Quick Response Stems Damage to Emulex

Here’s a tip for anybody contemplating a high-profile stock scam over the Internet: You’re probably going to get caught.

That seems to be the message coming from the recent spate of headline-grabbing online securities fraud cases in which authorities have quickly identified suspects and made arrests.

In yet another case, federal authorities Thursday charged a 23-year-old El Segundo man with securities fraud for allegedly concocting the hoax that sent shares of Costa Mesa-based Emulex Corp. on a brief but dizzying plunge last week.

It was the latest in a series of securities fraud prosecutions tied to the Internet, suggesting that authorities are getting better at policing misconduct in cyberspace.

That’s not to say, however, that all stock fraud over the Internet is being stamped out. Some experts say that far smaller and less noteworthy stock scams, many involving tiny “penny” stocks, continue unabated.

In the Emulex case, the suspect, Mark Simeon Jakob, allegedly sent out a bogus news release via e-mail that provided a trail of clues, experts said. One of the biggest turned out to be the e-mail message itself because investigators easily traced it as having been sent from a specific computer, experts said.

That hint--along with the fact that the perpetrator had a seemingly inside knowledge of the news-distribution service that was tricked into shipping the fake release to media outlets--made it relatively easy for federal investigators to identify a suspect, experts said.

Equally important, they said, the government clearly assigned top priority to the Emulex hoax, which generated nationwide headlines when the shares sank 62% on Aug. 25 on the phony claim that Emulex’s chief executive had resigned and that the company was being investigated by the Securities and Exchange Commission.

“If an agency is well-trained [in computer investigations] and they jump on it, they can easily deal with this stuff. It’s a no-brainer,” said Michael Anderson, chief executive of New Technologies Inc., a Gresham, Ore.-based computer consulting firm that teaches so-called computer forensics to government investigators.

In fact, the government has been able to make arrests quickly in several cases involving the spreading of false information over the Internet.

A year ago, a former employee of PairGain Technologies Inc. was sentenced to five years’ probation after pleading guilty to an Internet hoax involving the company’s stock. Authorities identified the man within days of the hoax.

A Houston day trader was arrested earlier this year on charges of posting a fake profit warning for Lucent Technologies just days earlier on a Yahoo message board.

Though the Emulex hoax points up the ease with which amateurs can carry out hoaxes in cyberspace, the Internet also makes it easier in key ways for authorities to pursue cases.

In the Emulex case, for example, the e-mail and an attached document gave computer trackers obvious clues. The e-mail’s “Internet protocol address,” a number that identifies a particular computer connected to the Internet, led investigators to the El Camino Community College computer from which it was sent, according to the Federal Bureau of Investigation’s affidavit in the case.

In comparison with the “boiler room” frauds that were commonplace in past decades, investigators in Internet fraud cases have an advantage in that evidence such as bogus e-mails often is in plain sight, said Stephen Cutler, deputy director of the agency’s enforcement division. Investigators have to spend less time ferreting out clandestine documents and re-creating high-pressure telephone sales pitches.

In another change, many of the perpetrators of today’s Internet frauds are amateurs who are less adept than professionals at covering their tracks.

On the Internet, “you’re going to leave footprints that the old-style manipulators didn’t,” he said.

Despite the recent successes, the government’s limited ability to police the vast reaches of cyberspace still makes it difficult to detect more mundane scams such as improper hyping of stocks, experts said.

“The fact of the matter is that this is happening every day, and how many resources do [government investigators] have?” said Dan Lefler, a securities attorney at Irell & Manella in Century City.

Stung in part by criticism in the mid-1990s that they were doing too little to combat Internet-based frauds, the SEC, the FBI and other agencies have beefed up their cyberspace teams in recent years.

The SEC, for example, has boosted the number of attorneys and computer experts assigned to Internet-fraud cases from two in 1998 to about 50 today, Cutler said.

Far from its buttoned-down image, the FBI has recruited young computer experts to battle the seeming army of youthful computer hackers, said Special Agent James V. DeSarno Jr., the head of FBI operations in Southern California.

“Not everyone wants to go out and make a million dollars in the computer industry,” DeSarno said.