Feds Study Emulex Hoax Evidence

Friday, September 1st 2000, 12:00 am
By: News On 6

LOS ANGELES (AP) — Was the man accused of sabotaging a company's stock by issuing a phony press release a clever cyber criminal or an amateur investor who hatched a clumsy plan to cover his losses?

Federal documents filed in the case of 23-year-old Mark Jakob reveal the El Segundo man authorities say caused Emulex's stock to plunge 62 percent went to great lengths to cover his tracks, going so far as to register at one Las Vegas hotel and make stock trades from another the day he allegedly perpetrated the hoax.

But they also paint a picture of a typical twentysomething who listed snowboarding and dancing as his hobbies and lived by the motto: ``LET IT RIDE!!!!''

Jakob, charged Thursday with securities fraud and wire fraud, faces a maximum of 15 years in prison if convicted. He was jailed in lieu of $100,000 bail.

He is accused of issuing a phony press release last Friday stating that the chief executive of Emulex Corp., a Costa Mesa, Calif., maker of fiber-optic equipment, had quit and the company was restating its quarterly earnings from a profit to a loss.

The company's stock plunged after some financial news services, including Bloomberg and Dow Jones Newswires, ran stories based on the bogus release.

Authorities say Jakob sent the release because he faced the prospects of a huge loss from a ``short sale'' of 3,000 Emulex shares. A short sale involves selling borrowed shares of a stock in anticipation that the price will decline.

Emulex is a fast-growing, high-tech company that has seen its stock climb from about $36 per share 12 months ago to more than $200 a share earlier this year. The volatile nature of the stock tends to attract Internet and day traders, said Emulex President Paul Folino, who called the case ``an intentional act of electronic terrorism.''

The bogus release was issued through Internet Wire, a 6-year-old online distributor of press releases where Jakob had worked until last month. He left the company ``on good terms'' a week before the crime, authorities charge.

A 41-page complaint filed by the U.S. Attorney's office claims Jakob made his short sales on Aug. 17 and 18, using a computer at Internet Wire to execute some of them. Instead of the stock price declining, as Jakob had hoped, it began to rise, leaving him with the probability of having to repurchase the shares at a loss of approximately $97,000, according to a lawsuit filed by the Securities and Exchange Commission.

Instead, authorities say, Jakob made more than $241,000 from Emulex trades after the phony press release was delivered.

On Aug. 23, authorities say, Jakob registered at the Luxor hotel in Las Vegas. The next day, they say, he opened an e-mail account using a computer at El Camino College in Torrance, Calif. where he had been a business major. Jakob attended classes during the summer session, but was not a student at the time of his alleged hoax, the college said.

Authorities say he posed as ``Ross Porter'' from the fictitious public relations firm ``Porter and Smith PR'' and sent the news release using language that led the skeleton staff of Internet Wire employees on the overnight shift to believe the document had been verified for accuracy and approved for release. He allegedly sent an e-mail with the news release attached from a computer at the college Thursday evening.

Friday morning, the release was distributed and within minutes, Emulex's stock plunged. Jakob then allegedly bought back the 3,000 shares of stock he had sold short, using a computer at the business center at Las Vegas' Mandalay Bay hotel.

But, apparently not satisfied to merely cover his losses, federal authorities say that within three minutes of his first trade Jakob bought 3,500 Emulex shares at their depressed price. He sold those a few days later at a profit of $186,814.

Minutes after the stock crash, Nasdaq halted trading after learning that the press release was false. Trading resumed that same day and the stock made up most if its losses.

In a strange twist, Jakob phoned a former colleague at Internet Wire about 2 p.m. or 3 p.m. last Friday, inquiring innocently about the Emulex matter, according to the federal court filing. When the colleague said he was too busy to talk, Jakob asked to speak with his former supervisor. But by the time the supervisor came to the phone, Jakob had hung up.

In the end, it took only a few hours for investigators from the SEC and the Federal Bureau of Investigation to trace the bogus press release.

At a new conference Thursday, investigators said they traced the e-mail from ``Ross Porter'' back to El Camino College. Investigators interviewed employees at Internet Wire and discovered that Jakob, who often talked about trading stocks, was a student there.

Investigators then reviewed Jakob's trading records, which were obtained by the SEC from Datek, Inc., an online stock brokerage.

Among the evidence they brought to court was a profile Jakob wrote when he obtained an account at America Online. He listed his hobbies as ``Las Vegas, snowboarding, beach, dancing, Playing the 'Market,' the stock market that is ... ''

Officials said they will continue their investigation to determine if anyone else was involved in the hoax. Already one investor has sued Internet Wire, claiming he lost thousands of dollars as a result of the bogus press release.

And a Hartford, Conn.-based law firm has filed a suit in the southern district of New York on behalf of Emulex investors against both Internet Wire and Bloomberg. The suit, filed by Schatz & Nobel, alleges that both companies of ``recklessly disseminating materially false and misleading information'' and is seeking class-action status.