, authorities say, by sending a fake news release to an Internet news service he had just quit, stating that Emulex was under investigation by the SEC, and that its chief executive had resigned.
The release went out on the Internet, and within minutes Emulex's stock plunged.
The hoax was soon discovered and Emulex's shares regained most of their value after a trading halt. But Jakob allegedly bought enough shares at bargain prices before the halt to more than cover his losses on previous trades, and net a total profit of $241,000, authorities allege.
"There were a lot of people who lost a lot of money because of one greedy, foolish young man," Johnston said. "All signs appear to be that he did it for financial reasons."
The SEC also filed a civil suit against Jakob, alleging securities fraud. Jakob's assets were frozen by U.S. District Judge Virginia A. Phillips based on the SEC's request.
Federal prosecutors said they were proceeding as well, one day after providing U.S. Magistrate Judge George Shwartz with information that led him to order the psychiatric evaluation. Prosecutors refused to say what that information was, citing Jakob's right to privacy. But officials in the federal court's pretrial services section, who interview people like Jakob after their arrest, described the order as unusual.
"It is rare," said Wilhelmina Jones, supervising U.S. Pretrial Services officer. " It is not something that is routine, I can tell you that."
A federal public defender representing Jakob did not return calls seeking comment.
latimes.com
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Saturday, September 2, 2000
In Wake of Emulex Hoax, Blame Game Begins
Analysis: Fingers are pointed at news organizations and Nasdaq, but the traders themselves also bear responsibility, an expert says.
By THOMAS S. MULLIGAN, Times Staff Writer
NEW YORK--Live by the quick trigger, die by the quick trigger.
Investors burned by last week's Emulex hoax are blaming financial-news organizations for rushing out headlines based on a bogus news release. In fact, the lawsuits already have started flying.
Others complain that the Nasdaq Stock Market halted trading in Emulex too slowly, or too quickly, or perhaps shouldn't have halted trading at all.
Then there are those who found that steps they'd taken to protect their investments actually backfired in the chaos brought on by the hoax. These investors are left wondering whether such time-honored tools as "stop-loss" orders can function properly in a fast-moving market.
With instant information at every fingertip and with online trading a growing influence on U.S. markets--especially in shares of technology highfliers like Emulex--split-second judgments by newspeople, regulators and investors carry ever greater consequences, experts say.
One specialist in market psychology thinks the Aug. 25 debacle shows that everyone needs to be more skeptical of every piece of information, regardless of how reputable its source.
"People jumped from the 20th floor, but there wasn't a fire," said Meir Statman, a finance professor at Santa Clara University.
The Emulex hoax, which resulted in the arrest Thursday of 23-year-old stock trader Mark Simeon Jakob, caused shares of the Costa Mesa-based firm to plunge 62% in 16 minutes before Nasdaq halted trading.
During the halt, word got out that the alarming news release--supposedly announcing an earnings restatement, an SEC investigation and the resignation of Emulex's chief executive--was phony. When trading resumed that afternoon, the shares bounced almost all the way back, but many who sold during the plunge lost money.
Authorities accuse Jakob, an El Segundo resident and student at El Camino Community College, of plotting to drive down Emulex shares so he could recover from a disastrous wrong-way bet on the stock and then profit from the inevitable rebound. Investigators say he made $241,000 on a series of trades.
Jakob allegedly exploited some holes in the market's shield against false information, authorities say: As a former employee of corporate-news distributor Internet Wire, he knew how to trick employees there into thinking his news release was genuine and had been approved by Internet Wire higher-ups. And, based on the timing of the release--9:30 a.m. Eastern time, but only 6:30 a.m. Pacific--authorities believe Jakob shrewdly reckoned that news services would have trouble reaching Emulex officials for confirmation but might run stories or headlines anyway.
Just as Jakob allegedly hoped, Bloomberg News, Dow Jones, CNBC and other outlets all carried items--either headlines, stories or brief mentions--based on the phony news release. The stock already had begun sliding after Internet message boards had spotted and repeated the news release.
At Bloomberg, Editor in Chief Matthew Winkler said Friday the problem in this case wasn't a lack of appropriate guidelines for newsroom personnel but a failure to follow them.
Like Dow Jones and other news organizations, Bloomberg has policies requiring information to be confirmed for accuracy before publication.
"We spend a lot of time explaining our rules and requirements--the biggest one being, 'Never assume,' " Winkler said.
"Our value is our critical judgment and ability to think under pressure. 'How do we know this is true?' 'Does this make sense?' Those are questions we should always ask," he said.
A lawsuit was filed Friday by a Florida investor against Bloomberg and Internet Wire, accusing them of "recklessly disseminating materially false and misleading information concerning Emulex." Neither defendant would comment on the suit.
On Internet message boards, some traders have turned their ire at Nasdaq for the way it suspended trading.
The halt came after the stock had crashed to $43 a share from $113.06 the day before. When the suspension was lifted after the hoax was exposed, the first trade was at $120 a share. Some investors complain that without a halt, they might have been able to buy back shares on the way up, thus cutting their losses.
"Consenting adults ought to be allowed to trade with or without accurate information," said Junius Peake, finance professor at the University of Northern Colorado and a longtime foe of mandated trading halts.
Nasdaq officials, however, say that there are times when allowing trading to continue can be unfair to investors.
"Any time there is information disequilibrium out there, you've got to try to put everyone back on an equal footing," a senior Nasdaq official, who asked not to be identified, said in a telephone interview Friday. Trading halts also make sense when an event such as a corporate takeover is driving a stock skyward but has yet to be announced, the official said.
Some investors are complaining on Internet message boards that the use of stop-loss orders--which are orders to sell a stock if it falls below a specified price--hurt them because the orders were triggered automatically during the Emulex plunge. In some cases, the market was moving too fast for the orders to be executed at the specified price, so the actual sale price was lower.
Experts said the fault isn't with stop-loss orders per se. Just as with the "portfolio insurance" that failed during the crash of 1987, there is no insurance program that can get an investor out instantly during a bout of panic selling, and there certainly is no system to prevent an investor from missing out on the bounce back after the stock has been sold.
While investors are assessing blame, they also should look to themselves, Santa Clara's Statman said.
"People forget that this entire trading game is an adversary game," he said. "You are not playing against 'the market' but against other traders. You should be very careful about assuming that your information is better than [that of] the person on the other side."
latimes.com |
