Re: 8/29/00-9/1/00 - [EMLX] It takes a village to tank a stock; Emulex hoax suspect bond set at $100,000; FBI arrests hoax suspect... Fake release on tech stock shows impact of Internet
It takes a village to tank a stock
August 29, 2000
by Stefani Lako Baldwin
NEW YORK -- Once upon a time, Friday to be exact, a bogus press release fluttered through the town. Royal messengers trumpeted the news of the abdication of Emulex's (EMLX) chief executive officer and its empty coffers. The townspeople scurried about. Some hid in their houses; others fled the city.
The moral of this sad tale?
It takes a village to tank a stock.
On Friday, a still unknown person or persons spent $325 to post a press release on Investment Wire and brought Emulex's market cap down by $2.5 billion.
The news release hit the wire at 9:30 a.m. At 10:31 a.m., the Nasdaq temporarily halted trading on the stock, which by that time had fallen 51 percent.
It took one hour for investors and media outlets to pick up on the false news that Emulex CEO Paul Folino had resigned, the company planned to reverse its Aug. 7 positive earnings call and the Securities and Exchange Commission had begun an investigation into the company.
Only the latter had some ring of truth. The SEC is indeed involved in an investigation -- along with the Federal Bureau of Investigations and the Nasdaq -- into who created this elaborate hoax and what they did or hoped to gain by it.
Call for a quick arrest
I, for one, hope an arrest comes quickly. But while only one person or group of people will go to jail, this incident has many guilty parties. The Emulex hoax is really a story about ourselves, about our information sources and about investor reaction.
(Full disclosure: UpsideToday never published a story on the hoax, though we did link to a Reuters story about the matter. I can't say, however, that we would have passed on the story if our writing staff were not already working on other stories.)
Late in the afternoon on Thursday, InternetWire received a press release from an individual or group claiming to be a public relations firm representing Emulex. The false release said the Costa Mesa, Calif.-based company planned to revise its fourth-quarter results to a loss of 15 cents per share down 40 cents from the original call of 25 cents per share.
Emulex, which manufactures networking cards that speed information between computers and data-storage networks, saw its stock rise 40 percent the morning after it reported its genuine fourth-quarter sales and profit numbers. Two weeks later, after the hoax, the stock plummeted from $103.00 to $45.00 in 15 minutes. The stock recovered by the end of trading. It closed down 6 percent on Monday, at $99.50.
Nothing new here
Sad to say, but this crime was not unique. Last year, PairGain Technologies (now part of ADC Technologies (ADCT), maker of high-speed digital subscriber lines (DSL), saw its stock rise and fall on a fake Bloomberg article that said the company would be acquired. A former employee was sentenced to five years' probation and a $93,000 fine for restitution. Another stock manipulation case involved Aastrom Biosciences (ASTM). In that case, a hacker allegedly posted a fake press release on the company's website.
Since I'm much too cynical to suggest that the federal government will eradicate all Internet fraud, and seriously doubt brokerages will nullify the trades made during that one-hour period, here are some possible remedies to prevent future calamities.
Sitting on this end of things I must admit the desire to get information out quickly has become a virtue in New Media. I can hear the print editors snickering from my perch on Park Avenue in New York City.
Certain rules, however, need to apply to certain media. For financial reporters at UpsideToday and other non-wire information services, we have a responsibility to double-check information from other sources. We rely on wire services, just like newspapers, to provide us with timely news of record. It is then our job to flesh out that story, call the company involved, add the human-interest angle, the contradictory opinion, etc.
In other words, I see no point in blaming Dow Jones, Reuters or Bloomberg. These outlets were doing what they do every day: reworking press releases and getting the information out to their clients, many of which are news services themselves. They could consider inserting the following at the end of stories that warrant it: "The aforementioned information has not been confirmed."
As for press release information, reporters can save themselves and their readers a great deal of trouble if they simply call the individuals noted as contacts at the bottom of the release.
The fraudulent Emulex release, for example, gave the name and phone number of an actual company investor relation official. Any news outlet that took that road on Friday would have reached a real investor relation contact for the company and learned that a massive act of fraud was being committed.
As for investors, knee-jerk reaction to news remains a problem. My colleagues and I watch stocks rise and fall all the time on the slightest bits of news, much to our confusion.
The SEC has tried to help by cautioning investors not to rely on a single source for investor news.
The Emulex situation, however, fell in between the cracks of this advice: a number of media outlets reported the news, including CNBC.
Can technology help?
Perhaps technology can help fix the problem it inadvertently helped create.
Some market watchers suggest digital signatures could solve this problem. By requiring companies to digitally sign press releases, news wires and public-relations wire services could validate sources of information.
This is definitely an instance where digital signature technology can do more than make it easier to sign up for online trading. These services could go a long way in helping information brokers make better calls about truthfulness.
And with online trading expected to grow, incorrect financial information will harm more investors.
In this column a few weeks ago I trumpeted the SEC's decision to pass Regulation Full Disclosure (see "The rules are changing"). The rule will give regular investors access to the same information as analysts and other big market players. Opponents of this rule argue that the investor is already overwhelmed with too much information.
Thanks to somebody's idea of a practical joke or get-rich-quick scheme, the Emulex press release hoax has offered fodder to those who think investors have too much information.
We can't allow that sentiment to grow.
Investors, members of the financial media and market players all need to realize our combined stake in the integrity of the U.S. markets. Together we made this mess and together we can clean it up.
Stefani Lako Baldwin is a financial writer for UpsideToday. Reach her at sbaldwin@upside.com. If you would like to submit a letter to the editor regarding this story, email online@upside.com.
upsidetoday.com
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Friday September 01 01:00 PM EDT
Emulex hoax suspect bond set at $100,000
By Sandeep Junnarkar, CNET News.com
The U.S. attorney's office has set a bond of $100,000 for Mark Simeon Jakob, the suspect apprehended yesterday by Federal law enforcement authorities for allegedly releasing a fake news announcement that sent shares of technology company Emulex reeling more than 50 percent last Friday.
Matthew McLaughlin, a spokesman for the Federal Bureau of Investigation in Los Angeles, said the suspect has not been released, pending a psychiatric evaluation. Unconfirmed reports this morning indicated that Jakob had been released on bail. "The bond was set last night, but the judge ordered (the suspect) to undergo psychiatric evaluation before he could be released," said Thom Mrozek, a spokesman for the U.S. attorney's office.
Since the arrest of the 23-year-old El Segundo, Calif., resident, several class-action lawsuits by Emulex investors who took a beating in the incident have begun pouring in against Bloomberg, one of the first news services to distribute an article based on the false announcement, and against Internet Wire, the service over whose network the sham news was circulated.
This morning, in the most recent case, the law firm of Schatz & Nobel PC, filed a lawsuit in U.S. District Court for the Southern District of New York on behalf of investors who were duped into taking action on the false news. The firm also named Internet Wire and Bloomberg as the defendents. The complaint alleges that both services violated the Securities Exchange Act of 1934 by "recklessly disseminating materially false and misleading information" about Emulex.
A Bloomberg spokeswoman said the company does not comment on ongoing litigation. A representative for Internet Wire could not be reached for comment at this time.
Jakob, a student at El Camino Community College, stands accused of wire fraud, acting with intent to defraud, participating in a scheme to defraud and securities fraud. He worked at Internet Wire until Aug. 18.
According to U.S. Attorney Alejandro Mayorkas, Jakob sent an email from the library at El Camino Community College to Internet Wire with a phony Emulex press release that "reflected familiarity with the procedures used" by the service.
Authorities are seeking civil penalties as well as criminal securities fraud charges. They allege that Jakob made nearly $250,000 from short sales he made in conjunction with the press release posting.
The fake announcement indicated Emulex would restate its earnings--revising its profits lower--and said the company's chief executive would resign. The company, which is based in Costa Mesa, Calif., and makes networking technology, lost about $2.5 billion in value last Friday before the hoax was discovered. Emulex said the information was false.
The FBI moved in swiftly to track the alleged perpetrator.
dailynews.yahoo.com
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Published Friday, September 1, 2000, in the San Jose Mercury News
FBI arrests hoax suspect
Fake release on tech stock shows impact of Internet
BY MICHELLE QUINN
Mercury News
The FBI on Thursday arrested a student on charges of carrying out an online hoax in which a company's stock lost nearly two-thirds of its market value in a 15-minute free fall last Friday.
The case highlights how the Internet has changed forever the world of stock trading.
Mark Jakob, 23, of El Segundo, a student and former employee of Internet Wire, an Internet press-release distributor, is charged with securities fraud and wire fraud for planting a fake press release about Emulex, a Southern California company, on Internet Wire. The release was picked up by news wires and sent the company's stock plummeting. The report was quickly refuted, and the stock mostly recovered within the day. Jakob made $241,814 in the process, the FBI said.
If convicted, Jakob faces up to 15 years in prison. The Securities and Exchange Commission also filed a civil complaint against Jakob seeking repayment of all profits plus unspecified civil penalties. Bail has been set at $100,000, and Jakob is forbidden from trading stock.
The Emulex story is testament to the Internet's promise and danger. Information, sometimes wrong, can be disseminated lightning-fast. And traders, from the fund manager on Wall Street to the individual investor in Willow Glen, can make impulsive decisions out of fear of being left holding the bag.
In fact, most players responded to the pressure to act instantly, a pressure that perhaps didn't exist in an earlier world where information moved more slowly.
This time, it seemed that all elements of restraint broke down. Jakob concocted a damaging e-mail in the name of an Emulex employee, which he sent to Internet Wire. The press release service sent out the information without double checking. News wires picked up the story, also without checking. An online columnist commented that he was trying to profit from the free fall. And traders didn't wait for confirmation.
``There's a premium to act quickly because the information flow is quicker,'' said Richard Walker, the SEC's director of enforcement. ``There's no `sort' button you can push that separates good information from bad information.''
In this case, however, investors may have thought they had that kind of button. They relied on information from brand-name sources such as Bloomberg News and Dow Jones News Service. Internet Wire is funded by Bay Area venture firms, Sequoia Capital and Hummer Winblad Venture Partners, as well as a Stanford University fund.
``Investors didn't do anything wrong,'' said Barbara Roper, director of investor protection at the Consumer Federaton of America, a non-profit consumer advocacy organization. ``It wasn't like they were listening to anonymous tips.''
But the Internet has given traders a false sense of empowerment, said Roper.
The stock recovered most of its ground soon after the company denied the reports. But for many people, that was too late. Instead of investors calling their brokers and discussing the matter, some panicked and sold, while others had sell orders executed automatically at pre-set prices. Of course, others profited as did the suspect, who had bought ``put options,'' which are essentially a bet on the stock price dropping.
``The Internet encourages some people to engage in short-term trading in individual stocks,'' she said. ``If you buy and hold for long term, it doesn't matter what happens to the Emulex stock.''
For as long as shares in companies have been traded, there has been the risk of people relying on bad information, said Brian Lane, formerly SEC's director of division of corporation and finance and now a partner at the law firm Gibson, Dunn & Crutcher.
What has changed, he said, is that now there is ``a velocity of information'' on traders' desks.
Still, he views the telephone as arguably more dangerous. ``True, the Internet permits a wider spread of fraud. But the telephone is more anonymous.''
Chris Taylor, a spokeswoman with Bloomberg, said that there had been ``a couple of missing links in the chain.'' Bloomberg reported that the press release said Emulex's chief executive had quit. It also reported that the company, a Costa Mesa maker of fiber-optic equipment, was restating its quarterly earnings from a profit to a loss. And that there was a SEC investigation.
``The stock was moving before the story went out,'' she said.
``In our universe, when a stock is moving we have to report why,'' Taylor continued. ``We didn't follow normal course of action. We didn't confirm. The company was closed at the time of the story. We should have said that in the story.''
As the Emulex case shows, though, the Internet has a flip side. Users inadvertently leave tracks as they move around the Internet. Thursday, the FBI and the SEC proudly pointed to the fact that Emulex was the fourth stock hoax over the Internet in which a suspect had been arrested in less than a week.
``The Internet is a valuable tool for someone who wants to commit stock fraud. And it's a valuable tool for law enforcement,'' the SEC's Walker said.
But that may be little solace for those who lost money when they sold on the way down. It is unclear who would be possible defendants in a lawsuit, said Reed Kathrein, a partner at the law firm Milberg Weiss Bershad Hynes & Lerach.
He ruled out the company. As for Internet Wire or the news companies, it ``would be a hard battle to be fought. You would have to show they should have known to check it out and they failed to check it out,'' Kathrein said.
But the world post-Emulex may change all that. ``Now that this has happened, that may put people on notice.''
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Mercury News wire stories contributed to this report.
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Contact Michelle Quinn at mquinn@sjmercury.com or (408) 920-5749.
mercurycenter.com
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Friday September 1 3:05 PM ET
Bloomberg, Internet Wire Face Lawsuit Over Emulex Hoax
NEW YORK (Reuters) - A Florida investor has filed a lawsuit against Internet Wire and Bloomberg LP over a false press release that led to a nosedive in the shares of Emulex Corp. (NasdaqNM:EMLX - news) last week in one of the biggest Web-based financial hoaxes ever, attorneys said on Friday.
The suit, filed on behalf of Ron Hart and which seeks class action status, accuses the two organizations of allegedly ''recklessly disseminating materially false and misleading information,'' Hartford, Conn.-based law firm Schatz & Nobel said in a statement. Hart lost as much as $15,000 as a result of the hoax, said Schatz partner Andrew Schatz.
Both Internet Wire, a company announcement distribution service, and Bloomberg, a financial information and news company, declined to comment on the suit, which was filed in the U.S. District Court for the Southern District of New York.
``We have not been served so we do not have a comment until we are,'' said Internet Wire spokeswoman Amy Orebaugh on Friday.
Bloomberg spokeswoman Chris Taylor said that as of early Friday morning it had not been served a lawsuit and said the company does not comment on ongoing litigation.
A false press release issued via Internet Wire and picked up by Bloomberg, Dow Jones and some other news organizations caused the data networking equipment maker's stock to fall more than 50 percent last Friday. Reuters did not carry the hoax. The release said that the company was under investigation by the Securities and Exchange Commission, was about to restate its earnings and that its chief executive had quit.
On Thursday, a 23-year-old college student was arrested and charged with the hoax and pocketing almost $250,000 from subsequent trading of Emulex stock.
The ``plaintiff seeks to recover damages on behalf of all investors who sold Emulex stock or call options or purchased put options on August 25, 2000 before the resumption of trading at 1:30 p.m. EST,'' Schatz & Nobel said in a statement.
Schatz said other investors had contacted him and he expected that some of them would join in the suit.
Hart had about 500 Emulex shares and sold them at about $80 each in the middle of the share price plunge, which reversed as soon as the hoax was revealed, said Andrew Schatz. The company's shares, which fell to $48-1/16 last Friday before trading was suspended, have since recovered to $108-7/16.
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