Feds Make Arrest in Emulex Hoax Case

Sharon Walsh (Computerworld)
01 September, 2000 12:01
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SAN FRANCISCO (09/01/2000) - Last week's $2.2 billion drop in the value of Emulex Corp. happened fast - about 16 minutes - as investors dumped the stock after reading various Internet news stories that were based on a phony press release.

Also swift - just six days - was the investigation that resulted in the arrest Thursday of a 23-year-old California student who allegedly posted the fake release and made nearly $250,000 in the process by selling the stock short.

Federal officials said Thursday that Mark S. Jakob, a onetime student at El Camino Community College and a former employee of Internet Wire, sent the counterfeit news in a press release to his former employer from a campus computer.

Internet Wire then distributed the release, which stated that the chief executive of the California maker of fiber-optic equipment had resigned and that the company was restating its quarterly earnings to show a loss rather than a profit.

The release was picked up by numerous news organizations and widely distributed in the brief period before the company notified news services that the story was false and regulators halted trading of the stock. That was not before the stock of Emulex, which is traded on the Nasdaq, dropped from $113 a share to about $43 a share, and hundreds of investors had lost millions of dollars.

Criminal charges of wire fraud and securities fraud were filed Thursday against Jakob by the U.S. attorney's office in Los Angeles. At the same time, the Securities and Exchange Commission filed civil charges of fraud and asked the court to freeze all of Jakob's assets.

While securities crime on the Internet has proliferated because perpetrators believe they can remain anonymous, federal authorities have become more practiced at tracking the criminals through the various Internet signatures that are left in the wake of the messages.

"We in law enforcement can navigate the information superhighway just as we can beat the pavement to catch criminals," said U.S. Attorney Alejandro N. Mayorkas. "As technology advances, so do our investigative techniques."

Jakob had shorted Emulex stock, expecting the price to drop. When the price rose instead, he had an unrealized loss of about $97,000, according to federal authorities.

Jakob then issued the fake press release, expecting the hoax to cause the stock to fall so he could make up for his losses, they said.

Emulex stock regained virtually all of its losses after it was discovered that the news was false.