No Quick Fix Seen for Eliminating False News Releases, Security Experts Say
If the hoax targeting Emulex Corp. proves anything, it’s that phony press releases and news stories will probably continue seeping into mainstream channels despite the stepped-up efforts of news distribution companies to head them off, experts said Friday.
In the last couple of years, firms that disseminate company news releases have tightened their policies to guard against the sort of bogus release that briefly but dramatically drove down the shares of the Costa Mesa-based maker of computer and networking gear.
But “this is not the first time something like this has happened, and it won’t be the last time,” said John Coffee, a Columbia University law professor.
Michael Terpin, chief executive of Internet Wire Inc., which distributed the Emulex release, said his firm has policies to guard against bogus news releases, including contacting companies by phone to verify the authenticity of a release that it has received electronically.
But whoever was behind the fake release had “sophisticated knowledge” of Internet Wire’s operation, and was able to “trick” Internet Wire’s night staff into believing that the day staff had checked out the release, Terpin said.
“This was a very sophisticated fraud,” he said.
The two leading firms that distribute corporate news releases, Business Wire and PR Newswire, say they have measures in place to guard against such an occurrence.
Earlier this year, for example, New York-based PR Newswire implemented a policy in which a firm signing up with its service must wait until the next business day to send out its first press release. That gives PR Newswire adequate time to check out the firm, said Renu Aldrich, a spokeswoman.
PR Newswire also has attempted to cut down on a popular practice known as “ticker spam” in which smaller companies seek to drum up investor interest, Aldrich said. This occurs when a small firm mentions big-name but unaffiliated companies in news releases. By including the ticker symbols of the bigger firms, the smaller firm’s release is included in the electronic news file of the larger firm.
Thus, someone calling up news on Microsoft or Intel on a Web site might be presented with the smaller company’s news release.
The tighter security is needed because PR Newswire frequently has to turn away questionable firms or dubious releases, Aldrich said.
“We catch things all the time,” she said.
Before using information from a news release, Bloomberg News verifies that the release comes from a bona fide wire service such as Internet Wire, “but we rely on the services to verify” that the news releases themselves are authentic, said spokeswoman Chris Taylor.
The New York Stock Exchange requires that companies listed on its exchange notify the NYSE of potentially market-moving news releases 10 minutes before they’re sent out to news services. That gives the exchange time to decide whether to halt trading of the stock.
A Nasdaq spokesman could not be reached for comment. However, Nasdaq has generally been against halting the trading of stocks except in extreme conditions.
Investors who lost money as a result of the Emulex hoax may be out of luck, Coffee said.
Eve if authorities can identify the creator of the release, the person or people are unlikely to have a “deep pocket,” he said.
And investors tempted to go after Internet Wire may not be able to recover money, he said.
To succeed in a court case, plaintiffs would have to prove that Internet Wire had acted “recklessly” by sending out a release that it knew, or strongly believed, to be bogus--which doesn’t appear to be the case, he said.
As to how investors can protect themselves, there are several steps they can take.
Always verify that the claims of a news release are true, experts say. The first step is to go to a company’s own Web site. If a company has put out a release over the wires, it probably has also posted it on its own Web site.
Check whether there’s anything odd about the release. Be suspicious if it’s written in a poor or sloppy manner.
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Recent Stock Hoaxes
The Securities and Exchange Commission has seen about 130 incidents of Internet fraud in the last five years, most of them coming in the last two years. Penalties are the same as for any stock manipulation, but can include fines or jail time. Here are some notable recent examples:
May 7, 1997: Shares in Bre-X Minerals Ltd. crashed to rock bottom, and Indonesian authorities halted the company’s operations after revelations that its much-touted gold find in Borneo was an intricate fraud. Shares once worth more than $200 traded for a few pennies on the Toronto Stock Exchange in the first day of trading for Bre-X after the hoax was exposed--the only buying was by collectors hoping the company’s stock certificates would become collectibles.
Aug. 20, 1998: The former chairman and another board member of Newport Beach-based Comparator Systems Corp. were ordered by a federal judge to pay almost $427,000 for allegedly helping the company inflate its assets from 1994 to 1996. Shares of Comparator, which billed itself as a maker of fingerprint identification systems, soared 30-fold in May 1996 to a stock market value of more than $1 billion before collapsing. It turned out that the company had no technology or assets.
April 7, 1999: Gary Dale Hoke of Raleigh, N.C., posted a fake Bloomberg News story on the Internet saying that PairGain Technologies Inc., a Tustin-based maker of communications equipment, would be acquired by an Israeli company for $1.4 billion. Hoke was sentenced to five months of home detention and five years of probation and ordered to pay $93,000 to about 30 investors who purchased stock because of the report and lost money.
March 23, 2000: Shares of telecommunications giant Lucent Technologies Inc. slid 4% after someone posted a fake earnings warning on a Yahoo Internet message board that was designed to look like a PR Newswire news release. Lucent notified the Securities and Exchange Commission about the phony warning and asked Yahoo to remove it. After Lucent issued a statement stating that the release was false, its shares rebounded and closed higher for the day.
July 19, 2000: AutoNation Inc., the largest U.S. automotive retailer, said that a buyout offer it got from a company calling itself Pegasus Capital Group Inc. was “nonsensical” and that a subsequent news release from Pegasus claiming its offer was spurned was probably part of a hoax. PR Newswire, a national distributor of press releases, retracted the Pegasus release after talking to AutoNation. But the hoax briefly delayed trading of AutoNation on the New York Stock Exchange. Sources: Times research, CNet.com
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How to Spot a Phony News Release
Experts advise investors to take these steps to avoid getting fooled by an Emulex-style hoax:
* Verify the claims of any release. Start by checking a company’s Web site to see whether the release is posted there.
* Be suspicious of oddly or poorly written releases.
* Be skeptical of releases that have different public relations contacts than earlier releases.
* Don’t trust releases that have been “cut and pasted” into stock chat rooms.
* Contact the company by telephone about any questionable releases.
* Be dubious of releases that appear on Fridays when news is light. Stocks may be especially susceptible to wild swings on such days.
Source: Times research
