Emulex Hoax Suspect Set to Plead Guilty

Mark Simeon Jakob, the amateur stock trader accused of committing one of the most audacious Wall Street hoaxes, has confessed and will plead guilty today to fraud charges.

Jakob’s manipulations caused shares of Costa Mesa high-tech firm Emulex Corp. to nose dive by more than 60%--about $2.5 billion in market value--in less than half an hour last August, costing investors as much as $110 million.

The 23-year-old El Segundo man faces up to 46 months in prison and the possibility of hefty fines and restitution equal to investors’ cumulative losses.

Although the hoax was quickly discovered and Emulex stock rebounded, it raised concerns worldwide about the alarming ease with which Wall Street can be manipulated in the fast-moving Internet age.

Emulex President Paul Folino expressed satisfaction Thursday that Jakob would go to jail, saying it drove home that such actions have serious consequences. “It’s good news for all people investing in public companies,” Folino said.

Jakob, a former El Camino College student, initially pleaded innocent to 11 criminal counts of securities and wire fraud. But on Dec. 22, he quietly entered into the plea agreement with federal prosecutors.

Authorities said Thursday that Jakob confessed because the evidence against him was overwhelming, and could have resulted in a much longer prison term had he gone to trial. Jakob’s attorney Joel Levine agreed, offering a succinct explanation for his client’s change of mind: “He’s guilty.”

“In a state of panic, he committed a crime and he’s ready to ‘fess up to it,” Levine said. “He’s a one-time offender. This isn’t a career stock manipulator.”

In his plea agreement, Jakob admitted to orchestrating the complicated hoax to recoup $97,000 in paper losses he faced because he had “sold short” 3,000 shares of Emulex, betting the stock price would go down.

Instead, Emulex stock had risen sharply. So Jakob drove the price down, he said, by using his inside knowledge of how Internet publicity works. He drafted a phony news release that said Emulex was restating prior profits as losses, that it was under investigation by the Securities and Exchange Commission and that Folino had quit.

He e-mailed the release to Internet Wire, a firm for which he had recently worked. Pretending to be an Emulex publicist, he hoodwinked Internet Wire employees into putting the news release out on the Internet.

It was picked up by Bloomberg News and other financial news outlets and disseminated worldwide. Within minutes, Emulex stock plummeted from about $113 to as low as $43 as panicked investors sold.

Jakob recovered the $97,000 and made more than $54,000 in profit. And as the stock rebounded later in the day after the hoax was discovered, Jakob bought more Emulex stock--enough to make another $186,000, for a net profit of more than $240,000

Authorities swiftly uncovered Jakob’s plot by following his digital footprints, tracking him to the El Camino college computer lab where he generated the bogus news release. They arrested him in less than a week.

“The speed with which this office, the FBI and the SEC exposed Jakob’s criminal activities demonstrates our joint commitment to solving these fast-moving Internet crimes,” said U.S. Atty. Alejandro N. Mayorkas. “Those who would seek to manipulate the market as Mark Jakob did should take heed of the years in federal prison he faces in light of his conduct.”

Jakob is scheduled to plead guilty today to two counts of securities fraud and one count of wire fraud before U.S. District Judge Dickran Tevrizian. The nonbinding plea agreement suggests Jakob’s sentence will be from 37 to 46 months.

He also is subject to making restitution and to a maximum fine of two times what investors lost, but authorities conceded Thursday that it’s unlikely he’ll have to repay his victims. Authorities can garnish only a portion of a person’s wages and the judge can decide that restitution is impractical.

The incident left little mark on Emulex, a 21-year-old storage networking company with clients including EMC Corp., IBM Corp. and Compaq Computer Corp. Top managers now carry satellite phones, Folino said. When the crisis hit in August, one executive was stranded with a flat tire and another was unreachable on a boat.

In the outcome, the hoax and ensuing publicity have helped the company on Wall Street, boosting its profile and providing new opportunities for it to explain its somewhat arcane business.

“Now, when you say Emulex, people remember us,” said Folino, noting that the company also recorded new highs in sales and profits this year.

Since the hoax, the number of securities analysts covering Emulex has doubled and its shares have sustained their value in a devastating market for technology issues. On Thursday, the stock gained $3.63 to close at $85.25.