[CNET] Hoax shaves $2 billion off Emulex's market cap

Date view Thread view Subject view Author view

From: Linda (joelinda1@home.com)
Date: Fri Aug 25 2000 - 15:42:52 PDT

[This is incredible. A fake press release (presumably issued by shorts)
caused this stock to drop 60% within 30 minutes before trading
was halted. It seems so wrong that the shorts have made a huge profit
on this. I feel most sorry for those long on Emulex with hard stops.
Given how quickly this stock plummeted, their stops could very well have
been filled near the low of the day, only to have the stock gap
up 40 points once trading resumed.



Hoax shaves $2 billion off Emulex's market cap
By: Corey Grice and Scott Ard, CNET News.com
8/25/00 12:45:00 PM
Source: News.com

A fake press release rocked the shares of networking equipment company
Emulex today, causing the company's market value to plunge by
$2 billion and creating anxiety for thousands of investors.

Around the same time trading began for the day, at 6:30 a.m. PT, a
press release purportedly from Emulex was posted on Internet Wire,
a Web-based distributor of corporate announcements.

According to the release, which contained formats similar to previous
Emulex announcements and listed an actual investor relations executive
as a contact, the company's chief executive was resigning and quarterly
earnings were being revised from a profit to a loss.

Reaction was swift and devastating: In about an hour the shares plunged
to as low as $43 from yesterday's close of $113.06. Volume during the
brief period topped 3 million shares.

Other shares were swept up in the sell-off as investors reasoned that
Emulex's woes might be part of a sector-wide problem.

Shares of Brocade Communications Systems, a storage area networking
company, opened at $216.53 but fell as low as $206. Shares of Qlogic
also tumbled, reaching as low as $74 from yesterday's close of $109.69

Officials with the Nasdaq Stock Market halted trading in Emulex shares
after being notified by the company that the release was phony.

Emulex CEO Paul Folino appeared at least twice on CNBC to reassure
investors that the release was a hoax. "This was a fictitious press
release that was released this morning. We are not restating our
fourth-quarter or annual earnings," he said. "Obviously I haven't
resigned and am on the job."

The release was reported by online news services TheStreet.com,
Bloomberg News, CBS MarketWatch and Dow Jones, which followed with

When trading resumed around 10:30 a.m. PT, the shares quickly jumped
to about $110.

Although the share prices have largely been restored, the investigations
and questions have just started.

Emulex is the latest victim of several high-profile hoaxes in recent
years, a development that investors and regulators fear will only
increase as the Internet plays a larger role in the financial industry.

The Internet allows for lightening-fast transmission of news--real or
fake--and allows investors to react with "sell" or "buy" orders almost
as quickly.

In one of the most widely known stock manipulation cases, PairGain
Technologies, a manufacturer of high-speed digital subscriber line
(DSL) Internet connection equipment, endured a roller-coaster stock
ride last year after a bogus news article said the company would be

A former PairGain employee was sentenced to five years of probation
and ordered to pay more than $93,000 in restitution after pleading
guilty to disseminating the fake news story.

Who made a profit

According to Folino, the Nasdaq, the U.S. Securities and Exchange
Commission and the FBI are investigating today's incident. "The first
place people will look" is at large "short" positions, he said.

Shorting is investing in reverse--a way to profit from a declining
stock. Instead of buying today and selling tomorrow, hoping the stock
will increase, shorters sell today and buy tomorrow, hoping the stock
will dive.

For example, a Charles Schwab customer might borrow 100 shares of a
company that is trading at $80 and immediately sell the shares for
$8,000. If the shares later fall to $40, the investor could purchase
the 100 shares for $4,000 and return them to Charles Schwab, netting a
profit of $4,000.

In the case of Emulex, about 575,000 shares were shorted as of July
10, meaning the shares had already been borrowed and sold, but not
yet replaced by investors. The amount of shorted shares is relatively
light--representing about 2 percent of the total number of shares that
have been floated.

While short sellers who needed to replace borrowed shares could have
benefited from today's plunge, there are other potential winners.

Investors who felt that the release was a fraud or who believed the
reaction was overdone could have purchased Emulex shares at fire-sale
prices. For example, an investor could have bought the shares at $50
in early trading and watched them double when trading reopened a
couple of hours later.

SEC officials declined to comment on the specific Emulex incident.

Not an isolated case
Although releases of bogus news and information are rare, regulators
and law enforcement agents have reason to be concerned about their
apparent increase and the Internet's role in the crimes.

SEC spokesman Chris Ullman said the commission has seen about 130
incidents of Internet fraud during the past five years, most of which
occurred in the past two years. The agency has several hundred
attorneys periodically trolling the Net for evidence of fraudulent or
manipulative behavior, he added.

Penalties for using the Net to manipulate stock prices aren't
intrinsically any more severe than for similarly illegal offline
behavior. But these penalties can be stiff: The SEC can impose financial
penalties and pull a stock broker's license. Jail time is also an

The Net has made it easier and faster for fraud to happen--but it's
also made it easier to catch some con artists, Ullman noted.

"They're easier to find when they're right out there," Ullman said.
"They may try to hide behind false identities, but we have subpoena
power and can root them out."

In the PairGain case, Gary Hoke was arrested after authorities scoured
the network logs of several companies.

Other stock manipulation cases include Aastrom Biosciences, which saw
its stock spike after an apparent hacker allegedly posted a fake
announcement on the company's Web site.

But stock manipulation efforts need not be so elaborate. Internet
stock chat rooms and message boards make it easy for manipulators to
anonymously post fake announcements and news articles.

In today's Emulex case, published news reports said Internet Wire
distributed the release. For a fee of $275, people may post news and
announcements on Internet Wire.

According to Internet Wire's terms of service agreement, subscribers
posting news on its service must agree "that the content of the release
is factually and legally accurate" and that "the release does not
contain any information which is libelous or otherwise illegal."

Internet Wire would not confirm or deny that it carried the release,
but a spokesman said "the Emulex release is under investigation." It
isn't clear whether Internet Wire posted the release or if someone
into the system and posted it.

Although the Internet has made financial information more readily
available, experts urge investors to make careful decisions about their
financial future.

"We try to implore investors never to rely on a single source of
information in making their buying and selling decisions," Ullman said.

Date view Thread view Subject view Author view

This archive was generated by hypermail 2b29 : Fri Aug 25 2000 - 15:45:45 PDT