Suspect in Emulex Stock Hoax Set to Plead Guilty to Fraud

Mark Simeon Jakob, the amateur stock trader accused of committing one of the most audacious Wall Street hoaxes ever, has confessed and is expected to plead guilty today to fraud charges and agree to pay as much as $110 million in restitution, authorities said.

Jakob, 23, also will serve as long as 46 months in prison for the scam, which he orchestrated last summer and from which he reaped more than $241,000 in profits.

Jakob sent the stock of Emulex Corp. plummeting 62%, about $2.5 billion, in less than half an hour after arranging a fake Internet news release Aug. 25 that contained false information about the Costa Mesa high-tech firm.

The hoax was quickly discovered and Emulex stock rebounded. But during that time, many investors bailed out, losing as much as $110 million. The hoax raised concerns worldwide about the alarming ease with which Wall Street can be manipulated in the fast-moving Internet age.

Jakob, a former El Camino College student from El Segundo, had initially pleaded not guilty to 11 criminal counts of securities and wire fraud. On Dec. 22, he agreed to the plea bargain 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 defense lawyer agreed, offering a short explanation for the plea: “He’s guilty.

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

Though he’s a first-time offender, authorities said, Jakob’s sentence will be significant.

“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.”

James V. DeSarno Jr., head of the FBI’s Southern California field office, said Jakob’s punishment should serve as a reminder that “he has committed serious felonies and caused real harm to real people.”

Jakob is scheduled to enter guilty pleas to two counts of securities fraud and one count of wire fraud before U.S. District Judge Dickran Tevrizian. The judge will have some leeway in deciding how long Jakob will remain in prison.

Although it is not binding, the plea agreement suggests that Jakob’s sentence under federal guidelines will be from 37 to 46 months. He will also be subject to a maximum fine equal to two times the about $110 million in losses suffered by victims, and an order of restitution of as much as $110 million to the victims.

In his plea agreement, Jakob admitting 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 that the stock price would go down.

Instead, Emulex stock rose sharply. So Jakob drove the price of the stock down, he said, by creating bad publicity about the firm, which makes high-speed data storage products.

Jakob did so by using his knowledge of Internet publicity. He drafted a bogus news release stating that Emulex was restating prior profits as losses, that it was under investigation by the Securities and Exchange Commission and that its chief executive officer had quit.

Then 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.

They did, and it was picked up by Bloomberg and other financial news outlets worldwide. Within minutes, Emulex stock nosedived from about $113 to as low as $43 as panicked investors sold.

Jakob recovered his $97,000 and made more than $54,000 in profit. As the stock rebounded later in the day after the hoax was discovered, Jakob bought more Emulex stock--enough to make an additional $186,000, for a total net profit of more than $241,000.

Jakob traveled to and from the Luxor hotel in Las Vegas when committing the fraud, authorities said.

Emulex Corp. President Paul Folino expressed satisfaction Thursday that Jakob would go to prison. “It’s good news for all people investing in public companies,” Folino said.

In the outcome, the hoax and ensuing publicity have helped Emulex, boosting its profile.

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

As for Jakob, authorities conceded Thursday it is unlikely he’ll ever be able to repay his victims.

Jakob agreed to repay the $110 million because full restitution is mandatory under the federal Victim Witness Protection program--and his “inability to repay that amount cannot be used to mitigate the amount he has to pay,” said Assistant U.S. Atty. Carl Moor.

But authorities can garnish only a certain portion of a person’s wages and are required to allow enough money to live.

Tevrizian can choose not to order restitution if the “number of victims is so large as to make the payment of restitution impracticable,” according to federal restitution law.

“Having a judgment is one thing,” said Assistant U.S. Atty. Pamela Johnston. “Being able to collect on that judgment is a whole different matter.”