Online Hoax Sends Firm’s Stock Diving
An audacious hoax battered the stock of a high-tech Southland firm Friday and sent shivers through Wall Street, where the markets seem increasingly vulnerable to dubious information being spread at Internet speed.
Shares of Emulex Corp. crashed as much as 62% after news services picked up a phony press release saying that the Costa Mesa maker of data-storage equipment was under investigation by the Securities and Exchange Commission, that its fourth-quarter profit would be revised to a loss and that its chief executive had resigned.
Trading in Emulex was halted by the Nasdaq Stock Market soon after the bogus release was published, and the company quickly issued a blanket denial. But in the meantime more than 1 million shares changed hands, with many investors taking steep losses as they bailed out of the stock.
After trading was resumed, the stock recouped most of its losses but still closed down $7.31 at $105.75. At its lowest point, just before the trading halt, the price was down $70.06, to $43, wiping out $2.5 billion in total value.
The FBI, SEC and Nasdaq have launched investigations into the hoax, which appeared to have been concocted by people who wanted to profit on the stock’s tumble.
The Chicago Board Options Exchange said it too has launched a probe of “unusual” trading that occurred before the hoax. One way to profit on misfortune is with “put” options, which rise in value as the price of the underlying stock drops.
Volume of put options--the right to sell Emulex shares at a set price--tripled Thursday from the three previous days. Options to sell 188,900 shares changed hands. That was the highest level since Aug. 8.
Experts said the options activity made it less likely that the hoax was carried out as a prank.
Friday’s was just the latest such incident involving a prominent company in recent years. Other victims have included Lucent Technologies, Bid.com and Tustin-based PairGain Technologies.
Although roiling the markets with false information is a ploy older than Wall Street, the speed and anonymity of the Internet make such scams easier than ever to pull off and potentially more lucrative.
“Markets have always been vulnerable to fraud,” noted Georgetown University finance professor James Angell. “It’s just that computers allow the fraudsters to work faster and cheaper. In the old days, you’d have to work a lot harder to get the word out.”
Investors who sold shares because of the phony news release may be out of luck.
Nasdaq said it had no authority to cancel the trades, so investors would have to negotiate any settlements with their brokers.
However, representatives of several online brokerages said they would not unwind the deals.
“Those trades are going to stand,” said Mike Dunn, spokesman for Datek Online. “Nasdaq didn’t tell us to undo them, and there was a real market operating.”
A spokesman for DLJ Direct said trades done through that firm also would stand.
The phony news release itself was a somewhat crude attempt to mimic the style of previous official statements by Emulex.
The cleverest thing about the hoax may have been the way the author got the bogus release before a wide audience.
The author convinced graveyard-shift production staffers of Internet Wire, which distributed the release, that the statement came from Emulex public-relations representatives and had already been approved by Internet Wire higher-ups.
“Somebody who was very smart and sophisticated figured out our procedures, but we’ll close that loophole,” Internet Wire Chief Executive Michael Terpin said late Friday.
‘It Was Just Our Turn This Time’
Six-year-old Internet Wire, based in Los Angeles, is a relative upstart among corporate-news distributors, compared with established rivals such as BusinessWire and PR Newswire. Terpin noted that other news services have previously been tricked by false releases.
“It was just our turn this time, I guess,” he said.
Internet Wire distributed the release at 9:30 a.m. EDT Friday. It was soon picked up by such news services as Bloomberg and Dow Jones, whose headlines trumpeted the shocking news about the supposed SEC probe, restated earnings and the CEO’s resignation.
A Bloomberg spokeswoman said that before using material in a press release, the news service verifies that it comes from a bona fide distributor like Internet Wire but relies on the distributor to make sure that the release itself is authentic.
The earliest Bloomberg headline was at 10:13 a.m. EDT. Fifteen minutes later, Nasdaq officials halted trading in the stock, but plenty of damage had already been done.
The institutional investor with the largest Emulex stake is mutual-fund giant Fidelity Management, with more than 4.8 million shares of Emulex as of June.
“You always have to do due diligence if you hear rumors,” Fidelity spokeswoman Anne Crowley said Friday. “We would check with the company, with their competitors and with industry sources” before acting on such rumors, she said, declining to say whether Fidelity had bought or sold any stock on Friday’s Emulex roller coaster.
“It’s a real shame that a rogue news story can do that kind of damage to people in a day,” said market analyst Robert Montague, who follows Emulex for Morgan Keegan & Co. in Memphis, Tenn. “It’s a shame that it’s picked up by some of the news services as absolutely true with no verification,” he said.
Despite a strong sense at Montague’s firm that the news was a hoax, many clients lost money before the truth got out, he said.
“We had retail and some institutional clients sell on that news at depressed levels,” he said.
The alarming news greeted Emulex executives as they trickled into work Friday morning. When Senior Vice President Kirk Roller logged on at 7:30 a.m. PDT, he saw that the stock was down $45.
“It was down $68 by the time I got to [CEO] Paul Folino’s office,” Roller said. “I found it pretty ironic that he was there, considering I’d just read he had resigned.”
Roller and other Emulex officials spent much of the day soothing frazzled investors.
“After just reporting a record quarter and a record year [in terms of profit], things have never been better inside the company,” he said. “We just told them there’s not any truth to any of it.”
Emulex is working with the SEC, FBI, U.S. attorney’s office and Nasdaq to unravel the hoax, Roller said, but so far has no leads on its perpetrator. He said he doubted it was a disgruntled employee or former employee.
“We’re not the typical tech company,” he said. “We had 3% turnover last year and many of our people have been here 15 years or more.”
Emulex’s investor relations managers also have called Orange County’s other prominent hoax victim, PairGain Technologies, to get advice on how to launch its in-house investigation.
Former PairGain engineer Gary D. Hoke was fined $93,000 and sentenced to five years of probation after pleading guilty to posting a false article on an Internet site in April 1999 saying the company was being sold for $1.35 billion. The bogus release sent PairGain’s shares soaring.
Shares of Aliso Viejo-based QLogic Corp., a former Emulex unit that was spun off in 1994, also got pounded Friday. Many investors apparently consider the firms linked because of their common origins. QLogic shares dropped to $74 before rebounding to close at $103.87, down $5.81, in Nasdaq trading.
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Times staff writers Karen Alexander and Robin Fields in Costa Mesa and Joseph Menn in San Francisco contributed to this story.
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Sudden Plunge
A look at the scary ride of stock in Costa Mesa-based Emulex Corp. on Friday.
