9/1/00 - [EMLX] National Post: How not to get rich from a stock hoax; Emulex fiasco made for good news copy but lousy larceny
How not to get rich from a stock hoax
Emulex fiasco made for good news copy but lousy larceny
Paul Kedrosky
National Post
So the FBI thinks it has the Emulex hoaxster. But lost in all the lip-smacking satisfaction about having apparently caught the perp is how low-rent and klutzy his alleged crimes remain.
In case you have somehow missed this little morality tale, last week someone convinced a fledgling Internet-based newswire to publish a fake press release about Emulex Corp. The gist of the release was that the computer storage company would restate earnings, and that Emulex was currently under U.S. Securities and Exchange Commission investigation.
Not surprisingly, the news kicked the windows in on Emulex's share price. It tumbled more than 50%, falling from more than US$100 to less than half of that in a few minutes of frantic trading before Nasdaq halted it so Emulex could clear things up. The company did, jumping up and down shouting, "Not my press release! Not my press release!" The stock resumed trading shortly thereafter, picking up more or less where it had started off, back in US$100 territory.
Media critics blamed the brouhaha on irresponsible media outlets; financial types have fingered Emulex and the SEC for taking so long to stop trading and fight the fire. The fear-mongering popular press has, as is its wont, breathlessly celebrated the perpetrator's audacity, while school-marmishly wagging its finger about those nasty-dangerous stock markets. The Wall Street Journal found its world view vindicated by columnist James Glassman, trumpeting the stock's whipsaw action (from US$100 to US$50-ish and back to US$100 again) as evidence of how darn efficient modern markets are at processing information.
In other words, the Emulex fraud has become a kind of tabula rasa, a blank slate on which people see precisely what they want to see. Moralists see it as evidence of how nasty people are in their quest for cash; market critics see it as evidence of how easily stock prices are messed with; media critics see it as further proof of the regressive effect of online media.
They all have somewhat of a point. Yes, Dow Jones and Bloomberg deserve short spankings for how blithely they plucked the story from the relatively unknown Internet newswire where the press release first appeared and retransmitted it on their own, more reputable, services. I understand not checking facts when it's a story about a human head inside a giant Australian codfish, but when a few billion dollars is on the line (the amount Emulex's market capitalization declined), you'd think folks would have a somewhat higher standard.
Yes, the online media have made it harder than ever to figure out what's "real" journalism and what isn't. Stories are legion about Webmasters from obscure Web sites vainly seeking media accreditation at conferences and media events, while print outlets with one-quarter their readership are ushered inside. We don't know who's who any more, and it's made things more confusing and fast-paced than ever.
That's not a bad thing, though. Personally, I would rather have the unruly and chaotic media chasing stories and each other than an august Paper of Record (or newscast) beaming me the Received Truth every morning between my orange juice and cornflakes. And the senders of received truth aren't always who you think they are. It was much-maligned business television network CNBC -- bubble-vision, as one critic calls it -- that was the first to set its more serious-minded counterparts straight on the Emulex story.
This is rapidly turning ignominious, anyway. The suspect is a 23-year-old former employee of that Internet newswire, as well as a sometime community college student. According to a recent employment application, he's a fan of "Las Vegas, snowboarding, beach, dancing, playing the 'market'."
According to the complaint, he made about US$244,000 on the fraudulent press release. He profited just shy of US$60,000 by shorting the stock as it dropped, then another $180,000 or so by buying it around its US$50 lows and holding it for the bounce after Emulex issued its own inevitable press release. But that's chump change, and shows just now unsophisticated the alleged fraudster was.
Because not only can our alleged fraudster not write -- his press release has bizarre, Barth-ian 19th-century capitalization and is missing words -- he can't trade. He knew the stock was going to drop massively, and he knew it was going to bounce back. Yet on a sure thing, he managed to make only a few hundred thousand dollars. On the same amount of capital, he should have made three or four times that.
If, for example, he had put his capital into September put options with a US$70 strike price in expectation of the drop, then bought September calls with a US$100 strike when the stock cratered, he could have netted at least a million dollars, perhaps even twice that. Instead, he apparently settled for simple, whitebread trading.
To be sure, it probably threw off the investigators. They must have been looking at option trading on the morning of the fraud, assuming anyone who was going to do something like this would ... you know, swing for the fences. Meanwhile, it seems to have been just some ethically challenged buy-and-hold investor trying to make up for past losses -- albeit, in a somewhat unorthodox way. Who would have thought.
Paul Kedrosky is a professor of business at the University of British Columbia.
nationalpost.com
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