Judge Freezes Assets of Man Accused in Emulex Stock Hoax

A federal judge on Monday froze the assets of a 23-year-old man accused of an audacious Wall Street hoax, but allowed him to withdraw $30,000 to pay his mounting legal bills.

Judge Virginia A. Phillips’ ruling came in response to a petition by the U.S. Securities and Exchange Commission, which sought to freeze about $428,000 that authorities have found in Mark Simeon Jakob’s bank and investment accounts since his Aug. 31 arrest.

In criminal and civil complaints, federal authorities have accused Jakob, of El Segundo, of orchestrating a hoax that rocked the stock market, made him $241,000 in profits and sent shares of Emulex Corp. plummeting 62%. The Aug. 25 hoax cost investors in the Costa Mesa high-tech firm $50 million in losses, and raised concerns worldwide about the alarming speed and ease with which Wall Street can be manipulated in the fast-moving Internet age.

At Monday’s hearing, two defense lawyers argued that because Jakob is accused of making about $241,000 from the incident, it is unfair for the SEC to put a hold on the entire $428,000, which had been temporarily frozen since his arrest.

Lawyers James Hepworth and Joel Levine told the judge that Jakob needs at least $35,000 to pay for living expenses and to pay for his defense in the SEC’s civil case against him and a separate criminal case.

Already, Hepworth said, those costs have exceeded $5,000 even before Jakob retained Levine as his criminal defense lawyer.

Over the SEC’s objection, Phillips allowed Jakob to withdraw $30,000: $5,000 for his civil defense and $25,000 for the criminal case.

But Phillips opposed giving Jakob access to any more of the money, agreeing with SEC lawyer Solomon R. Mangolini that Jakob ultimately could face more than $600,000 in restitution, fines and penalties. The SEC alleges that Jakob made about $338,000 from the alleged hoax, because he also recovered $97,000 in paper losses in the process.

“So we get to an amount that is approaching $600,000,” Phillips said. “The SEC has met its burden of showing that the amount in the defendant’s account is insufficient” to repay the SEC if it succeeds in its civil case against him.

The judge also denied Jakob’s request for a 30-day continuance in the case before considering the freeze.

In court papers, Jakob’s lawyers said the delay was needed to allow them to pursue “preliminary settlement discussions” with federal authorities that could resolve the civil and the criminal cases. Phillips said those discussions could continue whether or not his assets were frozen.

Last week, Jakob was indicted by a federal grand jury on 11 counts of securities and wire fraud stemming from the same incident. He is expected to enter a plea at an Oct. 10 arraignment.

Authorities said Jakob initially orchestrated the hoax to recoup the $97,000 in paper losses, which he faced because he had “sold short” 3,000 shares of Emulex, betting that the stock price would go down.

Instead, it rose sharply. Jakob then drove the price of the stock down, authorities allege, by issuing a fake--and damaging--news release about Emulex that was widely disseminated on the Internet.

In less than 20 minutes, Emulex stock plummeted from $113 to $43 a share. 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 total net profit of more than $241,000, authorities allege.

Authorities had no comment Monday on whether they are negotiating with Jakob’s lawyers in an effort to reach an out-of-court settlement of the civil and criminal charges.

Clifford C. Hyatt, an SEC lawyer, said authorities continue to aggressively investigate Jakob and his trading activity to determine whether he and his acquaintances may have profited from the stock’s roller-coaster ride on Wall Street in other ways.