Re: 8/25/00 [EMLX] TheStreet.com: Shock Wave: The Anatomy of the Emulex Fiasco; Once Bitten: Lessons From the Emulex Hoax
Shock Wave: The Anatomy of the Emulex Fiasco
By Dan Colarusso and Peter Eavis
Staff Reporters
8/25/00 6:07 PM ET
When Emulex (EMLX:Nasdaq - news) stock plunged Friday morning, investors assumed it was business as usual: Just another market darling headed for the scrap heap.
But this was no garden-variety blowup. At the end of trading Friday, questions surrounding Emulex's plunge were far from resolved. Regulators and exchange authorities were examining the possibility of illegal trading and Wall Street was recalling the aftermath of past press-release hoaxes. Some investors who sold on the first whiff of bad news were surely in the red at day's end. Meanwhile, the company said it was on track to meet all projections and to keep growing.
So unfolded the most jarring day this summer on Wall Street.
Steep Plunge
A press release posted around 9:30 a.m. EDT on the Internet reported an earnings restatement, a top executive's departure and a probe of accounting regularities by the Securities and Exchange Commission. The individual investors and money managers who had ridden Emulex to a 171% gain since mid-April started dumping their stock.
By 10:32 a.m., when Nasdaq halted Emulex trading, the stock, which had fallen as much as 62%, was down 51%.
"It went from 100 to 70 in three or four minutes," says one New York brokerage trader. "People were hitting the stock wherever they could, 5 and 6 points below the bid and offer." Ultimately the stock slid as low as 45, more than 67 points below its Thursday close.
"There were some massive offers in the stock," the New York trader says, noting that mutual funds, hedge funds, endowments and pension plans owned roughly 70% of it.
The Means of Production
The perpetrator of the fraud used Internet Wire, a public relations distribution service in Los Angeles, to spread the word. The charge for a release like the one that briefly took $2.5 billion of market capitalization out of Emulex: $325. Internet Wire is a six-year-old operation, a spokesman says, emphasizing that it is cooperating with authorities.
Whatever the hoax's origin, it was dutifully picked up by the major business wires and television stations. That served to stir the masses.
That said, the manager of one New York-based hedge fund that owns Emulex and didn't sell Friday says he was initially suspicious when he saw the press release: "It was so juvenile. It capitalized words for no reason." In addition, he thought it odd that trading in the stock was halted after the press release was issued, since companies typically request a halt before they issue big news.
Indeed, the release's headline highlights a supposed SEC investigation and the resignation of the CEO. But the text of the release fails to mention those actions. The text rambles about restated fiscal fourth-quarter results and promises further information at 5 p.m. EDT.
In any case, once trading resumed at 1:30 p.m. EDT, Emulex stock jumped, quickly regaining most of the ground lost in the morning.
The Aftermath
Now begins the hunt for the perpetrator. An FBI spokesman says both its New York and Los Angeles offices are looking into the hoax.
The Chicago Board Options Exchange said the "unusual" trading in Emulex options Friday "has triggered an intense investigation." The options also trade on the American Stock Exchange, the Philadelphia Stock Exchange and the Pacific Exchange. The PHLX and P-Coast said they are also looking into the trading in the options. The Amex has a policy not to comment on possible investigations.
The incident is reminiscent of last year's hoax involving PairGain, in which a phony news story was planted on an Internet message board saying the company was being acquired. The FBI caught up a week later with Gary Hoke, the 25-year-old company employee who planted the story.
When Hoke posted the fake Bloomberg story on a message board on April 7, 1999, PairGain jumped 30% before the hoax was exposed. It closed up 10% that day. PairGain was subsequently acquired by broadband player ADC Telecommunications (ADCT:Nasdaq - news) for $18.92 a share, less than a dollar above the hoax-takeout price.
In August of last year, Hoke was sentenced to five years' probation and five months of home detention and ordered to pay $92,000 in restitution to 30 investors deemed victims.
Stunning
One lucky soul is Tom Bleakley, manager of the Nicholas Applegate Small Cap Growth fund. He sold out of the stock recently because it got too big for his fund. But the hoax stunned him.
"I've never seen anything like this," Bleakley says. "When I looked at it, I assumed it was true."
Of course, it wasn't.
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Staff reporter Brian Louis contributed to this report.
thestreet.com
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Once Bitten: Lessons From the Emulex Hoax
By Tim Arango
and Dagen McDowell
Staff Reporters
8/25/00 5:22 PM ET
Do you smell that? It's the smell of scores of investors burned by another online hoax involving phony company news.
The latest case: A news release on the Internet this morning claimed Emulex (EMLX:Nasdaq - news) would restate earnings and report a loss rather than a profit. The stock, in turn, plunged 57% before it was halted on the Nasdaq Stock Market.
Emulex reopened after the hoax was detected and the stock regained most of its value, closing down 7 5/16, or 6.5%, at 105 3/4. But in the interim, many investors dumped the shares first and asked questions later. Among the many questions now being asked: How can investors protect themselves from making the same mistake twice?
Market-moving online hoaxes have happened before: In February, hackers broke into Aastrom Biosciences Web site and posted a phony notice about a merger with rival Geron. And in April 1999, a PairGain employee posted a bogus story online saying that the company had agreed to be acquired. In a market climate that sees an ever-increasing number of investors monitoring the latest news releases, it's likely to happen again.
Investment officials and cops on the beat at the top newswire outfits say there are lessons to be learned that can shield investors from the fire next time.
Live Wires
The Internet Wire, the six-year-old outfit that posted the bogus release, had this to say: "We are a delivery service of news announcements from corporations to the news media," said Jack Serpa, executive vice president of sales and strategic planning at Internet Wire. "We don't write or create the content of any of these news announcements that our clients send."
Business Wire and PRNewswire, the two best-known companies that disseminate news releases (who, in this case, didn't post the Emulex hoax), are the main line of defense against the spread of false news releases. The Big Two newswire companies offered some potential warnings signs for scanning news releases:
Beware of bad news on Friday.
Friday is typically a slow news day, and companies with bad news to share with the public will usually release it earlier in the week when it can be buried among other stories. "I'm always leery of Friday distribution of information," said David Savio, a spokesman at Business Wire. "There's less people to absorb it, and it's harder to hide."
Check contact information.
Many news releases offer several contact names, both within the company and its PR agency, said Kate Casey Foley, associate media relations specialist at PR firm Levick Strategic Communications. "A good release has several contacts," she said. In addition, it is important to check the email address provided in the contact name. An America Online or Hotmail address should raise suspicion.
Corroborate the information with other news sources and the company Web site.
"A lot of companies will post material information on their Web site as well," said Renu Aldrich, a spokeswoman at PRNewswire. "So if it's not there, that should be a red flag."
Once the news hits either Business Wire or PRNewswire, it should get the attention of investors. "It makes the first cut, that it's something I should pay attention to," said Ed Orgon, chief operating officer at Torrezano Group, a public relations firm. "Not act on it, but pay attention to it. Then you wait for legitimate news organizations to pick it up."
Check the title with the contents.
In the case of the phony Emulex release, the headline announced a Securities and Exchange Commission investigation into accounting practices. However, the contents of the release did not mention it further.
Of course, there is one foolproof way to avoid getting hoodwinked. "If there's any doubt, call the company," Aldrich said.
Last One Out's a Rotten Egg
Another key lesson from the Emulex hoax: If you're a small investor who has a full-time job that doesn't involve watching CNBC all day, you are never going to be the first one out of the door.
By the time you get around to unloading a stock following a negative announcement, plenty of other investors have already sold. You're probably going to be at the back of the pack. And, investment professionals say, you could wind up selling at the bottom, which is the last thing you want to happen.
"Usually by the time you've heard the bad news, it's too late anyway," says Bryan Olson, director of Charles Schwab's Center for Investment Research.
Instead, you should take a moment to do your own investigation of the news. You want to find out what the big institutional investors, the people with greater resources and greater company access, are saying in the press. What are their thoughts and concerns? Are they staying or going?
When you first buy a stock, you should have already decided what is going to cause you to sell. Are you going to sell on the first sign of pessimistic news? Do you plan on owning the company for five months or five years?
Owning an Array of Stocks
Lastly, the Emulex incident also illustrates the importance of building a diversified portfolio that you'll have for a long time.
"If you have a well-diversified, long-term strategy in place, you won't be sitting on the edge of your seat at every announcement," says Schwab's Olson.
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