FBI nabs Emulex suspect
College student is charged in last Friday's
'press-release' scam
By Staff Writer Richard Richtmyer
August 31, 2000: 5:00 p.m. ET
NEW YORK (CNNfn) - Federal law enforcement officials in Los Angeles arrested a 23-year-old
college student Thursday in connection with the Emulex press-release hoax last week.
The U.S. Attorney's office identified the suspect as Mark Simeon Jakob, a former employee of
Internet Wire, the online news release service that distributed the fake release last Friday, sending
shares of Emulex tumbling. Jakob was arrested early Thursday morning in El Segundo, Calif. He
is being charged with securities and mail fraud.
Jakob, a student at El Camino Community College, is accused of using one of the college's
computers to send the bogus press release to Internet Wire on August 24, and then executing a
series of trades in Emulex stock to benefit from the price fluctuations.
Federal agents traced the
source of the release through
e-mail records back to the
college, according to Alejandro
Mayorkas, the U.S. Attorney in
Los Angeles. Because he had
been employed by Internet wire,
he was able to circumvent the
safeguards the company has in
place to guard against fraud,
Mayorkas said.
"The e-mail included not only
language that reflected
familiarity with the procedures
used at Internet Wire, but also a
representation that the sales
department at Internet Wire
already had reviewed the
matter," Mayorkas said at a news
conference in Los Angeles
Thursday afternoon.
Trading account
records probed
The U.S. Attorney's office alleges that Jakob hatched the plan in an effort to make up for losses
he incurred from selling Emulex stock short.
Investors who sell short borrow their shares from a broker in the hopes that the price will fall. They
can then purchase those shares later at lower prices, pocketing the difference as profit.
On August 17 and 18, 2000, Jakob, expecting a decline in Emulex's stock price, sold short 3,000
Emulex shares at an average price of $80 per share, according to Mayorkas.
By August 24, 2000, however, Emulex stock had risen to over $113 per share, resulting in Jakob's
having unrealized losses of more than $97,000. He is accused of covering his short position in
Emulex just after the bogus release was issued, realizing a profit of more than $54,000 dollars.
Minutes later, law enforcement officials said, Jakob purchased 3,500 Emulex shares, which he
then sold on August 28 at a profit of more than $186,000. In total, his profit from the hoax was
more than $241,000, they said.
The fake release included a series of
damaging claims about the financial status
and senior management of Emulex, which
makes electronic components that connect
computer systems to network storage
devices. It was distributed just as the New
York securities markets opened. The Costa
Mesa, Calif.-based company's stock
plunged more than 60 percent in the first
hour of trading, knocking roughly $2.5
billion off its total market capitalization.
In Thursday trading, Emulex shares closed up about 4 percent or $4.19 a share at $104.69. They
closed at $113.06 last Thursday, the day before the fake press release was circulated.
Hoaxters beware
The Emulex case was similar to another fraud that was perpetrated last summer against PairGain
Technologies. In that case, a former PairGain employee posted a fake news story on several
Internet chat boards saying that the company was poised to be acquired, driving shares more than
30 percent higher.
Authorities eventually tracked down that former employee, Gary Dale Hoke, who pleaded guilty to
two counts of securities fraud. Hoke was ordered to pay $93,000 to investors who bought PairGain
stock and sold it at a loss after the company denied the bogus report. Hoke also was sentenced to
five years' probation.
In a similar case, Lucent Technologies' stock fell 4 percent in March after a fake news release was
posted on an Internet bulletin board, claiming Lucent would report lower earnings.
Last week's hoax underscored the perils that come with the instant
access to information investors now have with the Internet. But
Mayorkas used Thursday's arrest to warn any would-be Internet
hoaxters, hoping to cash in on similar scams in the future, that
they cannot hide in cyberspace. [861K WAV or 861K AIFF]
"Anybody who would use the Internet to commit a crime should
also understand one thing: Do not count on the anonymity of the
Internet to serve as a shield for your illegal conduct," Mayorkas
said. "We in law enforcement can navigate the information
superhighway just as we have had to, and continue, to beat the
pavement to detect and apprehend criminals."
Paul Folino, Emulex's chief executive, said he was pleased that
the authorities moved so swiftly in apprehending a suspect. He
also said that very few of the trades that took place in Emulex
shares during the sharp decline were block trades, indicating that individual investors and not
institutions were harmed most by the hoax.
If convicted of the federal fraud charges, Jakob faces up to 15 years in prison. But he could also
be facing a legion of angry investors who lost money as a result of the bogus news release.
"I suspect there are going to be a lot of class-action lawsuits," said Valerie Caproni, Pacific
Regional Director for the Securities and Exchange Commission.
Caproni could not say if there was any evidence that others may have benefited from the decline
and subsequent bounce in Emulex shares last Friday. She said the SEC is continuing its
investigation into the matter.
The SEC on Thursday filed its own complaint against Jakob, claiming he violated several
antifraud provisions of Securities Act of 1933 the Securities Exchange Act of 1934. The agency is
seeking a temporary restraining order, preliminary injunction and permanent injunction against
future antifraud violations, as well as civil penalties and an order freezing Jakob's assets.
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